Most small African Business often remains small. Discuss why this is the case.

Suggest
and illustrate any four practical strategies that can be employed to grow small business
enterprise in Africa.

Introduction

Hong and Daly (2005) point out that new Small-Medium Enterprises (SME) trigger
competition, stir research and development and innovation, push old firm to improve their
efficiency, inject new blood into the veins of the economy and result in economic growth,
technological upgrading, job creation and welfare improvement. Small enterprises can be
vied as a separate distinct entity including cooperative enterprises and non-governmental
organisations managed by one owner or more, including branches or subsidiaries if any is
predominately carried out in any sector or sub-sector of the economy mentioned in the
schedule of size standards and can be classified as SME by satisfying the criteria mentioned
in the schedule of size standards. Strategy is a plan of action or policy designed to achieve a
major or overall aim. This paper will discuss the case why small African business remain
small and also suggest and illustrate some practical strategies that can be employed to grow
business enterprises in Africa.

There are different approaches to explain the factors affecting the growth of small businesses
in Africa. Some of them have considered environmental and external factors to have a big
impact on the performance and growth of small firms (Lumpkin and Dess, 1996 ). Below is
discussion of causes which have made African small businesses enterprises to remain small.

Unfair Competition from the Non-Official Sector

Small business enterprises in African developing countries suffer more than large firms from
many policy and institutional constraints arising from imperfect markets and as a
consequence, they benefit disproportionately from reforms. Unfair competition arising from
the low cost of doing business in the informal sector is a serious challenge for a significant
section of SMEs, especially small sellers and producers. Unfair competition from companies
operating in the non-official sector is a serious challenge affecting both SMEs and large firms
in the African economy. The challenge here is to develop one single strategy that can be
applied throughout the world while at the same time maintaining the flexibility to adapt that
strategy to the local business environment when necessary (Yip G. 2002). Because of savings
on registration and licensing costs as well tax evasion, non-official companies gain a
substantial cost advantage. That can allow them to produce and sell goods at a low price
compared to companies that operate in the formal sector, which prevents genuine competition
and increases the relative costs of the formal firms.

The informal sector not only prevents genuine competition and increases the relative costs of
enterprises operating in the formal sector, but also weakens worker protection and reduces
workers social benefits. The informal sector also has a negative impact on the fiscal budget
and the entire infrastructure of the country because they tend to invade tax, registration fees.
As with all businesses, SMEs face challenges posed by the economic climate in a country as
the economic factors have a direct impact on the consumption patterns of consumers and
significantly affects all businesses in all sectors (Fatoki & Garwe, 2010).

Access to Finance

Despite their vital role in building a competitive private sector and contributing significantly
to employment growth, SMEs are facing more challenges in accessing financial resources in
Africa. Financial constraints are high for SMEs, but SMEs are particularly constrained by
gaps in the financial system, such as high interests rate, high collateral requirements, and
lack of experience with financial intermediaries. (Bbenkele, 2007) revealed that small
business enterprises especially those from rural areas have a poor understanding of the
services that banks offer and they also lack understanding of the bank loan procedures.
(Bbenkele, 2007) argues that this lack of information and knowledge leads to small business
enterprises weak bargaining position in terms of interest paid, asset and liability disclosure,
misuse of loan funds and generally bad preparedness when applying for business loans.

African banking system is large but is dominated by state-owned banks; moreover, banks
have some of the highest rates of credit concentration in the world. SME financing in Africa
is dominated by banks, with capital markets and non-bank financial institutions being
insignificant financing sources. Bank lending to SMEs is low. For this reason, SMEs rely on
their personal savings and informal financing to finance different investments and operations.
Access to financing remains highly unfavourable for SMEs in African countries, for example,
Fin Mark Trust (2006), finds that only 2% of new SMEs in South Africa are able to access
bank loans. According to Fox croft et al, (2002), 75% of applications for bank credit by new
SMEs in South Africa are rejected. This suggests that SMEs without finance may not be able
to survive and grow, hence, remain small and disappear without growth. Stokes and Wilson
(2006) also add on to say that financial difficulties of SMEs arise, either because of an
inability to raise sufficient funds to properly capitalise the business, or a mismanagement of
the funds that do exist or a combination of both. Be that it may, the problem of small business
operators failing to access funds can also be attributed to the problem of information
asymmetry. The other major variables that impact African small enterprises include interest
and exchange rates, inflation, unemployment, crime, HIV/Aids, technological advancements
and government legislation (Brink & Cant, 2003).

Lack of Managerial Skills

Management skills are the critical success factors of all businesses, and small business in
Africa is no exception. The lack of managerial skills places significant challenges on SME
development in Africa. The diaspora migration or scarcity of management talent in Africa has
a magnified impact on SMEs and hamper the progress of their development. Moreover, the
lack of support services or the irrelatively higher unit cost hamper SMEs efforts to improve
their management, because new and inexperienced entrepreneurs may not have the required
skills and managerial capacity to fully exploit new opportunities and markets. This is one of
the top most mistakes made by entrepreneurs.

