Small and Medium Enterprise¶s Success Factors

A Literature Review

Submitted by Amin S. Lalani (M.Phil Program) Submitted to

Fasihul Karim Siddqui

Institute of Business and Management Karachi, Pakistan.

Executive Summary
The Purpose of this Literature Review is to aggregate various success factors recommended by researchers through published articles in the journals, and by the government and international development agencies. Traditionally more emphasis has been placed on core factors like management, marketing and accounting. Apparently, there are other complementary factors like mentoring, competitive advantage and innovation which are equally important for the success of SMEs. In trying to identify the factors that help small business, it appears there is no simple pattern which maps growth or potential growth. Rather, the evidence points towards a complex set of interrelated factors that increase or decrease the probability that an individual will establish a successful and growing small business. (Stanworth and Gray, 1991) Through the Literature Review, I have identified 8 complementary factors that can help in sustainability and growth in Small Businesses. One important barrier was also identify ie of Regulatory Cost that keeps new startups away from entering into business venture and restrict growth and long term sustainability. The eight factors are listed below:
Mentoring Competitive Advantage SME Corporate Culture Innovation Agility Community/Social Networking Growth Strategy Partnership

Table of Content
1. Introduction 1.1 SMEs a backbone to National Economy 1.2 Discrete definition of SMEs by Government and Institutions 1.3 Core SME success factor 1.4 Complementary SME success factors 2. Complementary success factors 2.2 Mentoring 2.3 Innovation 2.4 Growth Strategy 2.5 Competitive Advantage 2.6 Agility 2.7 Partnership 2.8 SME Corporate Culture 2.9 Community Social Networking 3 4 5 6 Barriers: Regulatory Burden Summary Conclusion References

1.

Introduction

Small and Medium Enterprises (SMEs) are considered as the backbone of any economy. It constitute significance share in GDP and generates jobs, opportunities and innovation in an economy. SMEs eventually lead to large and multinational organization. There is a mis-conception about Micro Enterprises, which are considered as Small Business. Apparently, SMEs are defined discretely by various organizations and governments as shown in the following table in order to develop policy around the framework. SMEDA SME Definition Small & Medium Enterprises are defined as follows, as approved in SME Policy 2007 Enterprise Category Small & Medium Enterprise (SME) Employment Size (a) Up to 250 Paid Up Capital (b) Up to Rs. 25 Million Annual Sales (c) Up to Rs. 250 Million

SME Definitions used by various institutions in Pakistan Institution SME Bank Federal Bureau of Statistics Punjab Small Industries Corporation Punjab Industries Department Sindh Industries Department Small Total Assets of Rs. 20 million Less than 10 employees Fixed investment. up to Rs. 20 million excluding land and building Fixed assets with Rs. 10 million excluding cost of land Entity engaged in handicrafts or manufacturing of consumer or producer goods with fixed capital investment up to Rs.10 million including land & building State Bank of Pakistan (SME Prudential Regulations) An entity , ideally not being a public limited company, which does not employee more than 250 persons ( manufacturing) and 50 persons (trade / services) and also fulfills one of the following criteria: (i) A trade / services concern with total assets at cost excluding land and buildings up to Rs 50 million. (ii) A manufacturing concern with total assets at cost excluding land and building up to Rs 100 million. (iii) Any concern (trade, services or manufacturing) with net sales not exceeding Rs 300 million as per latest financial statements. Enterprises exporting up to US$2.5 Million a year are considered Small by the State Bank of Pakistan Medium Total Assets of Rs. 100 million N/A N/A

Sector APEC Australia Canada Manufacturing Services Manufacturing Services China Indonesia Japan* Manufacturing Wholesaling Retailing-Services Korea Manufacturing Services Malaysia Philippines Singapore Manufacturing Services USA Varies (for SMI) Varies with Industry

Employment

Other Measures

Less than 100 employees Less than 20 employees Less than 500 employees Less than 50 employees Usually less than 100 Employees Less than 100 employees Less than 300 employees Less than 100 employees Less than 50 employees Less than 300 employees Less than 20 employees Less than 75 employees (Different for Bumiputra Enterprises) Less than 200 employees Less than RM 2.5 million P 40 million assets less than S$12 million fixed assets Less than 100 employees Less than 500 employees ¥100 million assets ¥30 million assets ¥10 million assets

SMEDA (Small and Medium Development Authority, Pakistan)

Small Business Success Factors SMEToolkits a small business portal by IFC (International Finance Corporate) suggests following core success factors apparently vital for small businesses Accounting and Finance Legal Operation Business planning Sales and Marketing Technology HR International

2.

