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January – June 2018

What are the success factors of small business owners in South Africa?

Success factors of small business owners
  • USB MBA Students
  • MAY 2018
  •  width=Tags Insights, Finance
20 minutes to read

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The need for small business growth

Globally and also in South Africa, small, medium and micro-enterprises (SMMEs) represent the majority of private businesses. Their success is important for the creation of employment and the well-being of society.

As recently as 1996, South Africans were resisting entrepreneurship, preferring formal employment with fixed remuneration. But this has changed. People have begun to realise the importance of entrepreneurial businesses as unemployment remains a defining feature of this country’s challenges. Yet, the failure rate of our small businesses is among the highest in the world. Some reports say over 50% of them fail to grow. Without growth, these businesses cannot move from the existence-survival to the success-maturity stage.

… the failure rate of our small businesses is among the highest in the world. Some reports say over 50% of them fail to grow.

To help small business owners from lower income areas, training is typically offered by the government, corporates, academic institutions and NGOs. However, there seems to be a lack of evidence showing improvement in the management of these small companies after their owners have attended training. As a result, the research focus is now shifting to the reasons why small business owners do not take this training on board and to what they themselves regard as important for business success. This insight is important because the SME sector can absorb thousands of workers, especially from among the unskilled and semi-skilled.

To support small business owners from lower income areas, the University of Stellenbosch Business School (USB), through its Small Business Academy (SBA), provides a nine-month SBA Development Programme in the Western and Eastern Cape. Concurrent with this, USB undertakes research on small business development to accumulate a body of knowledge on various aspects of small business growth. MBA and other Master’s students at USB have the option of doing their research assignments on aspects of small business owners’ enterprises to gain insight into the success factors for growth in this sector.

Says Dr Marietjie Theron-Wepener, Head of USB’s Small Business Academy (SBA) and supervisor of the MBA research studies summarised in this article: ‘It seems that everyone agrees – successful small businesses are the key to much-needed economic growth and job opportunities. This is true for South Africa and the rest of the world. We encourage students on the USB MBA to do research on small business to learn how to ensure small business success. The knowledge gained in this way is embedded in the curriculum of our SBA Development Programme currently running in the Western and Eastern Cape. Our sponsors and partners have access to the published research and it is also used in workshops in our communities where the SBA has just started a Growth Initiative to support a wider group of small business owners.’

Below are some the findings of recent research by USB MBA students on the success factors for small business owners in South Africa.

Success depends on a combination of financial and non-financial factors

What do small business owners, who have graduated from USB’s SBA Development Programme, regard as important to achieve business success? USB MBA student Henem van Staden found that for small business owners from lower-income areas it is not all about turnover, revenue growth and employee numbers. His research focused on gaining a deeper understanding of the financial and non-financial factors that these small business owners regard as key to achieve success.

To gather the primary data, semi-structured interviews were conducted with seven small business owners from Khayelitsha and Mitchells Plain who graduated from the USB SBA Development Programme between 2014 and 2016, and whose businesses were still operational in 2017.

All the participants reported how personal life incidents combined with a specific interest or passion encouraged them to become small business owners. This made them consider their local area to see what they could do. Significantly, none of the participants interviewed mentioned that they perceived age, gender, education, business experience or years in business as factors required to achieve business success. Based on the participants’ feedback, they regarded the following factors as important to achieve business success:

Financial factors have an impact on their business success:

  • Economic conditions (inflation): All the participants noted with concern that their small businesses were extremely vulnerable to economic conditions, such as high inflation, which negatively affected input costs such as fuel, electricity and raw materials. These conditions also affected the disposable income of customers and made them more price conscious.
  • Business plan: Of the participants interviewed, 71% regarded their business plan as important for business success. They admitted that it was an important tool to guide their businesses.
  • Access to finance: All the participants indicated that access to finance for expansion and growth was a factor required to achieve business success while 57% indicated that they required funding to relocate their home-based businesses to business premises. These participants recognised that visible business premises in high-traffic areas represented business growth, increased brand awareness and work-life balance opportunities.

