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Critical Factors in the Success of Small and Medium Enterprises

Critical Factors in the Success of SMEs

Introduction

Small and Medium Enterprises have progressively taken a central role in most major and upcoming economies due to their versatile and adaptive nature, fueled by the highly dynamic consumer preferences scenario, as well as globalization which has revolutionized the way people think, operate and what they need. A significant number of businesses today are online and owned by individuals or a small number of people. Thus, most governments are looking into ways of supporting SMEs as the next strategic formulation towards job creation and boosting their economies.

While SMEs have traditionally been there, they have never before received as much focus as during this era of internet business and globalization, thus, while a quick majority of new investors is able to envision or fund a business, most lack the critical knowledge that will give them a competitive edge in a business platform which is already overcrowded (Wijewardena & Cooray, 1996). This paper will focus on critical factors that determine the success of an SME. Like in any other business, the factors that determine success are both internal and external. Traditional evaluation tools such as Porter’s Five Forces, the  Strengths, Weaknesses, Opportunities and Threats (SWOT) analysis, as well as the Political, Economic, Social, Technological, Environmental and Legal (PESTEL ) analyses all have found both the internal and external environments critical for any business’ success. To understand how these factors work, the paper will first define an SME.

Small and Medium sized Enterprises (SMEs)

Small and Medium sized Enterprises are business ventures with a total worker number and capital incentive smaller than that of large organizations of companies. There is no fixed categorization but different classifying authorities set varying restrictions on properties of an SME. The European Union defines as an SME “any business entity engaged in an economic activity, irrespective of its legal form. This includes in particular, self-employed persons and family businesses engaged in craft or other activities, and partnerships or associations regularly engaged in an economic activity.” (Euresearch, 2006). In addition, the entity must employ less than 250 people and have annual turnover of less than 50 million Euros and balance sheet with not more than 43 million Euros.  The Organization for Economic Cooperation and Development (OECD) defines a small enterprise as having 10-49 workers, with capital range of less than 10 million Euros, while a medium enterprise has 50- 249 employees and capital range less than 50 million Euros. Micro entities have less than 10 employees and 2 million Euros (The Organization for Economic Cooperation and Development, 2012).

Critical Success Factors for SMEs

While there are numerous factors identified as significant in the success of an SME, this paper will focus on those most frequently cited in most studies, which also tend to have the biggest bearing on SMEs growth. For instance, a Pareto analysis conducted in the 2nd International Conference on Business and Economic Research (ICBER) 2011 with regard to SMEs came up with the following Pareto table (Fard  and Mansor,  2011).

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The Marketing Mix

For the products or services of an SME to secure a niche in the business platform, the following variables called the four Ps should be essentially aligned. 

Product

The product/service offered by the SME is a fundamental factor in its success. This is particularly so because no matter the price, promotion, or place where a product is offered, customers will usually purchase a commodity only on the basis of the value addition it offers them. Customers are likely to purchase what they want, and not necessarily what they need. The SME should therefore have a good business intelligence processes to aid it in knowing what customers want. The quality of the product or service offered should be such that it adds value to the customer’s lifestyle and they find value for the money they spend on it. A good SME should have ways of finding the best product mix through studying the market trends, as well as by taking advantage of emerging technologies that make production easier and cheaper( for those in the manufacturing sector). The quality of products/services should also be such that it is better than that of competitors for a similar product, or that the SME is able to offer different qualities to suit different customer needs at different costs. This involves diversification and product differentiation as a strategy to capture as many customers as possible (Wijewardena & Cooray, 1996).

Price

The price of products or services should be affordable for the intended client population, while not being necessarily the cheapest. Customers will purchase only within their means, except in conditions of debt. It is therefore important that, a business model products in the affordable product range without necessarily compromising on quality. For this to happen, innovative strategies such as quantity reduction in the retail package, as well as product blending, may help to market expensive products in a low income market segment (Wijewardena & Cooray, 1996).

Place

Place refers to the intended market segment in which the product/service is to be offered. The key element to consider in aligning the Place variable is that different markets are affected by different market dynamics such as cultures, competition, incomes, alternative products/services availability as well as various legal or other government control mechanisms. The successful SME should have a progressive Business Intelligence initiative that helps them  to study both the market and consumer dynamics in order to keep ahead of competiton as well as stand chances of surviving various market forces such as competition, legal implications and restrictions ( especially in a time when there is a vigorous campaign for companies to go green).

