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Factors that hinder the growth of small businesses in South African townships
Boysana Mbonyane and Watson Ladzani
University of South Africa, Pretoria, South Africa
Abstract
Purpose The purpose of this paper is to examine factors that hinder the growth of small businesses in South African townships, to create awareness of these factors and to develop guidelines for small business owners to promote successful business enterprises. Design/methodology/approach The study was exploratory, descriptive and qualitative in nature. Semi-structured interviews were used to gather data. A response rate of 93 per cent was obtained from a sample of 30 businesses. Findings The slow growth rate can be attributed partly to the lack of support that small, medium and micro-enterprises receive from support institutions, and partly to their own internal weaknesses. The ndings furthermore revealed that the most common causes impeding business growth are a lack of legal knowledge, a lack of funding and a general lack of business acumen. Research limitations/implications The study was limited to the micro-, very small and small sectors of small businesses. Medium-sized businesses were not included in the sample. The research could be replicated in other similar townships to determine whether similar results could be obtained. Originality/value The study adds to the knowledge of challenges that small businesses face in Black townships and how these challenges could be minimised. Strategies recommended for ensuring the growth of small businesses are that government intensify information campaigns of their support services and encourage business owners to afliate with local business chambers for business support purposes. Business owners and their staff should also prioritise business training. Keywords South Africa, Small enterprises, Business development, South African townships, Growth rate, Business support services Paper type Research paper

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Received March 2010 Revised August 2010 Accepted February 2011

European Business Review Vol. 23 No. 6, 2011 pp. 550-560 q Emerald Group Publishing Limited 0955-534X DOI 10.1108/09555341111175390

Introduction Small businesses are the backbone of many economies across the globe. The major challenge they face is how to overcome the factors hindering growth (Buckley, 1998, p. 87; Kinunda-Rutashobya and Olomi, 1999, p. 7). In South Africa, where small businesses constitute more than 80 per cent of the business sector, the growth rate is low (Bowler and Dawood, 1996, p. 2; Badenhorst et al., 1997, p. 3). On average, 50 per cent of all small businesses fail to grow. This growth rate is as low as 20 per cent in some regions (Ladzani and van Vuuren, 2002, p. 155). Small business development in Kagiso is no exception. Some of the businesses that were started in the early 1990s are no longer in existence or not growing beyond the survivalist stage (Bowler and Dawood, 1996, p. 2). The low growth rate can be attributed partly to the lack of support offered to small, medium and micro-enterprises (SMMEs) (Business Connexion, 2004). The South African Government initially did not give enough support to the small business sector. Big business typically received more support than SMMEs. However, this scenario changed in the 1990s. The government initiated small business support

measures aimed at developing and promoting SMMEs (Bowler and Dawood, 1996, p. 2). The White Paper on the National Strategy for the Development and Promotion of Small Business in South Africa was released in 1995. This initiative was followed by the National Small Business Act of 1996. In this paper, the authors give a brief overview of the literature on limitations and factors that hinder the growth of small businesses. Then the research methodology is described, and the results of the research study are discussed. Finally, conclusions are reached and recommendations are made. Problem statement Many residents of Kagiso Township are unemployed. Some unemployed residents and some residents who had been retrenched (mainly from mining jobs in the region) started their own small businesses in the hope of earning an income. However, many of these small businesses did not succeed in getting off the ground (Parker, 2004, p. 24). The question addressed in this study was therefore: what prevents the growth of small businesses in Kagiso Township? Purpose of the study The purpose of this study was to explore the factors that seem to be responsible for the poor growth rate of small businesses and to develop guidelines for small business owners in order to promote successful business enterprises. Importance/benets of the study Poor business growth leads to increased unemployment and poverty. The study addressed the relationship between identied factors and the poor growth of small businesses. The study was important, because it aimed to create an awareness that small businesses in Kagiso Township should grow in order to create employment. Literature review: issues affecting growth in South African small businesses before and after 1994 There has been some research into factors that hinder the growth of small businesses in Kagiso. The constructs of small business as indicated by the National Small Business Act 102 of 1996 (South Africa, 1996) and growth as pointed out by Advanced Currency Markets (ACM) Trading Services (2010) have been dened to give insight into the research problem. The National Small Business Act (South Africa, 1996) denes a small business as a separate and distinct business entity, including cooperative enterprises and non-governmental organisations, managed by one owner or more which, including its branches or subsidiaries, if any, is predominantly carried on in any sector or sub-sector of the economy and which can be classied as a very small, a small, a micro- or a medium enterprise (SMME). Table I indicates the size of the small businesses as dened by the Act. Advanced Currency Markets (ACM) Trading Services (2010) denes growth as follows: An investment style that looks for stocks with strong earnings and/or revenue growth or growth potential or An economic expansion as measured by any of a number of indicators, such as Gross Domestic Product (GDP). Based on these denitions, the following issues that caused poor growth before 1994 are discussed.

