THEME 4

SMALL, MEDIUM AND MICRO ENTERPRISES (SMMEs)

 INTRODUCTION
• As we have come to realise the economies and industries of
the nineteenth, twentieth and twenty-first centuries have a very
different set of rules and regulations when compared to one
another, with regards to business and tourism.
• These new ideologies of neoliberalism and globalisation have
emphasised the role of SMMEs as promoters of a healthy
business climate, economic efficiency and power within
development.
• In recent years SMMEs have become key pillars for local,
regional, national, continental and international development
and promotion for countries in the global North as well as
in the global South.
• In these contexts, SMMEs, are seen as vital entities to
enhance innovation, competitiveness, formal and informal
entrepreneurship, value chain systems, as well as socio-
economic prosperity within the broader community and society
at large.
• Thus, it is fair to argue that SMMEs have developed and
advanced to exceed larger organisations in key areas such as
creativity, operations and production.
• However, although SMMEs have some adherent weaknesses
they are less affected by global and national economic crises
due to their flexibility and adaptability with regards to the
market and it is this critical ability which keeps SMMEs ahead
of changing conditions and circumstances.
 DEFINITIONS
• According to Keeble (1992) a “small business” can be defined
as: “a business in which one or two persons are required to
make all the critical management decisions, that includes for:
financing, accounting, personnel, purchasing, processing,
servicing, marketing as well as selling without the aid of internal
or external specialists in one or two functional areas”.
• Davids (2008) in turn describes a “small enterprise” as: “a
company or business, often small in size; or alternatively is the
activity of managing companies and businesses and/or starting
new ones in a limited capacity”.
• According to Xi (2013) a “start-up” in turn can be delineated as:
“the action or process to set something in motion or establish
something new; [thus] a company or project undertaken by an
entrepreneur to seek, develop and validate a scalable
economic model”.
• Lajovic (2018) in turn notes that one can rudimentally
understand a SMME as: “a business entity that maintains
revenues, assets and/or a number of employees below a
certain threshold”.
• Ngobeni (2014) likewise goes on to note that SMMEs have a
very broad definition (with South Africa being no exception),
seeing that they encompass a range of enterprises or small
businesses that includes both formally registered as well as
informal organisations.

• However, in its most simplistic form within this South African

context, according Ngobeni (2014), SMMEs can be defined as:
“enterprises or small businesses with an annual turnover of less
than R50 million, while simultaneously employing less than 250
employees”.
 START-UP

SMMEs

SMALL SMALL
BUSINESS ENTERPRISE
• McCarthy (2014) in turn defines the “value chain” as: “a
business module that describes the full range of activities
needed to create a product or service; [therefore] the step-by-
step business model for transforming a product or service from
an idea to a reality”.
• “Demand” on the one hand, according to Ntuli (2015) can be
defined as: “the quantity of products and/or services that
consumers are willing and able to purchase at various price
points during a given period of time”.
• While, “supply” on the other hand, as commented on by
Mashaba (2009), can be described as: “the amount of
resources business entities are willing and able to provide to
the market place or directly to another agent in the market
place”.
DEMAND SUPPLY

VALUE CHAIN
• According to Kemp (2020) “legislation” can be defined as: “the
legally binding acts, laws, regulations and policies business
entities need to comply with in order to continue operating in a
specific economic setting of a specific country, nation and/or
territory”.
• Naledi (2017) in turn describes “regulations” as: “a set of rules
and/or directives set-forth by an official authority or institutional
body to control and mandate all activities and processes
relevant, applicable and relatable to an individual wanting to
formulate, start or continue within a pre-determined business
landscape”.
• Botha (2020) likewise demarcates “policies” as: “a plan of
action delegated by a governing organisation (public or private)
to align all relevant principles and guidelines of a specific sector
in an attempt to structure the business segment to reach its
long-term strategic objectives and developmental goals”.
 LEGISLATION

