country. They are the drivers of a country’s GDP growth and employment creation. However, many SMEs particularly in developing economies, struggle to grow both in revenues and profitability. A casual observation reveals that a great majority (probably 99%) of the ones that survive the infant death of startups in the first 5 years will never become big organizations.
My interaction with entrepreneurs who own and run SMEs make me believe that these are the most hardworking, passionate and ambitious people who are always looking forward to converting their SMEs into large organizations. Despite all these factors there appears to be some glass ceiling that will stop them from growing beyond some level. Why is this the case?
Having worked with a number of SMEs, entrepreneurs and large organizations, I propose the following six reasons as the main constraints which are the unforeseen glass ceiling which unless removed will always hold down any business from growth.
- Unscalable Business Models.
- Over dependence on new customers
- Flawed Marketing Mindset
- Lack of Quality Human Capital
- Lack of Innovation
- Lack of systems that support growth
1. Unscalable Business Models.
No business can outperform its business model. A business model describes the integrated means through which you are trying to achieve your business objectives- creating and delivering value to the market for profit. When the perfect combination of such means is put to the highest test they could only give a certain result at best. The biggest limitation to SME growth, from my observation, has been unscalable business models. These are business models that don’t allow for growth.
Let me explain this with an example.
If you were a dairy products processor you could have the following as your business model. You have your dairy cattle, producing all the raw milk you require. You milk the cows, process and package the end products in your factory. Then you have two trucks with some delivery people who take the milk to various shops in your neighboring city. Try to get the highest results from this model you will discover that at some point you can only maintain a certain number of cattle however much capacity you have in your processing plant you can’t process more than your cows can produce. You will then discover that at some point you can only maintain a certain number of trucks and delivery boys to reach a particular region. However, much capital is injected into this business at some point it will be a prisoner of its business model.
Unless the model is changed there will be no growth. A change in model may mean a change in how the firm gets its raw materials – from self production to buy from other dairy farmers; it may also mean selling semi-processed products to other dairy products, it may mean sourcing out its excess capacity to competitors, add other products into its fold rather than focusing on dairy products only, develop a different channel of distribution among many other factors that affect its business model.
As you evaluate your business model you need to fully appreciate all the factors that drive your business and how they relate to each other.
2. Over dependence on new customers
All start up entrepreneurs have great stories of their first customers. The excitement of getting someone to believe in your product or firm is essential to keep you going in the early days of your new business. Unfortunately for most SME entrepreneurs this excitement becomes an obsession and it becomes the key purpose of all its business efforts. It has been widely believed that the most successful business is the one that has most first time customers. This is a partial truth.
My position is that the most successful business is the one that has customers who repeatedly do business with it and the frequency and size of this business increases with time. As a marketer and business owner, I know how costly and difficult it is to get a customer make the first purchase. This is incomparable to the easiness of getting a repeat purchase.
Many SMEs owners will agree with this logic in conversations but in practice you hear and see, ‘Lose them once they make the first purchase!’ Inscribed in all its customer dealings. You see it in the customer service, the quality of its products and weak after sale follow-up.
3. Flawed Marketing Mindset
For big companies marketing seem to be at the heart of everything they do. They do as much marketing as money can buy. A friend who own an SME once told me that the market budget of their large competitor is more than their annual turnover (not profit).
SME financial resources are limited. But this is not to say that marketing is a good thing to have if you have money. Marketing is a must ingredient to grow your business, and most SMEs extremely weak in marketing. Today’s business battles are worn or lost in the market arena. Many people seem to conclude that you have to invest all your capital into marketing. Never.
One guy who has been able to start SMEs and convert them into large organizations is Richard Branson. In his book, “Screw It”, he says that he learnt early that he didn’t have a lot of money for marketing and therefore he had to get publicity for his businesses and that is why whatever he does is newsworthy and that is more than advertising money can buy.
Unless you want to remain small you have to think of ways of getting marketing leverage for your business. You don’t have to be a marketing guru to do it. In our marketing course for entrepreneurs we cover various aspects of marketing your business with minimal budget- and there are limitless ways of doing so.
Some economists say that market seeks to create a perfect competitive environment by making every product a commodity while marketers seek to create monopolies. If you don’t create a monopoly for your product and business then the market will make you a commodity and businesses dealing in undifferentiated commodities will never grow.
4. Lack of Quality Human Capital
You wish I said financial capital. While this may be a challenge to some businesses but for those that remain small this is more of a consequence than the cause of being small. I have consulted and trained for large organizations and SMEs and one most visible difference between the two is the number of quality of people who work in the them.
While large organizations have a large number of talented, skilled and passionate people, SMEs particularly the ones who growth has stagnated has only one such person – the owner. That is why minus the physical and mental health of the owner the businesses will end up in ground zero.
When you hear of a guy who single handedly started and grew a small business into a large multinational just know that is a lie. Businesses are grown by have many highly skilled, talented, loyal and passionate employees. Talking to many SME owners they all complain that getting and keeping such people is hard and expensive if it happens. It is difficult but not impossible. Recently I advised a client to go for the right attitude and develop competencies with time. And for sure they are starting to experience great results from this.
As an SME owner you need to craft a strategy and develop a culture that will attract, develop and retain the best people you require for your business. A business cannot outgrow the quality of all the people working in it.
5. Lack of Innovation
Closely related to lack of human capital is lack of innovation. The two are directly proportional. One true measure of business growth is its innovativeness. It has been said that majority of the most successful companies in the world have heavily evolved from what they started out doing and those that have stagnated are doing exactly what they started out doing.
The world we live in is continuously changing. That which was a genius idea yesterday will not be appealing tomorrow. That which your customers fought to get last year will be highly inferior compared to what your competitors have next year.
To grow you have to innovate… and many SMEs don’t innovate. You have to develop new products, create more selling channels, give your customers more flavors, more service options, different ways of communicating to your customers.
Compare the case of Google growth and Kodak decline and you will understand why innovation is the engine that drives growth.
Innovation thrives in a business culture that allows, even encourages, mistakes. Unfortunately this culture is a major deficiency among many SMEs and the only person who can get away with a mistake is the owner. As a consequence no trying out new ideas that might fail and the final result is being a prisoner of smallness.
6. Lack of systems that support growth
Systems are the skeleton upon which growth is built upon. Too much growth with weak without a strong system will result into chaos and ultimately every business will tend to shrink to the level that the system can be able to hold. To move from biology to architecture systems are the pillars upon which the business is built on. They can only hold as much weight as they can support.
I have been involved in assisting SMEs put in place business systems and in most cases the only system that exists in some form is the accounting system. If a business is not built on system then it has to build on people. People move, people forget, people get sick, people get bored, and you know what all this become your business. While systems may not completely eliminate the effects of these occurrences they drastically minimize them.
In SMEs mistakes happen all the time. Some are never discovered and corrected, some become habits while the consequences of others are dressing down, reprimands and firings. The truth of the matter is that these mistakes will be repeated no matter what. To stop the mistakes from being repeated only a system that works all the time will help resolve them.
Sam Kariuki is an SME Business Growth Strategist, Consultant, Sales Trainer, Entrepreneurial Coach and Entrepreneur. Although Sam has trained and consulted for various large organizations his greatest passion is in helping SMEs businesses achieve success by growing their revenues, profits and cash flows.