Non-financial factors as having an impact on business success:

  • Human capital: All seven participants reported that they struggled to find reliable, committed, mature, experienced and affordable employees. According to the participants, younger generations lacked perseverance. Absenteeism, late arrivals due to transport problems, self-entitlement and an unwillingness by staff to learn more of the business negatively affected trust levels between small business owners and their employees.
  • Time management: All seven participants said time management was important for business success. The small business owners thought the lack of skilled and reliable staff to take over certain daily functions negatively impacted their ability to attend to various aspects of the business – such as marketing and business growth. The participants in this study were aware that they should work on the business and not in it, but time management combined with a small staff complement were challenges they struggled to overcome.
    Business support services: All the participants stated that ongoing business support services were required to achieve success. In particular, they needed business mentoring and assistance with strategic management decisions related to marketing, finance and human capital. Other needs included IT infrastructure and digital technology set-up, and assistance with final preparation of annual financial statements and tax returns. Some participants reported that despite attempts made to acquire accounting services, the response rate from service providers was disappointingly low.
  • Customer service: All the participants regarded customer service as key to achieving business success. Participants associated the following with customer service: integrity, creating a unique and memorable customer experience, genuine connecting and communicating with clients, building and maintaining relationships, product knowledge, prompt response to enquiries and resolving issues raised by dissatisfied customers.
  • Business identity: An unexpected finding, not explicitly found in literature, was that 57% of the participants regarded a unique business name as a factor required to achieve business success. They said a unique business name aided the formal registration process. A unique business name that was representative of the business vision, mission and strategy also provided differentiation in their communities where first or last names are traditionally used. This suggests that small business owners are well aware of brand identity.

All of the participants agreed that participation in the SBA Development Programme had positively contributed towards their business and personal development. In total, 71% acknowledged the value of their business plans, which they continued to revisit. All the participants valued the increased awareness and positive effects of marketing, branding, and exposure to traditional media and social media. Their financial management competencies also improved. After attending the programme, 43% of the participants identified opportunities outside their immediate area where changing consumer demands created room for their businesses to expand. All the participants found the mentoring component extremely valuable.

All the participants reported how personal life incidents combined with a specific interest or passion encouraged them to become small business owners.

It’s about training, financing, research, crime, competitors, and networks

USB MBA student Donovan Adams explored the factors that lead to the failure or non-growth of small business in the Western Cape. For this study, he interviewed the owners of ten small businesses representing various industries – from construction and transport to fishing, waste management and liquor. The following factors negatively impacted these small businesses:

  • Lack of proper management capacity and training: In his study, the owners of fishing, passenger transport and goods transportation businesses said that they acquired much of their business management skills through informal training as apprentices. However, the other small business owners believed formal training to be the key to business success.
  • Lack of access to sustainable financial assistance: The lack of access to financial resources was prevalent among all business owners in this study as they funded their enterprises from their own personal savings. One reason for this could be the relatively small initial investment required to establish their businesses. All the respondents reported that securing additional capital was a major challenge as traditional financial institutions rejected applications for financial assistance. The study participants mentioned that banks charged high interest rates on loans. Business owners claimed that they relied on either informal institutions or their family and friends for financial assistance because they had no access to information on alternative financial sources. Some of the small businesses eventually had to close their doors because they could not source the funding they required.
  • Inadequate industry research: Most of the small business owners interviewed cited the lack of proper industry research as one of the main causes of business failure. This is because these businesses are based on good business ideas but they lack understanding of the industry in which they operate.
  • Crime: Only a few entrepreneurs reported that they experienced a problem with crime, either from criminals or from their employees. Small business owners with fishing and liquor businesses experienced more crime than other types of entrepreneurs.
  • Business competition: One of the biggest challenges facing entrepreneurs in the Western Cape is business competition. This puts pressure on profits and business growth.
  • Lack of entrepreneurial networks: This study found that most of the entrepreneurs are not part of any entrepreneurial group or network. However, some of the respondents stressed the importance of immigrant networks in the success of their businesses. The entrepreneurs in the liquor and transport businesses specifically mentioned that good entrepreneurial networks can be used to obtain financial capital to launch or grow a business.

The findings revealed that most of the business owners perceived their challenges to be unique and believed that other small business owners are not in similar situations.

An unexpected finding … was that 57% of the participants regarded a unique business name as a factor required to achieve business success.

