Business 27.12.2016 12:16 pm

How to help new entrepreneurs to succeed

FILE PICTURE: Small Business Development Minister Lindiwe Zulu. Picture: Christine Vermooten

FILE PICTURE: Small Business Development Minister Lindiwe Zulu. Picture: Christine Vermooten

Why do 70% to 80% of small businesses fail within five years? What should be done to strengthen SMMEs in SA?

In our massive research during the past 15 years, we were focusing on the question of why about 70% to 80% of small businesses are failing within five years, and why certain entrepreneurs are more successful than others? Only about 1% of micro enterprises who have started with fewer than five employees have grown to employ 10 people or more. A negative consequence of this fact is that these businesses hardly contribute to the taxation base of the economy and are not creating employment.

In our research we were focusing mostly on members of the formerly disadvantaged community in South Africa. In small businesses of 1-50 employees, the owner is typically the source of action in the firm. He or she is the one making important decisions on products and ways of production, as well as offered services. The business owner deals with important customers, suppliers, and employees. Up to now there was almost no research in Africa dealing with the entrepreneur; most of the research dealt with the environment and the firm (eg, how does firm size and age influence success).

The results of our studies show which variables are important predictors of success of small-scale enterprises. Personal initiative (being self-starting, proactive and persistent), the opposite to reactive business strategy, was consistently related to success. This means whenever a business owner uses a reactive strategy (no proactivity, no planning), he or she will be more likely to fail. Business owners with a high personal initiative were more successful. Other factors found in our research strongly influencing the success of small-scale entrepreneurs were innovativeness, learning orientation and achievement orientation. Furthermore, planning strategies, including goal setting, have a high and positive correlation to success.

Summarising the results of our research, it is obvious that about 40% of the success of small-scale businesses depend on the entrepreneur him- or herself. Interestingly, we found almost the same results in our research in Zimbabwe and Namibia.

What lessons should be learnt from these results? I think we have to follow a partly new approach to make South African entrepreneurs more successful and reduce the failure rate in the future, because up to now important factors contributing to success, such as personal initiative, were not part of entrepreneurial training.

Out of the results of the research, a new three-day training programme was developed, which is addressing the shortfalls of South African entrepreneurs. The entrepreneurial training aims at developing and enhancing small-scale businesses to grow and become more profitable. Necessary skills  include personal initiative, learning how to be proactive, how to actively set and implement goals for one’s business and plan with a long-term focus, as well as being innovative, and generating and implementing new ideas. This approach focuses on the “concrete actions” of concrete individuals in the market and looks at resources and barriers for these actions and how to improve them. A condition for a proactive approach is to develop a mind-set as well as action strategies for effective implementation.

Six months after the training, we compared the business success of the entrepreneurs who participated in the training with a control group (no training). The training group improved their turnover, profit and employed more employees, while the control group stayed the same. This is the first time it could be proven that with the right entrepreneurial training, one can not only improve the business success of small-scale entrepreneurs, but also create employment.

What should be done to strengthen SMMEs in South Africa? Of course there are many answers to this question. In this short contribution, and from my point of view, I would like to give two answers.

  • There is a need for further research to build a more research-based entrepreneurial knowledge system that will provide empirical evidence of the effects of factors that impact on entrepreneurial behaviour, performance and effectiveness. Because we didn’t have a lot of good research in this country, government often spent money for the small-scale sector in a trial-and-error approach. But not only government agencies sometimes didn’t do very well. Our universities in South Africa also have not contributed a lot to benefit small-scale entrepreneurs. Apart from very few pieces of sound research, there is not much that can be used to improve the SMME sector. Good empirical research will take at least two to three years or more.
  • We also need to start a massive entrepreneurship training initiative in all nine provinces. The training should deal with aspects of personal initiative, innovation and action strategies with an action learning and action training approach, because we know that this strengthens the business performance of entrepreneurs and will create more employment.

Prof Christian Friedrich is from the University of Applied Sciences, Giessen, Germany, and is an extraordinary professor at the University of the Western Cape

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