However, it is important that small business in Africa have ample knowledge about the
industry they are entering, competitors, target market, current trends, advertising and
marketing techniques as well as financial know-how. It is fundamental for entrepreneurs to
possess the skills needed to start up new businesses. While setting proper goals to manage the
business, a system of controls is also needed to measure performance. Checks and metrics
help owners manage organizational activities. Moreover, the early founder of the SMEs
personal competence in selecting the right business and running it will be crucial, as the firm
is likely to be indistinguishable from the owner. Therefore, as the business develops, growth
can be rapidly partial due to unwillingness or inability to draw others to help with the
management of the business SME (Pasanen 2006).

A firm cannot control the external factors affecting its environment such as customers and
competitors but it can adapt its internal organizational activities. A good control system will
establish standards, measure performance, compare performance against standards and then
provide for a way to correct procedures where needed. From an economic perspective,
education is seen as a crucial agent in promoting long-term employment and economic
growth (Romjin, 1989). However, despite the numerous institutions providing training and
advisory services in Africa, there is still a skill gap in the SME sector.

Marketing Skills

Another important factor contributing to failure of small business in Africa is marketing

skills. There is extensive evidence to prove that marketing plays a significant role in the
success of SMEs. Marketing is also one of the biggest challenges SMEs face in their business
operations. SMEs in Africa are weak in terms of market research and have inadequate
marketing skills because most SMEs are owned and managed by one person for example
small business in Area 8 Glenview, Zimbabwe. Such entrepreneurs take care of all the
managerial functions of the enterprise and lack the time and funds to invest in research to
establish their target market or identify customer trends. Nevertheless small businesses in
Africa do not fully utilize the Technological Capacities in marketing their products. Among
the major challenges facing the development of SMEs in Africa is the huge lack of
technological capabilities, which is the key to developing the competency of SME owners
and managers. Technological capacities are considered as tools for strengthening the
competitiveness of SMEs (Romijn, 2001).

Notwithstanding the above challenges, for any entrepreneur or small businesses enterprise to
grow in Africa it should fully understand what they are letting themselves in for. It is
important that they go into any new venture with eyes wide open. Once Africa proves itself
on the market, the model works, life becomes a great deal more complex as it looks to take
the small business enterprises to the next level. Stokes and Wilson (2006) are of the belief
that product or service concepts and standards often reflect only the perceptions of the owner,
which may not be mirrored in the market place.

Practical strategise which can be employed to grow business in Africa

Developing a Growth Strategy: Intensive Growth

Growth strategies resemble a kind of ladder, where lower-level rungs present less risk but
maybe less quick-growth impact. The bottom line for small businesses, especially start-ups, is
to focus on those strategies that are at the lowest rungs of the ladder and then gradually move
way up as needed.
Market Penetration, the least risky growth strategy for any business is to simply sell more of
its current product to its current customers a strategy perfected by large consumer goods
companies, Market Development. The next rung up the ladder will be to devise a way to sell
more of current product to an adjacent market offering the product or service to customers in
another city or state, for example. For example, Spar supermarkets retail business that began
in United kingdom as a small business enterprise opened shop around the globe via a
franchising model. Alternative Channels. This growth strategy involves pursuing customers
in a different way such as selling products online. For example, When Apple added its retail
division, it was also adopting an Alternative Channel strategy. Using the Internet as a means
for customers to access small business products or services in a new way, such as by adopting
a rental model or software as a service, is another Alternative Channel strategy. Product
Development. A classic strategy, it involves developing new products to sell to the existing
customers as well as to new ones. If the small business enterprise has a choice, it would
ideally like to sell new products to existing customers. That is because selling products to
your existing customers is far less risky than "having to learn a new product and market at the
same time," New Products for New Customers. Sometimes, market conditions dictate that
you must create new products for new customers, as Polaris, the recreational vehicle
manufacturer in Minneapolis found out. For years, the company produced only snowmobiles.
Then, after several mild winters, the company was in dire straits. Fortunately, it developed a
wildly-successful series of four-wheel all-terrain vehicles, opening up an entirely new market.
Similarly, Apple pulled off this strategy when it introduced the iPod. What made the iPod
such a breakthrough product was that it could be sold alone, independent of an Apple
computer, but, at the same time, it also helped expose more new customers to the computers
Apple offered. iPhone has had a similar impact; once customers began to enjoy the look and
feel of the product's interface, they opened themselves up to buying other Apple products. A
high degree of integration of specific parent resources is required to achieve goals and it is
desirable to create loyalty to a new business distinct from the parents because their interests
might otherwise prevent the success of a collaboration (Kale P, Singh H. 2009).

Choosing to follow one of the Intensive Growth Strategies, African small business may
ideally take only one step up the ladder at a time, since each step brings risk, uncertainty, and
effort. The rub is that sometimes, the market forces a business to take action as a means of
self-preservation, as it did with Polaris. Sometimes, in business there is no choice but to
direct parent-to-parent collaboration often including licensing or long-term contractual
agreements.