SMMEs REGULATIONS

POLICIES
 FORMAL VERSUS INFORMAL SMMEs in the
REGISTERED OR UNREGISTERED ECONOMY
 FORMAL SMMEs
• These types of small businesses are officially licensed by all
applicable governing bodies and local authorities.
• These business entities are likewise registered as tax payers.
• These small entities can also be described as “modern” seeing
as they are characterised by the existence of one or more
formal wage employees.
• These characteristics are what mainly differentiates the formal
sector from the informal sector.
 INFORMAL SMMEs
• These are small businesses that are not governed, nor are
they in full compliance of the law – thus these entities
function and operate within what is deemed to be the “shadow
economy” of a specific business landscape.
• This sector is usually characterised by low level capital,
productivity levels, and is generally small and usually caters
to much different clientele, as opposed to the formal SMME
sector.
• Other characteristics that accompany this sector include: the
perceived low level of formal schooling; the intermediate
technology utilised; the preponderance of family labour and
ownership; and the general lack of support or recognition on the
part of the regional authorities or institutional bodies.
• These types of entities are also typified by fluctuating, limiting
and discontinuous employment.
 KEY BENEFITS OF SMMEs
1) SMMEs are the pillars to growth and promotion – this
means that SMMEs are vital to creating employment in any
country.
2) SMMEs are essential for a competitive and efficient market
structure – small businesses play the competitive game
differently from larger organisations, their nimble approach to
competition drives efficiency and productivity.
3) SMMEs are critical to poverty reduction – the geographical
location of SMMEs provide an opportunity to employ local
peoples, this alleviates poverty and encourages economic
activity.
4) SMMEs play an important role in developing countries – in
these contexts SMMEs are productive drivers of inclusive and
transformative economic growth and development, they also
drive diversification through their development of new and
unsaturated sectors and segments of the economy.
 CHARACTERISTICS OF SMMEs
• Size – the number of people the business can employ to still
qualify as a SMME.
• Value added – is the “turnover” of the business enterprise
calculated by estimating business assets.
• Licensing – is the business registered with all applicable
governmental bodies, local authorities and community
stakeholders.
• Location – where does the business operate from in its
physical capacity.
• Growth forecast – estimating how much the enterprise will
contribute to the local economy and if it will have a broader
impact outside its immediate environment.
 ADVANTAGES OF SMMEs
• SMMEs have a competitive structure and are more efficient in
the broader economy, seeing as SMMEs keep up with new
demands, supplies and innovative technologies much easier.
• Working styles within SMMEs are not one-dimensional or
conventional.
• SMMEs are more enduring to any economic crises or political
instabilities.
• SMMEs have a more successful role in increasing employment
and arranging income, seeing as SMMEs provide a more
balanced income spectrum.
• SMMEs play an important role in creating private initiatives,
seeing as SMMEs constitute an effective way to expand
manufacturing and industrialisation to the whole country’s
economy.
• Likewise SMMEs have the opportunity to make important
decisions quickly as opposed to larger organisations and their
chain of command.
• SMMEs work with less expenses in relation to management
and general operations, they also have faster and much
cheaper production methods.
• SMMEs hold a larger share of employment and training within
local communities – SMMEs are generally where people
receive their first form of experience and/or technical
training.
• In the same context SMMEs can be the manufacturer and/or
producer of intermediate goods and/or services as well as can
directly deliver these components to larger corporations.
• SMMEs may be effective in increasing quality of life given their
direct contribution to the local community.
 DISADVANTAGES OF SMMEs
• Lack of general administration – especially the lack of total
participation from low level workers to the decisions taken by
the owners/partners.
• Not employing specialists and financial consultants within the
enterprise (for various reasons), thus there is no expert
group/department is a solely dedicated to a specific component
of the SMME.
• Lack of capital and financial planning – not receiving enough
support from the banks and/or other financial corporations.
• Lack of further product development and service
diversification.
• Lack of coordination between production, and the sales of
product or service.
• Not embracing the potential of modern marketing
platforms.
• Limited spaces – SMMEs are often scheduled to residential
neighbourhoods.
• Within SMMEs there is also a considerable risk of bankruptcy,
where in this context the entrepreneur will loose his/her
independence.
• Limitations in regards to specialised staff, legislation and
bureaucracy.
• SMMEs often times have lower profit margins, as compared
to those of larger organisations.
CRITICAL SUCCESS FACTORS ASSOCIATED WITH SMMEs