Promotion

Competition continues to be the single greatest challenge for most businesses today, especially SMEs. In order for their products/services to remain visible, therefore, SMEs constantly need to upgrade their customer awareness strategies, traditionally done through advertisement. However, different strategies must be used by the different SMEs depending on the scope of their businesses. For locally operated SMEs, innovative advertisement strategies such as community projects involvement, charity work and simple sponsorships are a dynamic way to catch the market attention. For SMEs with an online presence, there are numerous intelligent tools developed by web applications engineers to take advantage of the most visited websites and also those most relevant for the particular product/service offered by the SME to aid in advertisement.

Government Control

Government control is an important factor for any business, regardless of size or capital. Government control includes all activities or policies conducted by the government that affect the business environment as regarding the SMEs in a given country or in the international business platform. Tax incentives, for example, are a common way in which governments regulate the business platform (Indarti & Langenberg, 2005). Very high tax schemes are detrimental for an SME’s success. Most governments have laid down attractive tax schemes to boost creation of SMEs within their jurisdictions as a way to promote self employment and job creation, as well as in order to boost their GDPs. However, governments may also set high tax schemes for foreign investors in the SME segment in order to discourage unhealthy competition with the local SMEs and therefore boost local investment.

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This later consideration is very important with the view that most current businesses have an online presence and may trade goods or services internationally. In such settings, SMEs may find external trade very unfavorable due to high import duties in target countries. Government control may also take the form of political interference by interested organs in the governing bodies especially where SMEs emerge to compete with state factions in providing certain services or manufacturing of goods. A successful SME should therefore conduct a comprehensive analysis of the environment it wishes to operate in so that it aligns its operations to match existing government regulations without reducing its profitability or potential for growth. Government control may also take the form of international treaties and business control mechanisms. For instance, a significant number of SMEs are involved in original design which is governed by the international Intellectual Property Rights legislation. It is therefore imperative that innovative designs be checked against existing patents in order to reduce conflicts and lead to reduced profitability.

Legality

There are many legal factors which are highly critical for the success of an SME. According to Wijewardena and Cooray, (1996), the policies, legislation regulation and taxing frameworks play a very big role in determining the success and survival of SMEs. Research shows that legality affects SMEs differently as compared to large enterprises. It is important to note many of SMEs have limited resources both financial and human resources compared to large and well established businesses. Many SMEs are forced to allocate huge budgets in order to overcome various legal challenges that hinder them from achieving their business goals. The legal policies that are implemented on regulation of SMEs greatly determine their success. According to Indarti and Langenberg (2005), it is highly important that any government ensure that its legislation favors the operations of SMEs in order to ensure their survival and success. Appropriate trade and taxing policies create a healthy environment for investment and sustainability of SMEs. Good and fair trade and taxing policies ensure that SMEs carry out their operations at minimal cost hence contributing to their success. On the other hand, unfavorable policies and business legislation increase the cost of operation of the small scale entrepreneurs hence hindering them from becoming successful.

As Wijewardena and Cooray, (1996) point out that the judiciary is a crucial legal factor that affect the success of SMEs in any nation. The judiciary has the obligation to provide legal protection to SMEs through various ways. The judiciary should ensure that intellectual property rights are protected in order to ensure that SMEs have the right to invest their business knowledge without unnecessary legal regulations. The judiciary should also ensure the implementation of competition laws since they are crucial for the success of any SME. According to Storey (2000), competition laws create an environment which encourage competition among SMEs and this greatly enhance their competitive advantage making them successful. The nature of legality in an SME is different from its nature in a large firm. According to Wijewardena and Cooray (1996), many SMEs heavily rely on government support in order to have legal regulations that are favorable for their business operations. On the other hand, large firm have adequate finances and hence do not only rely on government to ensure they perform well amidst strict legal restrictions. In addition, many large firms carry out their operations at the international level and hence their legal factors are determined by the various legal policies of all the nations that they carry out their business operations. 

