Whilst some SME’s perform extremely well from the outset, a significant proportion either go out of business in the first few years or experience considerable difficulties.
This article sets out to list some key areas that are responsible for some of these difficulties and to provide useful insight and advice.
Lack of expertise and market research to commence
Many SME owners start trading solely on the basis of an idea, but without appropriate skills, experience or basic research to establish market parameters, the industrial and competitive landscape, optimal targeting, customer needs and other essential issues.
In order to improve the probability of success, it is important for those establishing, or wishing to grow an SME, to acquire the necessary expertise, or to hire those who have. In addition to expertise, relevant experience will tip the scales even more in the right direction.
As regards market (and marketing) research, relevant information can often be sourced online or, alternatively, if on a low budget, SME owners can sometimes conduct basic research themselves, if they have sufficient skills.
Of relevance, however, is that poor methodology, research implementation or interpretation is potentially far more devastating than a lack of research.
Some years ago I consulted to one of the world’s top advertising agencies about an expensive advertising campaign that had failed miserably. My role was to establish why this had happened. The product category was stoves, hobs and ovens.
The strategy on which the failed campaign was based hinged on a number of group discussions which had fatal errors on a number of fronts including the selection of participants, methodology and interpretation.
Some months later I lunched with the CEO who advised me that whilst my report had ‘helped put things right,’ my findings were never disclosed to the client. I was not surprised by this as the heat would certainly have been turned up in the agency’s kitchen.
Depending on their stage of development, budget and research requirements, SME’s on a tight budget can resort to online research, syndicated research or work alongside an affordable consultant with research, business and strategic expertise.
Primary research can also be undertaken with professional research houses, but in many instances cost can be a constraining factor for smaller companies, although ‘packaged’ industry reports, are often reasonably priced.
Inadequate business model, strategy, planning and vision
Many SME owners start without thinking through their business model, which sets out to establish the rationale of the organization, the manner in which it operates and how it sets about creating, delivering and capturing value for itself, its customers and other stakeholders.
For example, if you are going to sell books will it be from a physical outlet, an online store or both? Will you specialise by category e.g. educational titles only or stock a general selection?
Will you have a loyalty program in place and if so how will it operate? What makes you different from your competitors? Will your point of difference enhance the experience of buyers and the target market? If so, how? Are your brand’s points of parity adequate in your model?
Business models are strategic and have consequences. If, for example, you choose to have low mark ups on your books you need to have volume sales. An important aspect of a business model is whether or not you have the resources to deliver your chosen model?
In addition to strategy at different levels, many SME’s fall short when it comes to planning across a wide range of areas. Reasons for this include a failure to understand the need to plan, a lack of expertise, or the inability to afford professional help.
It is relevant to note that strategy always precedes planning. Strategy determines the direction you wish to take, with limited resources, whilst planning sets out the best way to do this, i.e. how best to apply the strategy to attain the desired objectives and goals of your organisation.
In some instances SME management may not have the expertise and/or time to strategise or plan, which is another instance where affordable outsourced professional input can make a significant difference.
As far as business models and plans are concerned, SME management should commence by seeking an understanding of these concepts. This can be done at no cost from credible online sources.
Online templates to help create business models and plans can also be resorted to for starters, but lack the benefits of an expert where a tailored approach would be more beneficial. Furthermore, the consultant’s interpretive skills often has commendable merit.
Without a basic understanding SME’s are born without vision, and being blind are unable to see where they are headed.
Some years back, before the major international growth of Specsavers and similar brands, I consulted to an SME in the eyewear sector.
I advised the company that international trends showed that discounting of glasses, lenses and other eyewear was on the rise and that they should take cognisance of this trend. They did not see eye to eye with me and factor this in and their myopia proved costly.
Failure to understand brand potential and the lack of a marketing plan
Unlike many major corporations, many SME owners don’t realise just how important brand potential is.
To see things in perspective, some companies like Disney and Tiffany’s have a brand value component estimated to account for considerably more than half the entire value of the company. In fact, according to Interbrand, brand value can account for more than 80% of the value of an organisation, in some instances.
The principle whereby a brand has the potential to be an asset of considerable value holds true for organisations of all types and sizes.
Some SME executives believe that all that is needed for a brand to succeed is a good name, logo and tagline, and in many instances fail to optimise even these which, although valuable, represent the tip of a large iceberg.
Areas of importance in terms of a brand’s development and strategy include a brand audit/ situational analysis, brand identity including core and extended values, and points of difference and parity. Brand positioning, architecture, standards, management and measurement are just some other key areas that require optimising.
Brands that are optimised will have better brand equity (e.g. awareness, salience, associations, loyalty, advocacy, etc.) and can in turn command higher premiums and make claim to better future cash flows. All this in turn enhances the financial value of the brand and the value of the organisation that owns it.
In addition, many SME’s also lack a marketing strategy and plan, to provide direction and optimise implementation in these essential areas.
Many are unaware of even the most basic of concepts like market and marketing research and the ‘4P’ classic marketing mix. Whilst more sophisticated marketers go far beyond this framework the basics provide a useful framework from which to develop.
Something I have witnessed many times is the tendency for many SME owners to spend substantial amounts on marketing without having optimised the brand, or even worse promoting the brand negatively. My strong advice is to optimise your brand before you proceed with your marketing and communications on the broader front.
SME’s could begin by resorting to online resources to acquire an understanding of brands, brand strategy, and marketing more broadly and subscribe to online newsletters or feeds that focus on and build an appreciation of, these areas.
Furthermore they could employ these skills within the company or work alongside a specialist consultant or relevant agency to advise and assist, as long as the choice is relevant and affordable and adds relevant value.
