The importance of SMEs in South Africa: An outline of the background and problem facing these SMEs.
Updated: Aug 4
The need to improve business performance and reduce failure rates of South African (SA) small and medium enterprises (SMEs) partly stems from the South African National Small Business Strategy (SANSBS) goals. A report conducted by Maas and Herrington (2007) illustrates the SANSBS goals, which are to promote economic growth, employment creation and wealth distribution. SMEs have been increasingly recognised as vehicles for economic and employment growth, as well as a major source of innovation and technological development (Olawale & Garwe, 2010). Unlike global trends, which result in SMEs contributing to employment, SAs SMEs are stagnated, resulting in a reduction in employment creation and turnover. Both measures are extremely important in any economy, with turnover driving economic growth , and the increase of employment being the catalyst which ensures social stability (Business Environment Specialists, 2015). In line with this research, the National Development Plan (NDP) of 2030 (National Planning Commission, 2010) illustrates the massive shortage of engineers, among other professions, in SA. Therefore it is imperative to ensure that the developing Engineering firms in SA remain sustainable, with high performance rates in order to grow in the foreseeable future.
SMEs form the basis of many nation’s economic development, however SMEs face many challenges that require modern management techniques, or 'business practices' in order to address these challenges (Dumba, 2014, p. 33). Due to such challenges a staggering 75% of SMEs in SA fail or never become established firms (Olawale & Garwe, 2010). According to Von Broembesen, Wood and Herrington (2005) in comparison to any of the other Global Entrepreneurship Monitor (GEM) countries surveyed, in SA it is more likely that a firm will fail within the first 42 months. Willemse (2010) found that between 50% and 95% of SMEs in SA fail within the first five years due to issues such as the lack of management skills and the lack of access to finances.
In order to address the cause of these failures, leaders and managers are always looking for ways to make improvements to various aspects of how they operate. They do this in order to maintain the edge against their competitors, and to remain viable. This may be in the form of rules, methods, frameworks or procedures which the company employs in order to meet their objectives. These various tangible and intangible components will be referred to as ‘business practices’ for the purpose of this study. There has been various research conducted around the concept of 'business practices'; such as moral, ethical, unethical, environmental, and sustainable business practices, however no clear and specific definition for business practices have been found (Forsyth, 1992; Fowler & Hope, 2007; Gadenne, Kennedy, & McKeiver, 2008; Sarkis, 1998; Svensson, Wood, & Callaghan, 2010; Tituts & Bradford, 1996). A study by Mandal and Venta (2008) highlights various measurable elements of 'business practices' that can be used as indicators to determine whether a 'business practice' is working or not - these elements include productivity, profitability and innovation. Other than the larger manufacturing and commercial businesses, there is also a need in the SME sector to reduce failure rates, as discussed above. Maas and Herrington (2007) found the SMEs’ owner’s level of education correlated with the businesses capacity to create employment as it develops. Due to the legacy of apartheid, a lack of sufficient schooling and training has resulted in poor management capacity in start-up companies in SA, further linking to low levels of entrepreneurial creation and high failure rates (Von Broembesen et al., 2005). This lack of basic education and management skills has left many SASME leaders lacking necessary management skills and knowledge of business practice which is needed to ensure their businesses perform well and remain viable.
Research conducted by Neneh and van Zyl (2012) focused on the positive effects of 'business practices' by exploring marketing practices, strategic planning practices, human resources management (HRM) practices, risk management practices, performance management practices and teamwork practices, in order to see how their implementation effect business performance; It was observed that strategic, performance management and marketing practices dominated when correlated with firm performance. The results of Dumba’s (2014, p. 33) report illustrated that current research has been based on many of the areas identified above, as well as operational and financial management practices, as a result these practices have been identified for further investigation. There appears to have been large amounts of research conducted around these specific business practices; however there is limited research regarding the umbrella term 'business practices'.
The failure rate of SMEs in SA can be attributed largely to the low levels of basic education (Von Broembesen et al., 2005); management capacity and expertise, the lack of access to finances (Olawale & Garwe, 2010), and how one understands the influences of business practice’s on business performance and success (Hsu, Tan, Kannan, & Keong Leong, 2009). Understanding how management practices can, and are, being implemented to address such issues, has been speculated to significantly improve the success rate and overall performance of SMEs in SA.
“This abridged passage was first published in its full form by M. Schreiber as ‘Why South African SME engineering managers introduce business practices: The degree to which chosen business practices influence firm performance', 2016.”