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Issues affecting growth in South African small businesses before 1994 Bekker and Staude (1996, p. 17) emphasise that the worst that can happen is that one fails through ones mistakes. Thus, learning in small business is the essential fuel for the small business owners as leaders to grow. Research into the small business sector in South Africa has been insufcient and inadequate, and this has hampered the development of the sector. According to Saunders et al. (2000, p. 44), the literature review forms the basis of research because it helps to develop a good understanding of and insight into relevant previous research studies and emerging trends. Drodskie (2002, pp. 19-20) points out that small enterprises, particularly those located in townships and former black areas, face serious challenges. Business Connexion (2004) discovered that, during apartheid, the South African small business economy was either neglected by policy makers or, in the case of Black-owned enterprises, actively discouraged through repressive measures. However, small enterprises were wiped off the research agenda of most business schools during the apartheid era. A study of the economics of SMMEs in South Africa undertaken Berry et al. (2002) concludes that research in the area is sorely lacking. In addition, the study reported on by Business Connexion further explains that research into small business conducted over the past ten years neglected two important points: policy implementation and an understanding of the economics of the sector. The Tips report states that any policy decision concerning small businesses requires accurate information about numbers, size, structure, the state of the economy and their contribution to the economy. However, the economic empowerment potential of small businesses can only be estimated if researchers have a sense of the share of the previously disadvantaged individuals in the ownership of the enterprises. Since there appears to be inadequate information available about small businesses in South Africa and the reasons why they do not grow, some research into the factors that hinder growth in small businesses was initiated by the authors of this paper. These factors include a lack of awareness of the initiatives by government, poor nancial management, overtrading, crime, poor credit records, a lack of management expertise, poor infrastructure, a lack of information and poor access to communication technology. Factors hindering small business growth Jones and Tilley (2003, p. 4) and Simpson and Docherty (2004, p. 321) state that small businesses do not operate properly because their owners lack information about the registration of their businesses. This information should be communicated by the government. According to Thornhill and Amit (2003, p. 498), Jones and Tilley (2003, p. 4) and Ejembi and Ogiji (2007, p. 7), it can become problematic to run a business if the nances are not available or not managed. Bowen et al. (2009, p. 16) conrm that small business growth is delayed if proper nancing is not available.
Description Survivalists Micro-enterprises Small businesses Medium businesses None , R0.15m , R0.10m 0-5 , R0.15m , R0.10m 5-50 , R5m , R2.5m 50-100 , R10m , R5m

Table I. Size of small businesses

Full-time, paid employees Total annual turnover Total gross asset value

Longenecker et al. (2003, p. 514), Anesta et al. (2004, p. 15) and Busuttil (2007, p. 4) explain that poor inventory control delays the growth of small businesses. This happens because most small businesses do not have daily contact with customers, provide no special promotions, change prices and lack new product features. Bowes (2005, p. 16) and Asa et al. (2006, p. 1867) voice their concern about crime that hampers small business development. These crimes include robbery, break-ins and vandalism, and employees are injured or traumatised. As a result, losses incurred by small businesses include the cost of improving security or repairing damage and compensating affected staff members. Collinson (2006, p. 6) cautions that robbery is the crime that small businesses most often fall victim to. When robberies take place, customers and employees also fall victim to violence. The study reports that 60 per cent of workers in small retail outlets and small service businesses are exposed to robbery at some time. Drodskie (2002, pp. 19-20) states that many small business owners in townships struggle to obtain capital and a guaranteed income. As a result, they have poor credit records, which lead to poor cash ow. These factors constitute a real threat to small business growth. Bowen et al. (2009, p. 16) agree that a lack of credit is one of the serious constraints facing small businesses and contributes to poor small business growth. According to Thornhill and Amit (2003, p. 498) and Cheung (2008, p. 501), small business owners often lack experience in and training for the management of their businesses. As a result, they cannot meet the future needs of society. Ahmad (2009, p. 98) adds that factors that hamper small business growth include a lack of abilities and skills. Ihua (2009, p. 199) reports that one of the serious constraints on small business growth is a lack of management skills, which results in the poor management actions taken by small business owners. Anesta et al. (2004, p. 14) and Ejembi and Ogiji (2007, p. 7) have found that poor infrastructure (location) hampers small business growth. Poor infrastructure includes bad roads, inadequate water supplies and erratic electricity supply. Jones and Tilley (2003, p. 8) and Chong (2008, p. 469) explain that a lack of information and communication technology can lower customer satisfaction and seriously limit growth in small businesses. Bowen et al. (2009, p. 16) agree that infrastructure, as it relates to the provision of access roads, adequate power, water, sewerage and telecommunication services, poses a serious challenge to small businesses. They report that poor or inadequate infrastructure delays small business growth. Research methodology Research design This study was qualitative, exploratory and descriptive in nature. The research methodology employed was aimed at obtaining the most recent, relevant and in-depth information about the lack of growth in small businesses in Kagiso. An inductive format seemed appropriate. This format facilitated the development of a model and/or a theory that explained the difculties small business owners experienced and how these difculties shaped their behaviour and attitude towards business growth. Population Primary data were collected in Kagiso Township about factors that hinder growth in small businesses. Kagiso is located about 30 kilometer west of Johannesburg, Gauteng, and in 2009 its population stood at 190,000. The study looked at SMMEs in Kagiso

