Prison Break

7 Top Constraints that Hinder SMEs Growth to Big Companies

By

Sam Kariuki

Growth Partners th Hazina Towers 9 Floor P.O Box 51672-00100 Nairobi Tel: 020 8012627 Cell: 0720 790 173 Email: info@growthpartners.co.ke Website: www.growthpartners.co.ke

Prison Break: 7 Top Constraints that Stop SMEs from Becoming Big Companies
Introduction
It has been proven that very few SME startups remain in business in the first 5 years. A lot of studies have carried out on why so many of these businesses close doors and what needs to be done to reduce this high rate of failure. For those that survive the assumption made is that they have succeeded. That is not the case. Majority of these firms remain small till they close doors. That would be acceptable if it was the owners objective. Every day the owners work hard to see the businesses grow both in revenues and profits. This seems like it will never happen. They assume more money will help them grow but not necessarily. What causes this problem? That is the question this report seeks to answer. I have highlighted the 7 top constraints that make it so hard for SMEs to break into the club of large companies. The report has been built on information resulting from studies on SMEs, consultations engagements, training courses I have ran for SME entrepreneurs, coaching and mentorship sessions with business owners and day to day interactions with SME owners, consultants and their employees over a period of 5 years. While this report is not to be considered as strategic advice for a particular business or industry in the form provided, the issues it raises can greatly inform development of growth strategy for any SME business. By highlighting the constraints SME owners and organizations that partner and work with them can then develop interventions that can greatly improve the growth potential and capacity for these businesses. It is my sincere hope that issues raised here will spur further research, debate and studies on the subject and the result will be thriving large organizations that started out as SMEs. The author is currently working on a book on the same subject and he would be happy to engage with anyone who is interested in the subject. We hope that you will be draw value from reading the report. We look forward to your feedback. Thank You.

Sam Kariuki Growth Partners sam@growthpartnerske.com

Prison Break: 7 Top Constraints that Stop SMEs from Becoming Big Companies
Constraint1: Limiting Business Models
No business can outperform its business model. This business model describes the integrated means and processes through which an enterprise seeks to create and deliver value to the customer and how to make money from this value. The model is made up of various building blocks namely: Target Market; Key Resources; Value Design; Management Systems; Value Communication; Critical Activities; Value Delivery; Key Success Networks; Revenue Streams; Cost Structures. Customer Relationships; Any of constraint on these factors will limit the capacity of the business to grow. The constraints on the model could take many forms unscalability, inefficiency, deficiency, ineffectiveness or wrong format on any or a combination of the building blocks. Lets take an example of an existing food processing firm, called SamsDelite, model and what constraints the firm is likely to encounter as it seeks to grow. We focus only on a few elements of its business model to demonstrate the point.

Business Element

Model

The Current Model

The Constraint

Target Market

The health conscious segment of the This is a small niche market and growing it may market. require expensive educational marketing Customer Relations are based on giving A competitor with capacity to sell to the lowest prices possible. customer at a lower price will win the customer. The key revenue stream is sales of At some point sales of these products will not packaged food products. grow and therefore the business will plateau. The firm doesnt collaborate with other To grow, the firm may require utilizing excess players in the industry as they may steal its capacity of its competitors to package, business secrets. warehouse and distribute its products. The firm employs all its employees on The wage bill of the company is growing and fulltime basis, owns all its working tools etc with shrinking demand for its products the costs remain high.
Table1: The Current Model for SamsDelite

Customer Relationships;

Revenue Streams;

Key Success Networks

Cost Structures

As long as SamsDelite maintain this model, it does not matter how hard everyone in the company works, how much financial capital is injected in it will struggle to grow beyond the constraints of its model. SamsDelite will need to change this model to improve its potential and capacity to grow in revenues and profits. This is one suggestion (among many alternatives) on how the ownership of SamsDelite could change various aspects of its business model. Business Model Element
Target Market

The Current Model

The Constraint

New Model

Specializing on food products for health conscious segment of the market. Customer Relations are based on giving lowest prices possible.

This is a small niche market and growing it may require expensive educational marketing A competitor with capacity to sell to the customer at a lower price will win the customer. At some point sales of these products will not grow and therefore the business will plateau.

The firm decides to become a whole family food products firm targeting the trendy young families. The firm seeks to build a strong brand loyalty trough innovative marketing and continuous product development. Rather than process all it products it engages other processors whom it packages their products under its brand name. It also handles and manages product lines of non competing manufacturers both local and international. The firm has built partnerships with key suppliers in the industry particularly those providing raw materials, financial institutions that are always willing to provide finance to grow the business and has great relationships with competitors who are always willing to allow the firm to use their excess capacity. The firm seeks to maintain as much of its costs in variable form rather fixed terms.