Market segmentation
Because small business in Africa fears the unknown of penetrating new markets the strategy
of the Market segmentation if employ may yield results. This simply means picking a sub-
set of the entire marketplace that the business can organize its sales efforts around. Most big
businesses are good at carving out their corner of the market. Then they do whatever they can
to own that space. As with all businesses, SMEs face challenges posed by the economic
climate in a country as the economic factors have a direct impact on the consumption patterns
of consumers and significantly affects all businesses in all sectors (Fatoki & Garwe, 2010).

For example in in practical sense, Red Bull company gets its energy drinks in front of a
young, adventurous crowd, its segment of the market. Red Bull owns a Formula One racing
team. If small business enterprises in Africa do the same they may strike the right chords for
example those entrepreneurs who make sofa at Area 8 in Glenview may strategy by taking
their furnitures during high profile gatherings such as Crusades of churches, political
conferences etc. Another example is that, Pepsi was losing its battle with Coca-Cola to
become the heavyweight cola company. Instead of trying to beat Coke at its own game, Pepsi
focused on a young, fun-loving demographic. Many Pepsi commercials show younger music
stars, celebrities or other young status symbols. In other words, Pepsi stopped targeting the
over-30 crowd and segmented its market. Coke is still the top dog, but, partially to market
segmentation, Pepsi has built a very successful brand as well. Most small business owners
would be happy with building the next Pepsi, but many are afraid to eliminate part of a
potential market. It can seem scary, but you need to focus on your core customer if you want
a clear path to growth. Secondary research indicate that SME owners perception on
marketing related challenges is that they lack time or funds to invest in research to establish
their target market, customer trends and marketing in general (Van Scheers, 2012).
Segmenting the market comes down to making choices. Who will you serve? Who will you
avoid? And which segment can you focus on to improve profitability? This what small
African business should emulate.
Leveraging partnerships
Some small business owners love to complain about how they cannot compete with the
vendor relationships that the big guys enjoy. It is true small African business enterprises
cannot "pay to play", but can leverage partnerships in a savvy way. For example, a small
business makes tennis balls and has a technology that makes the balls bounce better and last
longer. They have a great product, but they do not have a manufacturing facility, a
distribution channel or any of the other parts of the tennis-ball supply chain. All they have are
great tennis balls. They may not be able to compete with the big industry players like Wilson,
Penn or Prince for sponsorships or tournament partnerships, but they could partner with a
tennis-ball factory and a distribution company. In fact, you could partner with them without
having to pay a cent for their own factory or distribution. Just pay the partners a portion of
the profit every time they sell a tennis ball. Negotiations for mainstream production and
distribution without paying the huge upfront cost of building a plant or hiring a shipping
company and they can focus on selling tennis balls instead of worrying about making them.
Big businesses can pay for partnerships up front. Small businesses have to negotiate for
partnerships that pay per sale. This practical example can be employed by Small business
Enterprises in Africa

Embrace Technology

Small business in Africa should take better advantage of technology innovations to help
manage their business. If a small business can identify a genuine need, technology likely
exists to fulfil that need both locally and globally. There are few barriers to entry in an age
where anyone with wireless can cheaply and quickly access the enabling technologies needed
to execute their business model. It comes down to creating the right operating blueprint that
connects the dots between your business model and the application of accessible
technologies. For example, Cobro Trucks Enterprise instead of having a small vehicle
following trucks which transport goods outside borders or others cities a trekker system can
be installed on the trucks, were the movement and truck distribution will be monitored. This
system saves money, time and resources. Those served resources may be invested in other
areas of business which can help make the business grow in Africa at large.

Small business in Africa to grow they should stand out from everyone else when they focus
on the customer and providing them with value. Too many entrepreneurs are only thinking
about the money. The entrepreneur should be creating products and services that impact
peoples lives. The key to success in entrepreneurship starts with a plan thats been well
researched. Study the facts and figures so you can use them to form your plan. Once your
plan is in place, take action. Its easy and comfortable to stay stuck in the research phase.
Most of the research in the world mean nothing if action is taken.

Categorizing firm resources

Once as many resources as possible are recognized the next step is to categorize them to
better understand what factors can impact the firm. The two categories into which the
firms resources can be divided are Internal/External and Strategic/Operational.
Internal/External is based on the environment in which the resources operate and
Strategic/Operational is based on the impact of the resources on the business plan.

The Internal resources are mostly the firms internal strengths to sustain its existence while
the External resources affect the external environment over which a firm has no direct
control such as customers, suppliers, competitors, financing institutions etc. The resources
are also classified as Strategic or Operational based on their influence on the overall vision
and plan of the firm. Operational efficiency impacts the day-to-day operations, while
Strategic are longer term that complement the strategic plan of the firm.

Conclusion

Despite the vital role of SMEs in building a competitive private sector and contributing
significantly to employment creation, innovation, and economic development in general,
SMEs are facing more challenges around the world in general and in developing countries in
particular. Likewise, African business is hampered by several factors, which may differ from
region to region within the country, between rural and urban areas, between sectors, or
between individual enterprises within a sector. However, there are certain challenges that are
common to almost all SMEs.

On the other hand, entrepreneurial characteristics, utilizations when employing successful

strategies as discussed above may boast the African business enterprise to growth.
Managerial capacities, Marketing skills, technological capacities are the main factors
responsible for the stable growth of SMEs in Africa.
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