Leadership
Management and
of finances relationship
management

Human
Marketing,
resource and
sales and
operational
customer
quality
relations
assurance
 SMME DEVELOPMENT FACTORS
1) Macroeconomic factors
2) Business environment
3) Growth opportunities
4) Historical determinants
1) MACROECONOMIC FACTORS
• One of the main macroeconomic factor’s that contributes to the
growth of SMMEs are government expenditures.
• Government assists with the development of registered
SMMEs, while discouraging unregistered SMMEs.
• Due to legal requirements, SMMEs hiring unreported labour
and evading taxes would not be able to participate in a
specific business landscape as drawn up by the government.
• Low inflation economic environments help the growth of
registered SMMEs – high inflation in turn moves businesses
to operate in the unregistered economy, thus monetary policy
plays a crucial role in the development and organisation of
SMMEs.
• Furthermore, a stable exchange rate is very important for
SMMEs seeing as they can make the most of their operations
in more stable environments.
• The level and quality of education in a country is also
important in the development of registered SMMEs, seeing as
entities working in the unregistered economy tend to use less
productive forms of labour with lessor skills.
• An increasingly important factor in the development of SMMEs
is the private credit market.
• Access to credit for investment and working capital allows
registered SMMEs to grow, discouraging unregistered SMMEs
at the same time.
• A banking sector providing loans at low cost is probably the
most important factor in the development of SMMEs.
• Non-compliance to the above generally forces SMMEs to
become part of the “shadow economy” given the rule and
regulations proposed by the macro-economic business
environment.
2) BUSINESS ENVIRONMENT
• Start-up costs, including (but not limited to) registration,
license fees and the processing time for administrative
requirements, are very important components for the
development of SMMEs considering that these are “sunk costs”
that cannot be recovered during the operations of the business.
• Contract enforcement and the protection of property rights at
low costs are also very important for SMMEs to start and
survive.
• If contract enforcement costs are too high SMMEs may in turn
prefer to operate in the unregistered economy rather than
engage in economic activities legally.
• Existence of credit registries can likewise help SMMEs to
establish a favourable and credible financial history.
• This way they can seek funds as well as defend their property
rights at low cost.
• Thus, an equitable and efficient judicial system is essential for
SMME growth on a local, regional, national, continental and
international scale.
• The mere existence of a sound judicial system would also
discourage corruption, which is a burden on most SMMEs.
• The levels of a regulatory environment is another factor to
consider when we consider the development of SMMEs in a
specific business environment, seeing as it provides certainty to
businesses operating in their respective industries.
• Labour market regulations, in particular, likewise play a
significant role in the value and cost structures of SMMEs.
• Strict labour laws in relation to the hiring and firing decisions of
the firm can likewise make it more costly for the SMMEs and
encourage them to employ workers without proper registration.
3) SMME GROWTH OPPORTUNITIES
• SMMEs in their “early stages” of activity are subjected to an
increased risk of bankruptcy.
• Survival rates of SMMEs are not high, particularly after the first
year.
• Thus, it is essential for SMMEs to obtain sufficient financing at
the very early stages of growth and development discourse.
• In this context, it is also important to point out that SMMEs often
lack their own funds and have to resort to borrowing capital
from banks or other financial institutions.
• Therefore, in the long-term SMMEs have to rely heavily on the
banking sector to obtain funds for investment purposes at
reasonable costs.
• A well-functioning infrastructure in terms of providing services,
such as policing power, is another factor that contributes to
SMME growth, development and promotion in the long-term.
• In this context it is likewise important to point out that SMMEs
cannot be expected to provide basic services privately unlike
large enterprises seeing as it is simple too expensive.
• Thus, stability is essential for entrepreneurs to commit their
funds as well as human capital and operational resources into
their business.
• SMMEs expect stability for future development and business
success.
• High crime rates in a specific location, for example would also
discourage SMMEs from expanding further given the potential
for increased costs for the protection of their small enterprise –