Social Network

Social network can be described as the channels that allow entrepreneurs to assess the necessary resources for the survival and continuity of their businesses (Wijewardena and Cooray, 1996). The most important aspect of social network that affects the success of any SME is the public infrastructure. SMEs heavily deepend on public infrastructure to such as roads, good communication network; electronic media among others reach out to their customers and carry most of their marketing operations. According to several researches on this topic, social network is crucial for the start-up, growth and survival of any SME. In order for small scale entrepreneurs to access the necessary resources to start up their businesses, they heavily rely on good infrastructure and communication network. In the contemporary, highly competitive markets, many SMEs depend on communication channels such as the print and electronic media to market their products and hence attract as many customers as possible (Indarti & Langenberg, 2005).

A well established social network enables small scale entrepreneurs to have an easy access to raw material and other resources needed to establish their businesses. This means that many small scale entrepreneurs in developing nations, which have poor road network experience many challenges in accessing the material to start up their businesses. According to Storey (2000), it is important that government make it a priority to invest and support the construction of good public infrastructure not only for the SMEs but also international entrepreneurs who wish to invest in their countries. Easy access to capital and raw ,materials enable small scale entrepreneurs to put their business ideas into practice, be competitive and enhance their survival even during unfavorable conditions. SMES mainly depend on the interaction between them and their local customers in order to achieve their business goals. On the other hand, large firms have to ensure good interactions with all their local, nations and intentional customers for their survival. Therefore, the nature of social network as a factor that determines the success of an SME is different from that of a large firm.  Many large firms have adequate resources that enable them to access the necessary material to put up, expand and sustain their businesses.

On the other hand, many SMEs have limited resources and mainly depend on good public infrastructure to carry out their business operations effectively. This underpins the reason as to why any government should ensure that there is good public infrastructure in order to ensure the success and survival of SMEs. Recent researches on factors affecting the success of SMEs indicate that access to technology is a crucial factor that determines the success of any small-scale entrepreneur. In order to enhance their competitive advantage, small scale entrepreneurs need to have an easy access to technology. Today’s markets are highly competitive and many businesses are relying on the advancing technology to enhance their survival. As a result of globalization, many SMEs are facing stiff competition from international investors. Therefore, there is need to ensure that SMEs have an easy access to technology in order to compete with these other entrepreneurs and hence be able to survive in the competitive markets.

Counter-Trade Strategy

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Depending on what the company produces, counter trade might be a critical factor in the success of SME’s.  As a result of the frequent world debt crises as the one being witnessed in countries such as the U.S., the European region among others, it has become critical for businesses to conduct their activities in other ways other than in cash. According to Richardson, (2005), countertrade entails the exchange of goods or service, in other ways in place of money. “Economy Watch” (2012) argues that, for SMEs, counter trade is largely viewed as one of the excellent ways in which they can acquire entry into new markets, expertise among other crucial elements. For instance, to most SMEs, they have been unable to acquire loan facilities from financial institutions, due to the fact that, the banks and other financial institutions are risk averse, a factor which has accelerated counter-trading for the SMEs. Having an open counter trade strategy can help SME’s overcome capital shortages in cases when they want to export their products. An open counter trade strategy can also be used to access foreign closed markets in order to sell their products as well as gain technological know-how from another country. The counter trade strategy can also include alliances between two different companies. These alliances can be joint ventures or mergers between two companies in the same sector.

 Alliances such as this can help minimize the gap between companies’ current resources and its future demands. Alliances tend to improve the competitiveness of companies by giving them access to external resources and providing them with a new way to look at business. Further, counter-trading offers sellers with the chance to differentiate their products from the ones of the competitors, thus higher levels of sustainability. For instance, in new markets, there can be several challenges of non-convertibility of currencies, deficiency of foreign exchange, or even lack of any commercial credit. Therefore, for SMEs to survive in these types of hostile business environments, counter-trading becomes inevitable, as it offers an alternative to their new ventures.

Therefore, it is critical for SMEs to realize that, when counter-trading, there is the need to ensure flexibility as this serves as an elaborate platform to acquire a higher level of customer loyalty, a key factor for the success of any firm (Richardson, 2005). Large firms such as Microsoft and Oracle amongst others tend to rely heavily on alliances in order to expand their growth strategy. In the case of SME they typically have smaller budgets which in turn limit them from being able to access globalization and technological change. Even though SME’s share this problem when compared to large firms they tend to be more limited to strategic alliances. This is due to the reluctance of SME to fully share their inside knowledge between one another. Other factors, which may require counter-trading for SMEs economic and political policies seeking to create a balance in oversees trade, stimulating output of domestic industries, such as mineral extraction and agriculture among others (Richardson, 2005).

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