Why do approximately 70% - 80% of small businesses fail within five years? Why are certain entrepreneurs more successful than others?
In a massive research programme running over the last 15 years, I’ve collaborated with a number of researchers to address these questions with a local flavour: Our research focused mostly on members of the formerly disadvantaged communities in South Africa.
Only about 1% of micro-enterprises who have started with less than five employees have grown to employ 10 people or more. A negative consequence of this fact is that these businesses are not helping to solve the unemployment issue, and hardly contribute to the taxation base of the economy.
So what makes the difference between success and failure for these small firms? Summarizing the results of our research, it is obvious that approximately 40% of the success of small-scale businesses is dependent on one thing: the person of the entrepreneur who owns the business.
In small businesses of 1-50 employees, the owner is typically the source of action in a 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 - the business can rise or fall based on his or her decisions.
Up to now there was almost no research in Africa dealing with the person of the entrepreneur - most research dealt with the environment and the firm (e.g. how firm size and age influence success, and which business structures work best in which environments).
Our results show several variables are important predictors of success for small-scale enterprises - and for the enterprise owners.
Personal initiative (being self-starting, proactivity and persistence) was consistently related to business success. This means that whenever a business owner uses a more reactive strategy (no proactivity, no planning), he or she will be more likely to fail. Business owners with high personal initiative were more successful.
Other factors 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.
Interestingly, we found almost the same results in our research in Zimbabwe and Namibia.
What lessons should we learn 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.
Based on the results of the research, a new three-day training programme was developed, addressing the shortfalls of South African entrepreneurs. The entrepreneurial training aims at developing and enhancing small-scale businesses to grow and to become more profitable - by developing personal initiative skills.
Other training components include learning how to be proactive, how to actively set and implement goals for one’s business and plan with a long-term focus, and time management - as well as being innovative, and generating and implementing new ideas.
This approach focuses on “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 mindset as well as action strategies for effective implementation.
Six months after training we compared the business success of the entrepreneurs who participated in the training with a control group. The training group improved their turnover and profit and employed more employees, while the control group (no training) stayed the same.
The training showed, for the first time, that with the right entrepreneurial development, one can not only improve the business success of small-scale entrepreneurs, but also create employment - a win for the economy as a whole.
What should be done to strengthen SMMEs in South Africa?
Of course there are many answers to this question. Here are a few quick ones that I think are worth considering.
Firstly, there’s 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 has often spent money for the small-scale sector in a random trial and error manner, succeeding or failing based more on luck than through informed decisions.
However, it’s not only government agencies that sometimes perform poorly. Our universities in South Africa also have not contributed a lot to benefit small-scale entrepreneurs. Apart from a very few pieces of sound research, there is not much which 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 massive entrepreneurship training initiatives 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.
Ultimately, what matters most is that we combine all these strategies in an effective manner - because only by using the best research can we fund and train small-scale entrepreneurs in the right way...and reap the benefits as a country.
Solomon, G., Frese, M., Friedrich, C., Glaub, M. (2013) Can personal initiative training improve small business success? A longitudinal South African evaluation study. International Journal of Entrepreneurship and Innovation. Volume 14, No. 4. Page 255-268. London.
Basardien, F., Friedrich, C. and Parker, H. (2013) The relationship between planning strategies and entrepreneurial success for start-up entrepreneurs in the Western Cape: a psychological approach to entrepreneurship. International Journal of Entrepreneurship and Innovation. Volume 14, No. 4. Page 281-288. London.
Prof Christian Friedrich is an Extraordinary Professor at the University of the Western Cape’s School of Business and Finance, and holds a professorship at the University of Applied Sciences, Giessen, Germany as well. His research deals with the success factors of entrepreneurs and small business owners in different parts of the world, and with how to improve their performance and reduce failure. His work also deals with evidence-based best practices of entrepreneurship education at universities.