Customer Relationships;

Revenue Streams;

The key revenue stream is sales of packaged food products.

Key Success Networks

The firm doesnt collaborate with other players in the industry as they may steal its business secrets.

To grow, the firm may require to utilize the excess capacity of other food processors to package, warehouse and distribute its products.

Cost Structures.

The firm employs all its employees on fulltime basis, owns all its working tools etc

The wage bill of the company is growing and with shrinking demand for its products the costs remain high.

Table 2: Changing the Business Model for SamsDelite

By adjusting its business model you see how this firm can improve its potential to grow and even its capabilities to do so. The changes may appear obvious to everyone but it is unlikely to be so to the owners of SamDelite. Are these guys daft? They are not. The reason is that many SME business owners dont understand their business models and when they do they dont question or challenge them and the consequences are business imprisoned in smallness.

Constraint 2: Lack of Strategy

What is your business strategy? Ask any SME Business Owner this question and you are likely to get some blank stares. Why would someone be blank yet this is one of the most common words in business language? The reason is that the word has become a clich.

A strategy is your plan to accomplish a major objective. Forget the loaded strategic plans documents created for government. It is a simple clear plan of how you intend to grow your business, increase revenues, profitability or market share. From my consultancy engagements with SMEs I rarely come across a clear strategy. I dont see business decisions made for strategic reasons. Every decision or action taken is likely for a tactical shorter reason- to resolve a crisis, to appease a client who is throwing tantrums, to get sell more to meet our cash flow deficits, to make a quick buck to maximize on a short term opportunity and the list is endless. None of these is wicked or wrong but businesses that are run this way will never grow. They miss out on bigger picture, long term growth opportunities, resolve a short term hiccup and sow seeds of long term crises etcetera. It is a fact that not all SME business owners have been to a business school but, that is never a good reason not to have a strategy whatever name you will call it.

Why many Strategies Dont Work

1. They are generic in nature and inapplicable in particular business; 2. They dont address crystal clear objectives; 3. They are vague in articulation; 4. They are not implemented or poorly implemented; 5. They dont have supporting structures to drive them; 6. They are not sustained over the long haul; 7. They are not monitored and measured; 8. People dont believe in them.

Constraint 3: Over-dependence on new customers for growth

All start up entrepreneurs has 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 the start up. Unfortunately for most SME entrepreneurs this excitement becomes an obsession and the only purpose of all its marketing efforts. It has been widely believed that the most successful business is the one that has the highest number of first time customers. This is a partial truth. One key measure of how well you are doing in business the number of repeat customers who come back to you as often as they can and spend as much as possible every time they buy from you. As a growth strategist, marketing consultant 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 keeping a customer and getting him to make a repeat purchase. Many SMEs owners will agree with this logic in conversations but in practice the opposite happens. You hear and see the inscription, Lose them once they make the first purchase! In their customer dealings. You see it in the customer service, the quality of its products and weak after sale follow-up. After a customer buys dont ask, How do I get the next one. But shout to yourself, How will I get him to come back!

After a customer buys dont ask, How do I get the next one. But shout to yourself, How will I get him to come back!

Constraint 4: Flawed Marketing

There is no business known to have grown without marketing. Whenever, I say this many entrepreneurs assume that I am approving their failure to market their businesses. They have this assumption because to them marketing costs a lot of money, which they dont have. It is a fact that some aspects of marketing will require finances. But a lot of money never makes good marketing. To majority of SMEs marketing involves advertising on Primetime TV and national newspapers. This is costly and any SME business owner who has tried it has a story of how they burnt their money. The experience is usually so bad that many of them give up on advertising ever again unless they are using other peoples money, like many marketing heads of large organizations. You have to grow your business using intelligent, results based marketing if as a small business you are going to enjoy growth that comes from marketing. Let me a military analogy. Consider yourself a general and your limited money make up your soldiers. Whenever you spend any marketing cash you are sending out your soldiers for war. You want them to bring back prisoners of war and great loot. As you send them out there is a risk that they will all be killed or taken as POW. What do you do to avoid this scenario? You need to be more creative, more strategic and a great planner so that every campaign you carry out is a success. Unfortunately for many SMEs they have tactical, uncreative and weak planners no wonder every soldier they send out is killed. After some point they have no more soldiers to send out and their business suffers greatly. They try to act like a general with an unlimited army yet they dont have the resources. It is often said that doing business without advertising is like winking to a girl in the darkness. But winking without a target and purpose is useless even in broad daylight. You need to have clear objectives for your marketing activities and they should be monitored and tweaked over time till you can get the highest possible result from every coin you spend.