this could easily lead to the demise of the SMME, therefore, it is
critical for good public safety to be enforced seeing as it
provides a safe environment for SMMEs to establish and grow
within.
• Taxes in turn while not a major factor can also deter SMMEs
from growth, development and promotion – this will
subsequently lead to them wanting to operate within the
“shadow economy”.
• Transactional taxes, high tax rates and accounting
requirements can likewise discourage SMMEs to grow and
prosper.
4) HISTORICAL DETERMINANTS
• Historic developmental factors play a significant role in the
formulation of any small business.
• Historically businesses that were located in favourable
geographic locations tended to survive and grow systematically.
• Furthermore, the usability of land also plays a crucial role within
the developmental factors, seeing as SMMEs in favourable
environments tend to prosper overtime – this given that the
business and the consumer are closely linked to one another.
• Location specific demographics are also a determining factor,
seeing as areas where there are ethnic fractionalisations
SMMEs are negatively affected since this introduces social,
cultural, economic, environmental and political instabilities to a
specific business landscape, that will naturally lead to disarray
in the value chain and within the local business environment as
a whole.
• As part of demographics, various scholars have also argued
that external aspects to the business environment, such as
religious beliefs and social structures can also play a significant
role – this is usually the most common cause for SMMEs to
operate within the unregistered economy.
• Legal systems are also another historical determinant for
SMME development and promotion in a specific business
setting.
 FEATURES OF AN ENTREPRENEURIAL FIRM
FEATURE DESCRIPTION
A learning organisation which is continuously
KNOWLEDGE AND committed to the acquisition of knowledge and
LEARNING expertise relative to both market and management
information; this is in order to maximise the firm’s
potential and to excel within a given activity
Be constantly vigilant towards identifying new
OPPORTUNITIES opportunities to be pursued and awareness that
opportunities have a limited “life”; thus acting quickly in
order to optimise and capitalise on them is pivotal.
Values the contribution of participants in the process of
PARTICIPANTS entrepreneurship; entrepreneurial teams are linked to a
set of commonly held values; the firm has the ability to
manage effectively the relationships/stakeholders
involved.
 FEATURES OF AN ENTREPRENEURIAL FIRM
FEATURE DESCRIPTION
Ingenious mobilization of resources enables the pursuit
RESOURCES and realisation of opportunities without regard for the
resource an entrepreneurial firm actually controls.
Evaluates the risks and uncertainty associated with
RISK AND projects, but does not suffer from analysis or
UNCERTAINTY “paralysis” in that the entrepreneur has the confidence
to assume a certain degree of risk and is willing to
learn from mistakes.
Has the power to discern future prospects of success,
VISION AND and the ambition and strategies to progress towards
STRATEGY achieving them; clear vision and directions for the
future are forces which bind the entrepreneurial firm.
 TYPES OF SMMEs
1) Sole proprietorship
2) Partnership
3) Private corporation
 1) SOLE PROPRIETORSHIP
• Also known as the “sole trader”, “individual entrepreneur” or
“proprietor,” is a type of enterprise owned and run by one
person, in which there is no legal distinction between the owner
and the business entity.
• However, a sole proprietor does not necessarily work “alone”,
seeing that it is possible for the sole trader to employ other
people.
• The sole proprietor in turn receives all profits (subject to
taxation) and has unlimited responsibility for all losses and
debts.
• Every asset of the business is owned by the “individual
entrepreneur” and all debts of the business are the proprietor’s.
• It is also important to point out that a sole proprietor may use a
trade name or business name other than their own, however,
they may have to legally trademark their business name if it
differs from their own legal name.
 SOLE PROPRIETORSHIP
ADVANTAGES DISADVANTAGES
Easy to establish Limited start-up capital
Single owner Unlimited personal liability
Legal trading name Lack of continuity
immediately available
No separation between
personal income tax rates and Constraint size
business taxes
Legal and financial obligations Lack of managerial
are those you have towards experience
yourself
 2) PARTNERSHIP
• A partnership is an arrangement between two or more people to
oversee business operations and share its profits and liabilities.
• In the agreement, parties known as “business partners” agree
to cooperate to advance the mutual interests of the small
enterprise.