Complementary Success Factors

Besides core factors other complementary factors, suggested in various researches which are equally vital for success are Mentoring Competitive Advantage SME Corporate Culture Innovation Agility Community/Social Networking Growth Strategy Partnership

Mentoring Mentoring is a single most important factor for SME success. Mentoring is provided at every stage, either it¶s a startup, growth or crisis. Mentors are volunteer offering specialized services to catalyst the setup or growth processes in the business. Mentorship could be formal or informal to Protégé. Kram (1983, 1985) suggested that mentoring relationships serve two separate, but interrelated, functions: career-related and psychosocial. Career-related support facilitates career advancement by increasing a protege's visibility in the organization and by improving the protege's knowledge of how to effectively navigate the corporate world (Aryee, Wyatt & Stone, 1996). The psychosocial function provides emotional and psychological support to the protege (Olian, Carroll & Giannantonion, 1993), and serves to enhance confidence in the protege's professional role. Participants, who are in the early stages of business development, were

likely to be anxious and, therefore, in need of high levels of psychosocial support. In deed, Pollock (1995) this is informal mentoring.
Innovation iPad and iPhone is one of the most recent examples of innovation that has rocked the company with billions of dollar and secure long term growth and opportunity in international market. Apple, which was struggling in its computer segment, created a Blue Ocean Strategy for iPad and iPhone and captured the market in no time. So far iPhone have launched 4 versions, the recent one is 4G and iPad is at second version. Innovation is vital for economic momentum of a country as stated by (Edwards and Gordon 1984).´ A process that begins with an invention proceeds with the development of the invention and results in introduction of a new product, process or service to the marketplace´ (Edwards and Gordon 1984). Growth Strategy: Many SMEs fail to sustain growth and gets dismantle. There are various forms of growth process Useful analytical framework is provided by punctuated equilibrium theory (PET) (e.g., Gersick 1991; Romanelli and Tushman 1994; Tushman and Romanelli 1985), a theory that has been adapted from evolutionary

biology into management theory. Researchers who use PET typically focus on three concepts: evolutionary periods, revolutionary periods, and deep structures. Growth is not only subject to sales but, due to new production plant, warehousing and more. In order to grow, small businesses must evolve their organization, incorporating changes to management structure, operational planning, control, and communication processes (Hanks 1990; Steinmetz 1969), Competitive Advantage: Those businesses having competitive advantage leads in sales, profit and growth. Having competitive advantage like: technology, innovation, qualified and competitive human resource or an international outsourcing setup for eg: software house in India, manufacturing centre in China or textile industry in Pakistan creates a competitive advantage to a firm which enables higher growth and profitability. Competitive Advantage is gained by industry analysis and competitor analysis (ME Porter. 1985). Competitive advantage cannot be understood by looking at a firm as a whole. It stems from the many descrete activities a firm performs in design, producing, marketing, delivery, and supporting its product. Each of these activites can contribute to a firm¶s relative cost position and create a basis for differentiation. (ME Porter 1985) Agility Today¶s car assembling belt manages more models of cars then ever before. Customizations have become KING and product innovation has become a routine for business growth. In such arena, Agility to change, innovate, perform, grow has become vital for small businesses. SME has to agile in different segment of business which includes Marketing, Operations, etc. Business Agility in operation using most modern technology is well defined by Nicholas D. Evans (2002). µWhat is fascinating is that we are now entering an era where emerging technology is allowing su to combine them in powerful new ways that signal what could well be a true business ± that of Business Agility.¶ The following formula can help explain the requirements for business agility Business Agility = Process Agility + Technical Agility Partnership Small Businesses can plug more ideas, capital and resources to the business while having 1 or more partners on board. Whilst, the entry and the exit should be transparent, fair and easy for any partner which could attract more partner entering into business leading growth and prosperity. Power (1987:71) describes the benefits of partnership as: Partnerships can afford a firm access to new technologies or markets; the ability to provide a wider range of products/services; economies of scale in joint research and/or production; access to knowledge beyond the firm's boundaries; sharing of risks; and access to complementary skills. Figure 1 describes the factors associated with partnership success.