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and focused on a population that included survivalists, micro-enterprises and small businesses. The size of the population made it impractical and uneconomical to involve all members of the population in a research project; therefore, the researchers chose to include only a sample of the population in the study. Generalisations were made with specic reference to the small business community in Kagiso. Sample Cluster sampling was used and the small business sector was subdivided into survivalists, micro-enterprises and small businesses. Purposive sampling was used to choose units of analysis in all clusters. Ten units were interviewed in each of the three clusters. This study focused on ten spaza shops, ten restaurants and ten supermarkets. This means that the sample consisted of 30 businesses in all, and only 28 responded. The sample excluded other small businesses such as doctors surgeries, car wash establishments, garages and other professional services. The small business owners were each given a covering letter explaining the nature of the research project and a follow-up letter in which they were assured that their privacy would be protected and that condentiality would be maintained. Data collection Small business owners were approached in the specic zones in which they operate in Kagiso. Semi-structured interviews were used to gather data. This method extracted the information needed to explain why small businesses do not grow and gave the researchers the opportunity to obtain further information from the interviewees. The interviews were recorded on audiotape and observations were noted. Each individual business owner was interviewed based on the cluster to which he or she belonged. In some instances, local languages were used during the interview, because some business owners could not express themselves well in English. Interviews were conducted over a six-month period and each interview took 10-20 minutes. Data analysis For the purpose of this study, the qualitative data obtained from the participants during the personal interviews were subjected to content analysis based on grounded theory. The aim was to identify differences and similarities of small businesses from the participants responses to the semi-structured questions. The data analysis used was based on recommendations by Neuman (2006, p. 322) and Corbin and Strauss (2008, pp. 293-4). Secondary data collected were analysed in terms of factors that hinder growth on small business. Primary data were analysed in tabular form and a coding system was applied to the categories (survivalists, micro-enterprises and small businesses) and themes of the questions. Ten main interview questions and a number of sub questions were asked. The problems encountered during data collection included the language participants used, negativity towards the study and delayed appointments with the participants. In addition, two out of ten small business owners refused to be interviewed, particularly supermarkets. They lacked trust because they feared competition. One of the small business owners refused to have the interview recorded on audiotape. The sample drawn was not large enough to allow generalisation to all the small businesses

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in Kagiso Township. However, the study provides very useful insights into the factors that hinder small business growth. The results are reported and discussed in detail in the next section. Results and discussion The factors that contribute to the poor growth of small businesses in Kagiso Township are summarised in Table II and Figure 1. About 60 per cent of the survivalists and the micro-enterprises acknowledged that their businesses had not been licensed. In fact, probably none of the small businesses were licensed, although owners were reluctant to disclose this fact. The literature supports the nding that small businesses very often do not comply with legal requirements. Jones and Tilley (2003, p. 4) and Simpson and Docherty (2004, p. 321) state that the failure of survivalists and micro-enterprises to register can be attributed to a lack of information received from the government. The results also indicate that 70 per cent of the survivalists, 60 per cent of the micro-enterprises and 38 per cent of the small businesses did not keep records.
Problem areas Legal requirements not met Poor nancial management Poor stock control (overtrading) Poor crime prevention Poor access to credit Poor staff relations Poor infrastructure Poor technological skills Total Survivalists 6 7 9 2 5 4 6 9 10 Micro-enterprises 6 6 3 8 10 6 6 7 10 Small businesses 0 3 7 6 7 0 7 7 8

