Small and Medium Enterprises (SMEs) are relatively small businesses that employ a limited number of employees. In addition, they are also characterized by limited amounts of sales volume. There are cross-regional differences in the categorization of businesses in terms of size (Bruno, & Leidecker, 1988, p. 34). However, it is universally agreed that SMEs are the businesses on the lower end of the business categorization in terms of size, as defined by the scale of operation and the number of employees. Globally, the role of SMEs is immense (Land, 1975, p. 232). Analysts believe that SMEs contribute to about 99% of the global economy. They also employ a similar percentage of employees. (Bowler & Dawood, 1996, p. 45). Considering their scale of operations across the different sectors, they are an important source of innovation, and this acts as a major driver of the global economy (Huysamen, 1994, p. 87). This being the case, there is the urge for governments and other organizations to support the expansion of these small businesses by assisting in startups as well as maintaining support to ensure their success (Said, & Hughey, 1977, p. 324). This is because they fully understand the role played by the SME sector and any efforts to better the economic situation must always be taken into account the plight of this sector (Dutton & Jackson, 1987, p. 87). This paper shall explore factors contributing to the death as well as the survival of SMEs within the first 10 years of their operation.
According to Ulmer and Nielsen (1947), failure of any business enterprise is seen in the context of a business that goes to bankruptcy or stops operations, causing losses to creditors (Land, 1975, p. 232). This implies that if a business stops operations out of reasons other than bankruptcy, the business is not deemed to have failed. Businesses that were sold out do not necessarily point to failure. Cochran (1981) on the other hand looks at the failure of an SME as “the inability of the business entity to take maximum advantage when business opportunities arise” (Bowler & Dawood, 1996, p. 45). This definition is much wider and oriented towards quality management as opposed to mere success from obvious business practices (Land, 1975, p. 232). However, business failure is universally seen as the closedown or termination of the firm as a legal entity (Huysamen, 1994, p. 87). This means the complete dissolution of a company’s existence. It is akin to killing a natural person (Cochran, 1981, p. 32). This element of dissolution out of the inability to continue with business is the best measurable variable to represent failure (Dutton & Jackson, 1987, p. 87). Global estimates reveal that the failure rates of SMEs stand at approximately 55% within the first 10 years of operation. This means that only an average of 45% of new business startups is unable to continue operation for a period of more than ten years (Said, & Hughey, 1977, p. 324). The proportions however vary with the different economic conditions prevalent in the country under consideration (Leedy & Ormrod, 2005, p. 67). This high failure rate is the main concern for governments and other supportive organs.
Understandably, SMEs startup with deficiencies in the most critical areas of business. They range from finance to skills in production, marketing, and general business management (Bruno, & Leidecker, 1988, p. 39). These elements make this business segment much more vulnerable in relation to the more established business entities (Leedy & Ormrod, 2005, p. 65). The vulnerability to fail is dependent on both internal as well as external factors unique to the small businesses (Berryman, 2001, p. 30).
Generally, the macro-environment is composed of a myriad of factors that are safely external to the company but have the effect of inhibiting elements of entrepreneurship early in the lives of SMEs and also during the entire lifecycle. The factors present real challenges as well as opportunities affecting businesses regardless of their background as well as a business concept. Some common external factors include market conditions, social demographics, and legal, institutional, political as well as cultural factors (King, 1982, p. 234). Others are technological advancements and the available physical infrastructure supporting the particular sector in which the business operates (Bannock, 2000, p. 78).
Market conditions are defined by the supply and demand factors that influence the pricing strategies to be adopted by firms in the businesses operating in the industry (Reynolds, 2006, p. 42). In a market dominated by big players with very strong brands, it becomes very difficult for a small business to come up and succeed with a product that competes with those offered by the bigger firms as they have greater financial strengths to outdo the smaller firms in marketing activities such as advertising and other promotions (Cochran, 1981, p. 32).
Aspects of social and cultural demographics are also very influential to the success of small businesses (King, 1982, p. 234). Often, small businesses come up to develop products that cover a limited section of the population. Cultural issues are thus likely to have a significant impact on the small market size leading to the failure of the business. The same case applies to political factors (Bannock, 2000, p. 78). There may be big firms with the ability to influence the political class. Political class refers to the people in power, for example, government ministers responsible for the implementation of policies, against the lower-level businesses (Reynolds, 2006, p. 49).