Communication Behavior - Quality - Information Sharing - Participation - Commitment - Coordination - Interdependance - Trust Conflict Resolution Techniques - Joint Problem Solving - Persuassion - Smoothing - Domination - Harsh Words - Arbitration

Attributes of the Parnership

Success of Partnership - Satisfaction - Dyadic Sales

Figure 1. Factors associated with partnership success. Jakki Mohr and Robert Spekman (1994) SME Corporate Unlike large organization, SMEs have their own structure of culture which is centralized and people oriented. Although this culture have pros and cons. SMEs are considered to have greater flexibility, an absence of bureaucracy, less rigidity in decision-making, and can respond more quickly to new opportunities and threats (Carsson, 1999; Kuratko, Goodale, and Hornsby, 2001). Consequently, SMEs are considered to have a competitive advantage over the ³corporate disnosurs driven by standardization, mass production and stifled by bureaucratic organizations.´ (Thore, 1995, p115). In addition, the close interaction of management with employees in small organizations provides an opportunity for direct leadership which may facilitate the permeation of strong culture and innovation practices (Weisner and McDonald 2000) Community/Social Networking Social Software Tools: A Critical Evaluation offered useful insight into the choices SMBs need to make when moving into social networking. Tony Byrne, founder of CMS Watch, started with a useful breakdown of the complex world of social networking, beginning with separating external and internal applications, depending on whether the connections occur inside or outside your company: External Branded community

Internal Project collaboration

Tech support Reader interaction

Enterprise collaboration Enterprise discussion (especially useful after a merger or acquisition)

Partner collaboration Professional networking Hosted user blogs and blog comments (you host, but don't control, user postings)

Information organization/filtering Knowledgebase management (collaboration) Communities of practice

Enterprise networking (intranets and/or Facebook groups for employees); vendors include Ning and Lithium
Frederic Paul. 2009. Forbes Magazine

3.

Barrier: Regulatory Burden

Regulatory Burden is one of the major barrier blocking small business startups not only in developing countries but, also in developed countries. It is common for firms with less than 20 employees to incur compliance costs that are several times greater than the costs incurred by large businesses (e.g. UK Inland Revenue 1998). Although government try to facilitate small businesses but it is impossible to evaluate the cost and benefit ratio as suggested in the OMB (Office of Management and Budget) for compliance 2000 report which states that: ³it is difficult , if not impossible, to estimate the actual total costs and benefits of all existing federal regulations with accuracy. We lack good information about the complex interactions between the different regulations and the economy. A variety of estimation problems for individual and aggregate estimates distort the results in different ways´

4.

Summary

The Literature review reflects that SMEs are more tilted towards core success factors, whereas, complementary factors are equally important which actually boost business growth and profitability. For example: Mentoring, a complementary component could save initial cost for setting up the business can can guide through the initial setup process which is more crucial and full of challenges 1. Mentoring can play a vital role in SME setup, growth and critical situation, it could save time and cost for the growth, profitability of small businesses. 2. Partnership firm can be more vibrant than a proprietor firm as different partners brings with them different sets of knowledge and specialization which creates competitive advantage for a firm. 3. Innovation can act as a spring for a SMEs. Through innovation new product/processes could be created in shortest possible time as due to centralized decision system, the decision could be taken in no time to apply innovation to workplace and earn an edge over competition. 4. Community / Social Network dynamics can bring feedback, customer retentionship, new ideas and new customer onboard 5. Growth can paralyze businesses as it involve risk, resources and challenges. If any of the factor goes short, there are chances SMEs may not only suffer loss but may complete get out of business. In this situation Growth should be taken as a challenge as Growth cans equality damage business as do the crisis. 6. Any business can survive and compete in the market through its competitive advantage. SMEs can build unique competitive advantage for example: µPizza in 30 minutes¶ by Dominos. Such competitive advantage could bring more loyal customer to business and stay for long period of time