• In a general partnership, all members share both profits and
liabilities.
• A partnership may likewise result in the issuing and holding of
equity, or may be only governed by a contract.
• Professional partnerships among individuals, businesses,
interest-based organisations, schools, governments or a
combination of the above are very common. (silent partner)
 PARTNERSHIP
ADVANTAGES DISADVANTAGES
Multiple perspectives and points of view
from multiple owners (two heads)
More start-up capital available, with
greater borrowing capacity
High-calibre employees can be made
partners in the small business
Partner’s business affairs are private
with limited external regulation
Easy change of legal structures should
circumstances change
Liability of the partners for the debts of
the business is unlimited
Each partner is “jointly and severally”
liable for the partnerships debts; each
partner is thus liable for their share of
the partnerships debts as well as being
liable for all the associated business
debts
There is a risk of disagreements and
friction among partners and
management
Each partner is an agent of the
partnership and is liable for actions by
other partners
If partners join or leave, you will
probably have to value all the
partnership assets and this can be
costly.
 3) PRIVATE CORPORATION
• A private company is a firm that is privately owned.
• A “privately held company” or a “close corporation” therefore
can not be owned by the government and/or non-governmental
organisations.
• Private companies may issue stock and have stakeholders, but
their shares do not trade on public exchanges.
• A private company’s “stock” is offered, owned and traded or
exchanged privately and/or “over-the-counter”.
• Although less visible than their publicly traded counterparts,
being sole proprietorships and partnerships, private
corporations have a major importance in the world’s economy.
 PRIVATE CORPORATION
ADVANTAGES DISADVANTAGES
The company has a perpetual lifespan
and can continue even if one of the
owners passes on
Shareholders have limited liability, but
director’s are personally liable, if they are
knowingly part of running the business in
a reckless or fraudulent manner
Transfer of ownership can be done with
ease
Raising start-up capital is easier given an
established track record and management
experience
Private companies are not required to file
their annual financial statements, thus
these statements are not available to the
general public.
Private companies are subject to many
legal requirements
They are more difficult and expensive to
register compared to a sole proprietorship
and/or partnership
At least one director is required in a
private corporation, however, a minimum
of two stakeholders are required for any
meeting
Shares may not be offered to the public
and cannot be listed on a national stock
exchange
Annual financial statements must be
audited by an external organisation in
compliance with legislation.
 EXAMPLES OF SMMEs
• Virtual assistant
• Hairdressing services
• Interior designer
• Electronic repair services
• Social media consultancy
• Tutoring services
• Grocery delivery services
• Gardening services
• Affiliate marketing services
• Digital seller
• Paid “blogger” and “vlogger”
• Editorial services
• Translator
• Direct sales representative
• Informal social events planner
 EXAMPLES OF SMMEs
• Computer trainer
• Property manager
• Courier services
• Resume writer
• Laundry services
• Babysitting and childproofing services
• Day-care services
• Informal product creator
• Tourist guiding
• Packing services
• Pet sitter, dog trainer, groomer and walker
• Referral services
• Travel and itinerary planning
• Sustainability consultant
• E-commerce and website technician
SMMEs VERSUS LARGE ORGANISATIONS
 DIFFERENCES BETWEEN SMMEs AND LARGE
ORGANISATIONS
1) Marketing
2) Management
3) Internal communications
4) External communication
5) Qualified technical manpower
6) Finances
7) Economic scale and system
8) Growth
9) Patents
10) Government regulations
COMPONENT SMMEs LARGE
ORGANISATIONS
Ability to react quickly Comprehensive
and keep in-front, and distribution and servicing
MARKETING “on” trend with the fast facilities; high degree of
changing market market power with
requirements existing products
Lack of bureaucracy;
dynamic, entrepreneurial Professional managers
managers react quickly are able to control
MANAGEMENT to take advantage of new complex organisations
opportunities and are and to establish corporate
more willing to accept strategies.
risk.
 COMPONENT SMMEs LARGE
ORGANISATIONS
Efficient and informal
communication Internal
networks; affords a fast communication is
INTERNAL response to internal often cumbersome,
COMMUNICATIONS problem-solving; SMMEs and this can lead to a
also provide the ability to slow reaction to
recognise rapidly and external threats and
adapt to change in the opportunities.