In addition, issues of technological advancement are a constant worry for the SME category of business (Storey, 1989, p. 780). This is because they may take longer to adapt to emerging technologies mainly due to limitations in resources required to fund rapid changes in technological advancement (Dutton, & Ottensmeyer, 2000, p. 34). This means that on many occasions, small businesses find themselves edged out of the market by big companies through the introduction of better technologies in production which not only leads to better quality but also competitive pricing (Storey, 1989, p. 789). Also, the availability of physical infrastructure supports the sector (Dutton, & Ottensmeyer, 1987, p. 34). In certain cases, SMEs start up in the hope that the relevant institutions will act to fix infrastructure for better efficiency in the future (Kent, 2001, p45). Such expectations more often lead to failure in the future (Cressy, 2006 p. 110).
The macro-economic variables may be applicable to all businesses but they have bigger effects on the SMEs. Inflationary pressures basically mean that the value of wealth diminishes with time (Kent, 2001, p. 45). It is clear that the wealth creation rate in SMEs is lower than in the big firms. Therefore the instability has the highest effect on these smaller businesses’ ability to survive. The level of interest rates is also a major factor. Interest rates define the price of credit which in turn defines the level of access to the credit (Carter, & Howard, 2006, p. 495). Credit access is a key determinant to how well SMEs are able to grow and expand thus enhancing their ability to survive over a much longer period (Chaganti, 1983, p. 16. This is done through investments in risk reduction measures such as product diversification and expansion of market coverage (Chaganti, 1983, p. 20).
Transportation costs are also touted as an important hindrance to the business for SMEs. Transportation costs are known to constitute as much as 40% of the cost of availing many products to the customers (Hall & Young 1991, p. 982). The fact that the SMEs produce in smaller quantities as compared to the larger firms means that they are unable to take advantage of economies of scale in the magnitudes enjoyed by the large businesses. The effect of this is that per-unit costs may be forced to go up despite the efforts placed in innovation and technological advancement (Hall & Young 1991, p. 982).
Taxation is also a major hindrance to the advancement of business. Taxation siphons money from the SMEs for public expenditure (Storey, 1989, p. 243). It is however notable that the money is often used to develop the infrastructure required making the firm’s operations even more efficient (Berryman, 2001, p. 34). All these factors are not controllable for any business entity. Success on the part of the SMEs largely depends on the ability of the management to develop efficient mechanisms to deal with or find ways of surviving. It is however not all bleak for SMEs (Storey, 1989, p. 243). Globally, they are known to enjoy a host of advantages developed by governments to boost their survival (Chaganti, 1983, p. 23). In countries such as the US, there are numerous special considerations for SMEs which offer them a significant reprieve from the full effect of some of the policies and regulations developed. An example is an exemption to contribute to insurance schemes for small companies (Small bone, 1999, p. 230). Such allowances not only give incentives to form new businesses but enhance the growth rate of the SMEs and improve their ability to survive (Holmes & Nicholls 1988, p. 21).
It is also true that there are several internal factors that determine how well SMEs are able to survive. The first and most important internal factor is the managerial skills available. It is clear that there is minimal separation between ownership and management. This means that what is most important are the capital and a business idea (Holmes & Nicholls 1988, p. 23). This being the case many of the people starting up the business do not have adequate skills to effectively manage the business in the long term (Small bone, 1999, p. 232). The problem is compounded by the inability of the small businesses to attract the best-skilled employees as they are outdone by the larger firms which are able to offer more competitive remunerations.
Despite the numerous challenges facing the SMEs, there exist several intervention measures well applicable to mitigate the effects of both the external as well as internal hurdles. The most important support programs identified across the world for SMEs are capacity development through the provision of managerial training in a bid to equip the managers with the relevant skills to manage the SMEs most productively (Reynolds, 2006, p. 59). Secondly, there should be proper channels for credit access among the SMEs in addition to a stable macro-environment as this reduces uncertainties thus improving chances of survival.
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