How we can help small companies grow into bigger businesses
The environment needs to be conducive, which is where the government comes in, and the private sector must then bring capital and training
Solving the unemployment crisis by teaching people to be entrepreneurial feels like resolving the National Health Insurance debate by teaching people to be healthy. It’s a good idea, but the problem is not that simple.
It is true that more jobs are created by new small businesses than by any other means. Entrepreneurs create jobs by creating businesses, while most bigger businesses, at best, maintain their levels of employment. We should be doing all we can to encourage and equip people to start businesses.
But it is also true that more jobs are lost from failing small businesses than by any other means. It is the longevity and growth of a business that provides sustainable employment, not its small size. So we should be doing all we can to help existing businesses grow into bigger businesses.
Unfortunately, the understandable emphasis on creating small businesses has made entrepreneurship seem unrealistically attractive. We recently ran a programme for young people with two tracks — one for those who aspired to be entrepreneurs, and the other for those who aspired to find good jobs. No-one signed up for the latter.
In one sense, that is excellent news. In the recent past, young people aspired to enter government or a big company, so anyone who has travelled in our continent has seen that SA has a far smaller ecosystem of thriving independent small businesses than the rest of Africa.
But I fear this change may be born out of despair of finding a formal job, plus an unrealistic belief, fostered by the buzz around entrepreneurship, that simply attending a course will enable someone to create their own job. That is not true. So, instead of focusing entirely on starting new businesses, we should be helping existing businesses to thrive and grow.
So how do small businesses thrive?
First, like garden plants, they thrive best in an environment that nourishes them. Small firms in developing markets grow at a fraction of those in the US. Evidence from Colombia, for example, is that all the difference between the growth of small firms there and in the US may be accounted for by 10% of the fastest-growing firms in the US. Colombia somehow does not facilitate the break out of a small number of high-growth firms.
Creating this environment is something the government should lead in by providing physical and economic infrastructure, redesigning legislation and regulation, educating the population, and enforcing rules. But it would be a mistake for bureaucrats to tell businesses how to be competitive, or general educators to teach entrepreneurship.
That works about as well as taking my illness to an administrator rather than a doctor — or taking my insurance application to a doctor, instead of an administrator.
Second, small firms need internal strengths to thrive in whatever environment they encounter — which is something the private sector should create by providing capital and training, developing enterprises in supply chains and being innovative in finding business models that work best here. This help should be practical and rooted in the local environment. Firms that thrive in the often barren, rocky economic soil of Africa may be different from those that thrive in the deep, fertile economic soil found in places where most of the textbooks are written.
What are these inner strengths that promote growth? We have identified 24 practices that are associated with the success of small and growing businesses. A “practice” is an activity that is carried out habitually in a business — such as negotiating regularly with suppliers to obtain the best available quality and price of inputs. The practices fall into five traditional business areas: planning and measurement, money, markets, people and operations.
The practices required for large companies are different from those for SMEs, which are different from those for microenterprises. But, by combining the best of global research with realistic study of local conditions, we increasingly know what they are. If our capacity building focused on these, I think we would see employment grow.
• Cook, a former director of the Gordon Institute of Business Science, is chair and co-founder of the African Management Initiative (AMI)