external environment.
Ability to “plug-in” to
Frequent lack of time or external resources for
EXTERNAL resources to identify and market, scientific and
COMMUNICATION use important external technological
sources for market, expertise; can acquire
scientific and/or crucial information to
technological expertise. enhance operations
or production.
COMPONENT SMMEs LARGE
ORGANISATIONS
Frequent lack of suitably Ability to attract highly-
qualified technical skilled technical
QUALIFIED specialists; often unable specialists; has the
TECHNICAL to support a formal effort capacity to support
MANPOWER on an acceptable scale or additional manpower for
level. pro-longed periods of
time.
Great difficulty in Ability to borrow on
attracting capital, capital market
especially risk capital; (reputation with banks);
innovation can represent ability to spread risk over
FINANCE a disproportionately large a portfolio of projects
financial risk. better able to fund
diversification into new
technologies and new
markets.
COMPONENT SMMEs LARGE
ORGANISATIONS
Some areas scale Ability to gain scale
economies form economies in relation to
ECONOMIC substantial entry barriers marketing as well as
SCALE AND to small firms; inability to production; ability to offer
SYSTEM offer integrated product a range of
lines or systems complementary products
(generally seen in (generally seen in
developing countries). developed countries).
Ability to finance
Can experience difficulty expansion for a
GROWTH in acquiring external production base; ability
capital necessary for rapid to fund growth by way of
growth (long-term). diversification and
acquisition (short-term).
COMPONENT SMMEs LARGE
ORGANISATIONS
Can experience problems Ability to employ patent
in coping with patent specialists; can afford to
PATENTS systems; can not afford register and litigate to
time and costs involved in defend patents against
patent registration and infringements.
litigation.
Ability to fund legal
services to cope with
Often can not cope with complex regulatory
GOVERNMENT complex regulations; unit requirements; can
REGULATIONS costs of compliance for spread regulatory costs
small firms are often high. throughout the
enterprise; able to fund
to achieve necessary
compliance in relation to
institutional mechanisms.
 STEPS TO STARTING A SMME
1) Personal assessment
2) Feasibility analysis
3) Select a business idea
4) Market research
5) Financial resource analysis
6) Business plan
7) Start your legally structured business
8) Licenses, permits, patents, trade, service marks, copyrights
and other regulations
9) Business taxes
10) Independence
11) Hiring employees
12) Financing a business
13) Managing a business
14) Marketing a business
15) Staged evaluations and assessments
1) PERSONAL ASSESSMENT
 SELF-ASSESSMENT
Are you ready to be in business (with yourself)?
1) Why do I want to start a business?
2) What kind of business do I want to start?
3) Why do I believe I can make this type of business work?
4) Why do I believe this type of business is sustainable?
5) What education, training, skills, competencies and experience
do I have in this industry?
6) What is my true purpose and/or the goal I hope to accomplish
with this business?
7) What is the financial objective I am seeking to achieve?
8) If I will need financing, do I have the resources and credit
worthiness necessary to be eligible?
9) What are my immediate strengths and opportunities?
10) What are my weaknesses and the threats I should be aware
of in a specific business space?
11) What is my physical, mental and emotional health and
stamina?
12)What knowledge and skills do I have to start, and control the
day-to-day operations of a business?
13) Do I know and understand the technology necessary to be
competitive in this business landscape?
14) What will it take for me to balance personal life and business
demands?
15) What sacrifices and risks am I willing to take to be successful?
2) FEASIBILITY ANALYSIS
3) SELECT A BUSINESS IDEA
4) MARKET RESEARCH
5) FINANCIAL RESOURCES ANALYSIS
6) BUSINESS PLAN
7) START YOUR LEGALLY STRUCTURED BUSINESS
8) LICENSES, PERMITS, PATENTS, TRADE, SERVICE
MARKS, COPYRIGHTS AND OTHER REGULATIONS
9) BUSINESS TAXES
10) INDEPENDENCE
11) HIRING EMPLOYEES
12) FINANCING A BUSINESS
13) MANAGING A BUSINESS
14) MARKETING A BUSINESS
15) STAGED EVALUATIONS AND ASSESSMENTS
 WHY DO SMMEs FAIL?
1) Inadequate planning
2) Underestimating the commitment it takes to succeed
3) Cash flow problems
4) Poor management
5) Not understanding the importance of customers
6) Staffing problems
7) Inflexibility accompanied by no adaptability
8) Poor marketing and/or inability to sell
9) Not enough operational capital
10) Pricing problems
11) Lack of competitive edge
12) Intensity of self-employment
13) Growing to fast
14) Internal conflicts
15) External treats
CASE STUDIES?
WORKSHEET 4
END OF THEME 4
 END,
THANK YOU!