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Table II. Analysis of factors contributing to the poor growth of SMMEs in Kagiso Township

12 10 8 6 4 2 0 0 66 7 6 3 3 2 0 10 9 8 7 6 5 4 7 6 66 7 77 9 8 Survivalists Micro-enterprises Small businesses 1010

Le ga lr Po equ ire o Po r or fin men sto anc t ia s no ck co l ma t m nt et na r Po ol ( gem o or e v cr ert nt im ra d Po ep in g or r ac eve ) nt ce io s Po or s to n sta cre f d P Po oo f rel it at or r in io f te ns ch ras no tru ct lo u gi ca re ls ki ll TO s TA L

Figure 1. Analysis of factors contributing to poor growth of small businesses in Kagiso Township

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They struggled to obtain loans from nancial institutions and their businesses did not have budgets. The literature conrms that most survivalists and micro-enterprises struggle to manage their nances. Thornhill and Amit (2003, p. 498), Jones and Tilley (2003, p. 4) and Ejembi and Ogiji (2007, p. 7) say that running a business can present serious problems if its nancial support is inadequate and the owner cannot make nancial projections. These problems contribute to the lack of growth in small businesses. About 90 per cent of the survivalists, 30 per cent of the micro-enterprises and 88 per cent of the small businesses did not ourish because their mark-ups were very low and their customers could not afford their products. Longenecker et al. (2003, p. 514), Anesta et al. (2004, p. 15) and Busuttil (2007, p. 4) have discovered that most small businesses fail because their customer relations management is poor. In terms of overtrading, the price of the products tends to be the same regardless of where the customers do their shopping. The literature concurs with the nding that pricing presents a serious problem. Business owners in all clusters found it difcult to attract customers. About 20 per cent of survivalists, 80 per cent of micro-enterprises and 75 per cent of small businesses reported that crime posed a risk to their businesses. According to Asa et al. (2006, p. 1867), crime hampers the development of small businesses. Losses incurred by small businesses include the cost of improving security or repairing damage and compensating affected staff members. The literature supports the nding that crime is a serious threat to most micro-enterprises and small businesses. About 50 per cent of survivalists, 100 per cent of the micro-enterprises and 88 per cent of small businesses did not grant credit to customers. Respondents reported that they could not trust their customers to pay their debts especially if both parties did not agree on a repayment date. Survivalists who did grant credit often did not have the funds to pay suppliers who had extended credit to them. These results support the ndings in the literature that survivalists have a serious problem with the granting of credit. Drodskie (2002, pp. 19-20) writes that small enterprises, particularly those located in townships and former Black areas, have poor credit records. In terms of staff relations, 40 per cent of survivalists, 60 per cent of micro-enterprises and 0 per cent of the small businesses reported that no training was provided for their staff. The literature makes it clear that more than 50 per cent of micro-enterprises lack training in proper business management. According to Thornhill and Amit (2003, p. 498) and Cheung (2008, p. 501), small business owners lack the experience and expertise to run their businesses successfully. It was further found that 60 per cent of both survivalists and micro-enterprises and 88 per cent of small businesses experienced problems with infrastructure, including roads and driveways. They had to contend with potholes, dust and sewerage close to their businesses or on their business premises. Respondents complained that they were never informed about disruptions in electricity or water supply that would jeopardise their businesses. They needed both water and electricity to prepare takeaways, for example. The ndings concur with the literature that small businesses are often not situated in areas suitable for business operations. Anesta et al. (2004, p. 14) and Ejembi and Ogiji (2007, p. 7) support the results that small businesses do not grow owing to poor infrastructure (location). In some other instances, small businesses select a site without rst thoroughly analysing the suitability of location.