Increasing the implementation rate of business training

USB MBA student Sabelo Ntanjana looked at the demographic attributes of small business owners to see whether there are any links between these attributes and the uptake of business knowledge after training.

So, to gain a better understanding of the inability of small business owners to take new training on board, this study looked at business owner characteristics – such as age, gender, race and small business owners’ business experience with another employer prior to opening their own business – to see whether there is a relationship between the implementation of business training and small business owner characteristics. The thinking was that this could ultimately help to improve the business performance of these small businesses. A questionnaire was distributed to business owners in the Western Cape who had attended training offered by a government agency. This is what the study found:

  • The older the business, the more readily the owner will implement business training. This means that the older the small business, the higher the chance of the owner attending business training and the higher the chance of the owner implementing the training. In this study, the implementation of all the management elements – namely general management, marketing, financial management, operations (production) as well as the overall training –has a positive correlation with the number of years the business has been operational.
  • The more experience the owner has had with previous employers, the more readily the owner will implement business training. The experience of the small business owners with previous employers has a positive correlation with the perceived implementation of the business training elements.
  • The higher the education level of the owner, the more readily the owner will implement business training. Even though the correlation is weaker than with the other attributes, it is still positive.
  • The higher the number of employees, the more readily the owner will implement business training. The number of employees that the small business employs has a positive correlation with the perceived implementation of the business elements learnt during the training. Interestingly, the number of employees has a statistical significant impact on perceived implementation of the marketing element as well as the overall implementation of the training. However, the number of employees has no significant impact on the implementation of general management, financial management and the operations (production) management elements of the training.
  • The higher the number of training days, the more readily the owner will implement business training. This means the more training days the business owner has attended, the higher the probability of implementing the elements learnt during the training.

The study showed that, mostly, there is no significant difference between small business owner characteristics and the implementation of training elements. However, the study pointed to some interesting results that need to be explored in future.

There is a positive correlation between years in operation, number of training days, the small business owner’s level of education and the number of employees employed with the elements of training that the small business owner implements. This shows that the longer the business has been in operation the higher the value of implementing training and attending training.

People have begun to realise the importance of entrepreneurial businesses as unemployment remains a defining feature of this country’s challenges.

The importance of understanding your customers and competitors

The construction industry in South African was boosted by the infrastructure development brought about by the Soccer World Cup in 2010. Growth slowed down after this although some firms continued to perform well. USB MBA student Odirile Mametse looked at the impact of market orientation on the financial performance of construction firms, asking: Why is management’s understanding of the firm’s customers and competitors important for financial success?

This research therefore wanted to determine whether the market orientation of SME companies in the construction industry has an impact on their financial performance with the assumption that financially successful companies will report stronger growth and employ more people.

The relationship between the financial performance of a business and the three components of market orientation – namely customer orientation, competitor orientation and inter-functional coordination – was also investigated.

To gather primary data, questionnaires were sent to 488 small and medium-sized Gauteng-based construction companies all belonging to the Master Builders South Africa. Market orientation and its components (customer orientation, competitor orientation and inter-functional coordination) were used as the independent variables with financial performance of the business (measured by revenue, profit margin and return on assets) as the dependent variable.

The results confirmed a positive relationship between market orientation and financial performance. The implication of the study for management and other interested parties is the need to put more emphasis on understanding the customer and competitor landscape in order to be market-oriented and to have an impact on the financial performance of the business.

This article is based on the research assignments of four USB MBA students:

  • Adams, D. 2017. Exploring factors that lead to failure or non-growth of small businesses in the Western Cape. Unpublished MBA research assignment. Bellville: University of Stellenbosch Business School.
  • Ntanjana, S.S. 2017. Do the demographic attributes of small business owners play a role in their implementation of business elements after training? Unpublished MBA research assignment. Bellville: University of Stellenbosch Business School.
  • Mametse, O.R. 2017. The impact of market orientation on the financial performance of small and medium-sized construction firms in South Africa. Unpublished MBA research assignment. Bellville: University of Stellenbosch Business School.
  • Van Staden, H. 2017. Exploring small business owners’ perceptions of factors required to achieve business success. Unpublished MBA research assignment. Bellville: University of Stellenbosch Business School.

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