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Why do 70% to 80 % of small businesses fail within five years?

…and what should be done to strengthen SMMEs in South Africa?

In our massive research during the last 15 years we were focusing on the question of why  approximately 70% to 80 % of the small businesses are failing within 5 years, and why certain entrepreneurs are more successful than others?  Only about 1% of micro enterprises who have started with less than 5 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 his firm. He 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 (e. g. 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 will be more likely to fail. Business owners with a high personal initiative were more successful. Other factors found in our research strongly influencing success of small scale entrepreneurs were innovativeness, learning orientation, 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 approximately 40% of the success of  small scale businesses are depending on the entrepreneur himself. 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 like 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 “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 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, 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 a massive entrepreneurship training initiative in all nine provinces. The training should deal with aspect of personal initiative, innovation and action strategies with an action learning and action training approach, because we know that this is strengthening the business performance of entrepreneurs and will create more employment.

Prof Christian Friedrich, University of Applied Sciences, Giessen, Germany and  Extraordinary Professor at the University of the Western Cape

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If you keep the statistics in mind, it is not prudent to start a business. If the chance of success is less than 20% in the first five years and if only 4% survive after 10 years, it is better to sleep late and play the lotto.

To start a small business is simply reckless, unless you can do it with someone else’s money. Now, say you have the capital to start a business, is it not much more prudent, wise and sophisticated to buy into a business that has a proven track record? Why try to invent the wheel again and risk your capital doing so?

For more than 90% of entrepreneurs the road to sustainable wealth lies in JSE listed or regulated instruments. Leave this “starting my own business” stuff for the uninformed and starry-eyed fools.

Sensei…you have a point when the “entrepreneur” is either lacking the inertia to succeed or “has to” go it alone due to circumstances as being retrenched from a cozy office chair.

On the other side I salute those who gained training in a field, nurtured an idea and persued the notion to be more than an paid “doer”.

Without entrepreneurs we would all be back to “wondering” what the purpose of a “wheel” is.

Such an uninformed comment Sensei. Having started a business 8 years ago, and almost going bust 4 years ago I think I can add something to the conversation. There is no special skill needed to start a business, just a healthy dose of common sense and realism. One must be prepared to make difficult decisions, however unpopular. Understand your value proposition, preferably it is one that adds value or solves a real problem, then organize yourself to deliver to that proposition. Get paid on time, and understand which factors impact costs and revenue the most.

I am now earning what I was earning 8 years ago, but the experience has left me so much richer, and ironically, employable. The sense of achievement that comes from creating something and then have someone say “yeah, I’ll pay for that” outstrips the joy of a big bonus. Anyway, good luck with that small mindset of yours…

Being an entrepreneur is wonderfull!!! In Theory!!!
The reality is that entrepreneurs start out proactive, full of energy, until reality sets in!!! SA economy very small, high unemployment, people don’t want to pay/don’t pay!!! economy is dependent on consumer spending, not enough consumers with disposable income!!! bills still have to be paid at the end of the month!!! being employed is better!!! salary, salary increases, bonus, paid leave/training etc!!! therefore, no real incentive to become an entrepreneur!!! rather work for a company!!!

Prof…this is good work, however I wanted to enquire, did you include the Stats SA SESE survey in your research? I believe doing so would shed a lot of light on what government is thinking and where you’re going, so you don’t shadow their mindset. From what you wrote I gather that your approach emphasizes knowledge as power, but I also think we should distinguish what knowledge is necessary at which economic tier. 2nd economy enterprises are altogether different species to 1st economy businesses.

So here is my penny.

To start your own business is risky but the fact remains there has to be a balance in an economy, some are business owners and some are employees.

But, if anyone tells you that it is less risky to be an employee… wake up. Companies retrench thousands of people on a constant basis, the risk is just as high to be an employee.

You can be jobless TODAY.

This is retrenchment over 2015/2016

1. Telkom – 8055
2. Lonmin – 5108
3. SA Post Office – 5065
4. Harmony Gold – 3100
5. Kumba – 2633
6. Bokoni – 2600
7. Anglo American – 2000
8. Unisa – 2000
9. Absa – 1952
10. Samancor Mines – 1700

Total is 34 213 employees who are now jobless multiply that with 4 and you’ll see how many people does not have the means to feed their family anymore.

So, yes, I would rather start a part time business and see it through – than throw in my lot with a company and just become another number.

What it comes down to is, rather the be the retrencher then the retrenchee, however ridiculous that statement sounds I believe it makes sense.

when you get retrenched you get a payout and can draw UIF for 8/9 months – when your business goes bankrupt you lose your house,car,money etc!!!!

Of course yes, that is true as well. But I think as well everyone can debate this day in day out. I’ll be referring back to the previous paragraph of some are employees and some entrepreneurs.

I’m just stating that there is no security in either of them, just a sense of security. We as individuals must decide which risk we are most comfortable with.

Agree work for yourself you cannot be fired but you can go bust.

I’ve started my own business 11 years ago from scratch. Prior I was employed. After 11 years my business is getting sustainable traction and we are expanding in to the USA. My learnings during these years it is lonely, hard and if I don’t pull up my socks every single day and keep at it, nobody will do it for me.
I want to share 3 things:
– being an entrepreneur is not for everybody and that is not a judgement at all. My brother failed running his business, but excels as a corporate. He is happier where he is now.
– if my product does not sell, I have an existential problem and I am doing something wrong, not my customer/market. If we have a few days where it is more quite than usual, I worry.
– if things do not go well because clients own us money or we failed to get that order or I am unhappy with the performance of an employee, it affects my mood and often my wife and kids take the brunt.

After 11 years on my own, I don’t look back and love what I am doing. I am grateful to my wife and kids and take pride looking after them.

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