About 90 per cent of survivalists and micro-enterprises and 88 per cent of the small businesses surveyed did not have adequate knowledge of technology such as advanced software, internet and advanced technology. The literature supports the ndings that non-availability of appropriate technology prevents micro-enterprises and small businesses from reaching suppliers and customers in good time. Jones and Tilley (2003, p. 8) and Chong (2008, p. 469) express their concern about small businesses that cannot grow if the appropriate technology is not accessible. Conclusions and recommendations The following conclusions were drawn and recommendations made to increase the growth rate of small businesses in Kagiso Township. Based on the results, the researcher concludes that, in terms of legal issues, the government is not actively providing support mechanisms for business registration to ensure the success of survivalists and micro-enterprises. There is also poor communication between the government and small business owners. Thus, it is recommended that the South African Government introduces a more intense information campaign (for example via radio stations broadcasting to the population of Kagiso) and provides wide-reaching support mechanisms to help potential small businesses get licensed. Since small businesses fail with regard to nancial management, the researcher came to the conclusion that most small business owners who run their own businesses cannot obtain loans because they are not trusted by nancial institutions. They do not have a reliable track record and they fail to grasp the importance of correct budgeting. Based on the results and conclusions made, it is recommended that survivalists and micro-enterprises keep records that could be evaluated weekly or monthly. In addition, they should draw up a nancial plan for the future. A monitoring team could be formed by local business chambers for this purpose. Those business owners that are serious about growing their businesses could afliate with the business chambers and allow the monitoring of their businesses. The researcher concludes that most small businesses fail to stick to the correct mark-ups in an attempt to respond to overtrading because they have no idea how to play around with pricing. They simply do not know how prices should be determined. Failure to adhere to the correct mark-ups delays growth in small businesses. It is therefore recommended that survivalists and small businesses reach consensus on the type of products they offer. This could help them be more diverse in their product or service offerings and thus could result in their success. Based on the results, it appears as though many customers of small businesses in Kagiso Township take goods on account and do not repay their debt by the due date. As a result, most survivalists have poor credit records. Survivalists bad debts should be taken seriously as Drodskie (2002, pp. 19-20) asserts, since they lead to the nancial ruin of small businesses. Therefore, it is recommended that survivalists establish a credit system that will limit a customer to a certain amount of debt and a repayment period to ensure that the businesses do not operate at a loss. It appears from the results that the government does not have enough support mechanisms available to ensure that small business owners and their employees receive the training that would enable them to run the business successfully. Thus, it is recommended that most small businesses attract and keep good employees

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by enhancing employees knowledge and providing affordable textbooks on effective small business management. Free or inexpensive small business seminars could be offered by company vendors. The researcher concludes that crime is more often committed against micro-enterprises and small businesses because of the large size of the structure that needs to be secured, failure to establish a climate of trust and failure to apply techniques that will thwart opportunities for employee theft (including alarm and security systems). Crimes are committed by employees because they do not earn enough money. Since very few small businesses in Kagiso Township are insured against crime, victims of crime may never recover nancially. In such cases, small business growth is out of the question. The size of structure that needs to be secured, a lack of staff loyalty and the failure to apply techniques that might prevent employee theft must be considered. It is recommended that micro-enterprises and small businesses be insured against crime and loss. It appears from the results that most of the survivalists and micro-enterprises are failing owing to a lack of space provided by the government and the various shortcomings of the small business owners regarding their businesses. The researcher also concludes that the municipality and Eskom supply utility do not inform them about water and electricity supply disruptions. The lack of suitable trading space and small business owners apparent inability to persevere and overcome start-up obstacles should be addressed. Small business owners should take the initiative to minimise factors that hinder their business growth. It is recommended that survivalists and micro-enterprises do the following to ensure that they trade from a suitable location: conduct thorough market research; investigate access to transport; determine what their competitors weaknesses are; and familiarise themselves with municipality regulations and by-laws. The researcher concludes that the lack of technology available to survivalists, micro-enterprises and small businesses is caused by a lack of training and a lack of funds to invest in technology or to attend exhibitions on the latest information technology. These factors contribute to the poor growth of small businesses. Poor access to technology in all the small business clusters in Kagiso could be overcome if all small businesses owners could be motivated to attend seminars about and exhibitions on the latest information technology that may help their businesses grow. These recommendations, if applied properly, will ensure the growth of small businesses in Kagiso and in the rest of South Africa. Usefulness of this study for European managers Nations of the world depend on small businesses for their economic growth. These businesses constitute more than 90 per cent in both developed and developing nations, more than 40 per cent to employment and more than 20 per cent to the GDP. The contribution of small and medium businesses to national economies in Germany and the UK, for example, is more than 95 per cent, more than 60 per cent to employment and more than 30 per cent to the GDP. Challenges to small businesses are common everywhere. European managers need to know what developing nations face in growing their small businesses and seek ways of contributing to their growth in kind. European academics and managers may do comparative studies of these businesses. Some books on entrepreneurship and small business management that are prescribed and read

in South Africa are by European authors. Future writings should also benchmark the differences and similarities that small businesses have on both sides of the world. Limitations This study focused only on the micro-, very small and small sectors of business. Medium enterprises were not included in the study. Not all factors that could hinder small business growth in Kagiso Township were included in the study. The study only drew on Kagiso and its characteristics in terms of the factors that hinder the growth of small businesses in South African townships. Primary data collected in Kagiso Township may not apply to other South African townships.
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