Qualities of Good Marketing

It is a profit centre not a cost centre It has a strategic objective; It is measurable in impact and results; It gets customers to spend money on your business repeatedly It gets the highest possible returns.

Constraint 5: Low Return on Human Capital

Financial Capital may hinder growth for some businesses. But for majority of those that have refused to grow money is not the problem. Actually they dont have money because they dont have capacity to make it. Human Capital is the most unleveraged resource in any business. This is more articulated in SMEs than in large organizations. I have consulted and trained for large organizations and SMEs and the most visible difference between the two is the number of quality of people they have in their team. While large organizations have a large number of talented, skilled and passionate people, SMEs particularly the ones whose growth has stagnated have only one such person the owner. That is why minus the physical and mental health of the owner many SMES end up closing doors. 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 utilizing the wealth of skilled, talented, loyal and passionate employees. Many entrepreneurs running SMEs complain that getting and retaining great people expensive and almost an impossibility. It is difficult but not impossible. Early last year I advised a client to go for the right attitude and develop skills with time. And for sure they are starting to experience great results from this. To get the highest returns from your people you need to hire right, manage effectively, appraise the people regularly, reward on performance and retain good and great performers and getting rid of dead wood as soon as you pick it.

Human Capital Challenges in SMES

1. Lack of clear strategy in hiring; 2. Unskilled workforce; 3. Lack of regular and objective appraisal system; 4. Unmotivated employees; 5. Undefined Roles; 6. Failure to retain top performers.

Constraint 6: 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. Majority of the highly admired for their growth from small start ups to success companies have are not doing what they started out doing and if at all they are they are not doing it the same way they did it in the beginning. The yester-year giants that have stagnated are doing exactly what they started out doing. I dont want to mention names. 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 have last year will be highly inferior compared to what your competitors will introduce next year. How do you grow in this environment? INNOVATE! Innovation is what fuels of business growth. 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. Innovation will be possible only if you become more outward looking. Then align everything in your business to the external happenings and prepare for the future. 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 new ideas come up in the business for fear of failure and the result is being a prisoner of smallness. You will not grow the business if there is a monopoly of idea generation in the business.

Skills for Innovation

Observe
what is happening in the world

Question
Dont accept things as they are without questioning;

Associate
unrelated ideas;

Network
even with all manner of people seeking different viewpoints

Experiment
with new things and ideas (Innovators DNA by Jeff Dyer)
9

Constraint 7: Lack of systems that support growth

Systems are the skeleton upon which growth is built upon. Too much growth with without strong systems will result into chaos and ultimately the business will tend to shrink to the level that the system can support. Talk of Business Body Mass Index. 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 all else is dependent on whims, know-how and How to Create Effective Systems for SMEs temperament of the people.
1. Break down your business into various processes and sub processes; 2. Align the processes to the business objectives and strategy; 3. 4. 5. 6. 7. Document the processes; Train the people on the systems; Quantify results expected from every process; Monitor and Measure the Results; Improve the processes better, faster, easier, more profitable.

People move, people forget, people get sick, people get bored, and all this become your business. While systems may not completely eliminate the effects of these occurrences they drastically minimize them. You then have a predictable business that can always deliver what it is supposed to deliver regardless of the mood of the moment. In SMEs mistakes happen all the time. Some are never discovered and corrected, some become habits. While dressing downs, reprimands and firings are the methods used to deal with these problems they are hardly the most effective ways on their own to ensure mistakes are not repeated. Systems go along way to help. If you want to break away from the prison of smallness you need to work on removing all these constraints.

10

About the Sam Kariuki

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. After being called upon to help many SME Businesses he has found out that many principles being promoted by business schools and consultants dont work for SMEs given the unique situation that SMEs are in. Based on this knowledge his strategy, training and consultancy services are unique in that they seek to address the SME needs in a non-conventional approach. Sam believes that entrepreneurship is not just about financial capital, hard work, belief and grit. Although these factors are essential there are certain structures and principles that differentiate successful SMEs from the struggling ones. It is these structure that Sam helps entrepreneurs discover and put them in place. Many organizations do not maximize on all the opportunities they have and also do not get optimal results from their investments and have many hidden assets that are rarely utilized. Sam helps the businesses do exactly this. Unlike many consultants Sam guarantees his services in various forms. To talk to Sam: Email: sam@growthpartners.co.ke Website: www.growthpartners.co.ke LinkedIn: http://ke.linkedin.com/in/samkariuki Call: +254721303864

11