The 3fs of scaling internal setbacks of sme development

BY: Graphic Business

This article has been put together by the China Europe Internatioal Business school  within the context of the Vodafone African SME Summit, November 2015.

There is a strong case for doing big business in Africa. Natural resources abound within the continent; markets are fast expanding along with increasing sophistication in consumer tastes.

A debatable point is the existence and adequacy of infrastructure to support business activity.

In this regard, the existence of many thriving multinationals within the continent attests, either to a respectable measure of infrastructural development; or the financial power of these multinationals to, pun intended, make a way where there is none.

Small and medium-sized enterprises (SMEs) are the greatest contributors to Gross Domestic Product (GDP) in developing countries. In Ghana alone, SMEs account for 70 per cent of GDP and 92 per cent of businesses. Thus, the implications of wide-spread SME growth for economic development are staggering. However, though widely touted,

SME development is progressing at a surprisingly glacial speed considering the promises and publicity given the topic across the continent.

Some challenges to scaling up SMEs
Admittedly, many of the challenges to scaling up SMEs are extraneous to the businesses themselves. These extraneous challenges include: infrastructural deficiencies, prohibitive policies and trading regulations and the broader economic condition. However, equally powerful and often overlooked are internal deterrents to SME growth.

Internal deterrents, as used in this article, are factors within the purview and control of SMEs or their owners, which often serve as a barrier to scaling up of the business.

Although these factors are varied and broad, three broad categories have been identified in light of CEIBS Africa’s experience interacting with African businesses and their owners for almost a decade:

Familiarity: Humans are known to be creatures of habit; and in our experience, many business owners imbue their operations with this fondness for doing things the same

way at the same pace; with the aim of achieving the same or –incredibly – even better results. Many small business owners are reluctant to face the question of scaling up because of the changes such a decision may bring.

Familiarity in and of itself does not feel like a terrible thing. It is accompanied by a shroud of comfort and certainty which some stakeholder groups, including employees, may appreciate. However, familiarity becomes a poison pill for business in a world that is no longer content with yesterday’s products, methods or services.

For this reason, academics and practitioners alike call for businesses to innovate and continually reinvent themselves. Fear: Fear of failure is a barrier to entering into and scaling up small businesses, which has been widely addressed. However, other strands of fear exist. The fear of losing control of a business is one powerful motivator that keep small business owners from seeking partnerships in order to expand their ventures. Coupled with this factor is the trait of chronic mistrust.

While a business owner may be ill-advised to accept partnerships with blind trust; the positive prospects of scaling up by sharing ownership are too compelling to ignore.

Partnering with the right individuals and institutions is accompanied by the injection of funds, expertise and vicarious credibility into a business. The pressing question, in this regard, is thus: who are the right partners and how does one find them?

Funding: Although a largely extraneous factor, funding is worthy of mention in order to examine the internal barriers that intensify the extraneous difficulties. In our experience, small business owners view funding as an end and the requirements for qualifying for that funding as the means. If this perspective has any merit; it’s the logic. However, it is a misguided view.

Take business planning, for example. A comprehensive and convincing business plan is central for attracting funding; but the process of becoming the business described in the plan should be the overriding focus of an entrepreneur —the end, so to speak — and not merely the means to attract funding.

In the quest to scale up one’s business, it is easy to become focused on the search for funding and in so doing, make that the business’ primary pursuit. Ironically, small businesses that take this approach often do not obtain the funds pursued.

This may be because funding institutions have a knack for sensing the skew in the motivations of the applicant. It could also be because the more businesses focus on attracting funding as an end, the more outlandish the claims their applications make — even beyond the focus of the business — and the less suitable they appear as applicants.

The above arguments beg the question, “Is scaling up ideal for every business?” The answer to this question, of course, is “Probably not”.

A more specific question must be asked by each small business regarding the suitability of scaling up for that particular venture. The answers to this more specific question would depend on two main things: the wish of the owner; and the wishes of the stakeholders to the business.

Two tenets of corporate social responsibility, economic and ethical responsibility, emphasise the obligation of the business to act in the best interests of its stakeholders, notably clients and employees. 

Therefore, in considering whether or not to scale up, we invite business owners to broaden their decision criteria beyond personal preferences and profitability to encompass these.

This year, CEIBS Africa developed a case study on the typical challenges faced by a small-scale Ghanaian business in scaling up its operations. The subject of the case is mSimps; an award-winning creator of African-themed fashion accessories. We invite you to examine the synopsis and excerpt below and analyse them critically. Were you

Mabel, what choice would you make; in light of the 3Fs, what does your choice imply about your stance on SME growth?

Mabel Simpson, the sole proprietor of the mSimps, faces a choice which will result in a trade-off between expertise, funding and ownership stake in her business. Mabel almost single-handedly runs a demanding, successful business which operates a highly-specialised product differentiation model.

She juggles her constant need to be involved in the design and quality control of mSimps’ custom-made bags, shoes and other accessories, with management of the company’s media (both electronic and socio-cultural) presence. 

At the same time, macro-economic crises affecting Ghana’s energy and financial sectors present severe constraints on mSimps’ profit margin and Mabel’s ability to sustain and expand the business. Mabel estimates that she would require at least GHS 50,000 in the short-term to efficiently run the business.

A private investor offers Mabel an attractive sum of GHS 100,000 in exchange for 51% stake in mSimps; or 30% stake for half the amount. Within the two-week window Mabel is to make her decision, her confidant- a former design school classmate- approaches her with an offer of his own: to partner Mabel in running mSimps, given his vast knowledge of the fashion industry, and put forward capital of GHS 10,000 in exchange for 30% ownership.

An Excerpt from the case: mSimps: Decision-Making in Scaling up a Small Business
Mabel mulled over the decision before her. Accepting an offer from Anthony Evans’ would enable her catapult mSimps to new grounds in the fashion industry; however, regarding changes to the very nature of mSimps, Mabel knew the expectations which had been expressly stated would only be the tip of the iceberg.

On the other hand, Kwesi’s offer would give her the chance to run mSimps almost the same as she currently did- if they could generate cash to sustain the business model. Mabel contemplated accepting an offer of Mr. Evans’ and simultaneously bringing Kwesi on board; however she knew that would not be possible.

Even if she was willing to part with more of her stake in mSimps, Evans was unlikely to accept an extra partner to the business. Additionally, a part of Mabel still balked at the prospect of giving away substantial stake in mSimps. She wondered if there were aspects of her current business that she could restructure in order to reduce cost and enhance sales.