Inadequate financial skills and discipline
Many SME’S experience difficulty in areas related to finance. These include, but are not limited to:
- A failure to perform professional due diligence when purchasing a business, which often results in an overpayment for the business relative to market value and potential earnings. Before purchasing any business, including a franchise, it is well worth consulting with relevant financial and legal specialists to appraise the offer objectively.
- Lack of financial planning, forecasting and budgeting skills and poor financial management. SME’s need to establish a system, usually with the help of a professional, that enables them to identify and monitor key performance indicators (KPI’s), as well as detecting significant deviations between expected and actual outcomes and the reasons for this.
- Poor cash flow. Many SME’s experience cash flow difficulties at some stage of their business. In this regard SME’s need to monitor their cash flows carefully and take relevant action. SME cash flow management should incorporate the use of financial ratios to uncover trends into the financial soundness of their organisations.
- Bad debts. Although somewhat obvious many SME’s don’t conduct sufficient credit checks on clients or, having done so once, feel that no further credit checks are required. An early warning sign occurs when clients that have traditionally paid on time take longer to pay, or don’t pay in full. The impact of bad debt is heightened in instances where the bulk of an SME’s income is dependent on a single source. Some banks offer guidelines to assist small business whilst specialist credit reporting agencies, such as Dun and Bradstreet, can also play a valuable role.
- Reliance on a single supplier. SME’s that rely on a single supplier can run into financial problems when it comes to renewing a contract. To illustrate this a client that is dependent on a large company to supply an active ingredient was recently told that to renew the contract the client would have to accept a 40% price hike, ‘take it or leave it’. Before embarking in a particular direction, SME management should ensure there are alternative suppliers and not be held to ransom.
- Overtrading. Some SME’s run into financial difficulties by overtrading. By expanding too rapidly they run the risk of incurring costs substantially beyond anticipated revenue in the short term. This is particularly disadvantageous when fixed costs (e.g. in the form of lengthy leases) are incurred without the necessary expertise and risk management procedures in place. Professional advice is the best option in this instance.
- Capital Raising Issues. Many SME’s require capital at different stages of their development and failure to procure funds can severely inhibit their growth. In this regard many options need to be assessed including factoring, asset based finance, debt, equity finance, purchase order funding (using firm orders or new contracts to secure funds), trade credit, etc. Seeking independent expertise to assess which option is best is strongly advised.
Lack of risk assessment or management
Risk assessment and management is an area that many SME’s ignore, either because they are unaware of its importance or believe it unnecessary, expensive, or time consuming.
The objective of risk assessment is to identify and assess risks of various types as well as predicting their relative probability. In addition, it examines the impact that these risk categories would have on the specific business
Risk management is concerned with objectively, and consistently managing risk over time, and establishing optimal ways to minimise future risk or, at worst, establishing how best to cope with the consequences of different forms of risks, should they arise.
Risk can manifest in many different forms including poor market offerings, industrial forces, competitive activity, financial and economic issues and changing trends, to name but some. There are also information technology (IT) safety and environmental risks and risks pertaining to specific occupation types, only some of which may be dealt with by legislation.
Whilst SME owners can familiarise themselves with this area online, including Government guides, expert advice is specific areas is often warranted.
Lack of direction as regards human resources and training
Quality people are assets of the highest calibre for any organisation.
Many SME’s, especially start-ups, usually lack the funds and credibility to attract the calibre of person they need. Without proper management and excellent staff support an organisation cannot reach its full potential.
Whilst fund raising can assist in attracting a higher calibre of staff, another possibility is to incentivise a suitable partner for their skills contribution, even if the contribution is not on a full time basis. Another option is to employ a consultant to provide expertise on an affordable basis.
As an organisation grows, organisational structures, HR programs and retention strategies need to be developed.
The delivery of professional training courses, workshops, enhanced skills, etc. all instill a more competitive mindset. In addition service levels are also progressed. This in turn benefits your brand, as management and staff are important ambassadors for your organisation.
SME’s should work with a credible supplier of professional human development courses and undertake training courses most relevant for their needs. In addition they should investigate training courses that are subsidised by Government as these can be extremely beneficial.
No exit strategy
SME owners start a business for many different reasons. For some, the financial potential is the primary motivator, whilst for others lifestyle or a passion for a particular activity may be the primary driver. Many, particularly in these times, start a business because they are unable to find suitable employment.
Whilst some SME owners appreciate the need for a business plan, many do not have an exit strategy, which is short sighted to say the least
Ideally a business exit strategy should be considered from the outset, with the understanding that this will be modified as circumstances change. In this way the framework and discipline of the process is in place from the start, which is highly advantageous.
In addition to the peace of mind that comes from having an exit strategy there are also many other advantages.
The optimal exit strategy that SME’s should choose depends on their objectives and prevailing circumstances. Each option has different consequences which should be carefully weighed.
In this regard it is sagacious to consult with financial and legal experts to ascertain the best course of action.
Wrong mindset and attitude
Some SME owners believe that they ‘know it all’ and don’t need advice in many essential areas. Ignorance and ego are often the main culprits.
No one ‘knows it all’ and there are times when specialist advice can be most beneficial and add significant value.
A mindset that recognises that hiring expertise in specialised areas is not only healthy but often necessary but comes with the proviso that SME’s are free to select providers that are best suited to their specific needs and circumstances.
About the Writer
Alan Kaplan PhD is an executive director of Optivance 360 a Sydney based management and franchise consultancy. Alan has worked alongside clients ranging in size from SME’s to large corporates such as Agrevo, Aventis, BASF, World Vision and Qantas Loyalty to name but a few.
Alan’s international experience spans more than twenty five years across academic, media, agency, client and consulting areas. Alan’s profile can be viewed at www.optivance360.com or on LinkedIn and he can be contacted on firstname.lastname@example.org