7. The world has become more dynamics, products/services can come from any corner of the world with exceptional quality and affordable price. SMEs should be agile to take such challenges to deliver new product/service at affordable in local and international market 8. Like any other culture, SMEs has its own culture which do have pros and cons, SMEs through its size and structure must over come traditional method of business and apply best practices by giving authority and 9. Barriers such as Regulatory Burden slows the setup and growth process of SMEs

5.

Conclusion

Following conclusion derived from the Literature review 1. SMEs must consider complementary factors which are equally important as core factors as SME can curtail cost, jump to high growth and become innovative during the first phase of business cycle rather than waiting for 2nd and 3rd phrase. 2. SMEs should buildup linkage with Universities to apply research which could optimize productivity and performance of the organization or help in developing new product/process 3. Having empowered employee and centralized management system can boost small business due to its flexibility to adopt new process and technology in no time. 4. There is evidence that SMEs are equally innovative as large businesses, this could help small businesses to reach market in shortest possible time as it has no bureaucracy hierarchy to delay the process. 5. SME can buildup and reach to the market through its new Competitive Advantage in no time due to its size and structure of business which is a great advantage 6. SMEs are mostly social active which gives them edge of corporate as it has no real face to follow. SMEs can use this advantage to get closer to the social and community network to get feedback, loyalty and new customers.

6.

References

Aryee, S., Wyatt, T., & Stone, R. (1996). Early career outcomes of graduate employees: the effect of mentoring and ingratiation. Journal of Management Studies, 33, 95-118. Carlsson, B. 1999. ³Small Business Entrepreneurship and Industrial Dynamics.´ In Are Small Firms Important? Their Role and Impact. Ed Z. L. Acs Boston MA:Khwer Academic Publishers, 99-100. Edwards, K. & Gordon, T. 1984. Characterization of innovations introduced on the U.S. market in 1982. The Futures Group and U.S. Small Business Administration, Washington DC. Frederic Paul. Smart Social Networking For Your Small Business. 2009. Forbes Magazine. http://www.forbes.com/2009/06/05/social-networking-interop-entrepreneurs-technology-bmighty.html Jakki Mohr and Robert Spekman. (1994) Characteristics of Partnership Success: Partnership Attributes, Communication Behavior, and Conflict Resolution Techniques. Strategic Management Journal. pp. 135152 Kuratko. D.F., J.C. Goodale. and J.S.Hornsby 2001. ³Quality Practices for a Competitive Advantage in Small Firms. ³ Journal of Small Business Management 39 no.4:293-312. Kram, K (1983). Phases of the mentoring relationship. Academy of Management Journal, 26, 608-625. Kram, K (1985). Mentoring at Work. Glenview, IL: Scott, Foresman & Co. Michael E. Porter. Competitive Advantage. Creating and sustaining superior performance. Michael E. Porter. The Free Press 1985 Nicholas D.Evans. Business Agility. 2002. Strategies for Gaining Competitive Advantage Through Mobile Business Solutions. Olian, J., Carroll, S., & Giannantonio, C. (1993). Mentor reactions to proteges: An experi ment with managers. Journal of Vocational Behavior, 43, 266-278. Stanworth, John & Gray, Colin. The small firm in the 1990s. P. Chapman Pub. (London). 1991. Thore.S. 1995. ³Lean and Mean: The Changing Landscape of Corporate Power in the Age of Flexibility.´ Journal of Macromarketing. 15 no. I: 115-17 Weisner.R., and J.MacDonald. 2000. ³The Human Side of Small and Medium Enterprises.´ Journal of the Australian and New Zealand Academy of Management 7 no.2:58-69

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