Small and medium-scale enterprises (SMEs) have typically struggled to survive in Nigeria. Data by both the Small and Medium Scale Enterprises Development Agency of Nigeria (SMEDAN) and the International Labour Organisation showed that 80 percent of small businesses in Nigeria do not survive beyond five years. This is way higher than the African average of 54 percent. In effect, eight in 10 startups die within five years. Considering that the sector is a major contributor to the country’s GDP (an average of 48% over the past five years, according to data by SMEDAN and the National Bureau of Statistics) and contributes close to 90 percent of employment, it is surprising that economic leaders have not found a solution to mitigate this. Why is the business mortality rate this high? It is a combination of both internal and external factors.
“Poor infrastructure such as electricity, water supply, road and communication networks, and security remains a problem for SMEs.”
In truth, this problem is not peculiar to Nigeria. Even developed economies face a similar challenge. For instance, data from the US Bureau of Labour Statistics showed that circa 20 percent of new businesses fail in their first year and around 45 percent will collapse in five years. In Australia, 60 percent of new businesses fail in three years, while in the UK, only 40 percent of new businesses make it past three years. New businesses generally struggle with cash flow, customer acquisition, and pricing challenges.
However, while the issue may be global, Nigeria’s situation seems to be harsher. The challenges, grouped into external and internal, range from financial issues, harsh operating environment, low capacity utilisation, poor management to inadequate marketing, lack of structure, low adoption of technology, poor recruitment practices, wrong product line, and hasty expansion, among others.
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SME challenges
The external challenges are well known, and every new and old SME will continue to contend with them. Ask any small business owner, and they will tell you finance is at the top of the pile of external challenges they must overcome. In truth, traditional financial institutions in the country are wary of extending facilities to the SME sector. Besides, interest on bank loans has remained high, sometimes as high as 30 percent and above. However, the funding landscape is now wider for any serious entrepreneur. Angel investors and venture capitalists are willing to finance viable business plans. Poor infrastructure such as electricity, water supply, road and communication networks, and security remains a problem for SMEs. So is the government’s flip-flop on policies and regulations and multiple taxation.
Internal challenges most critical to business success
Much of the discussions around the challenges SMEs face in the country are directed at these external factors. But, my opinion is that while these factors remain critical, the most important factors that hasten the death of SMEs in the country are internal. In my career, I have worked closely with SME owners and witnessed firsthand the challenges in the sector.
Most business owners have the technical expertise for the market they are operating in but little or no idea about the inner workings of a business. This is reflected in the inadequate organisational structure and, in some cases, misalignment of corporate strategy, which could significantly impair business growth. A poor business structure manifests in several ways, among which are: opaque record-keeping, unsavoury work culture, poor leadership, work overload, poor communication, and a lack of work-life balance.
Work overload
From my experience, many SME owners start their businesses, and they are the managing director, the accountant, the customer service person or marketer, the procurement officer, the logistic officer, and the admin/HR manager. What then tends to happen is that there is no proper structure in place to ensure a seamless flow of operations. Overseeing everything can lead to burnout, which ultimately could spell doom for the new business.
Poor leadership
Where the owner engages professionals to help build the company, he/she insists on micromanaging them, invariably killing creativity and initiative, inadvertently creating a culture of resentment and nonchalance that drains productivity and stifles the fledgling business. Many small business owners seem to believe that they have to make the decisions concerning every aspect of their business—after all, it is their business. That simply shows a lack of trust in the personnel hired and poor leadership. The attitude also sometimes stems from the irrational fear of the business owner that he may lose his company to a smart employee(s).
Shoddy bookkeeping practices
Poor bookkeeping is a major reason many SMEs are overlooked for bank facilities. Where there are no proper records of inflows and outflows, it is difficult to determine the cash flow or financial position of the business and its viability. Many small business owners run their company accounts like personal accounts or use private accounts to conduct business. No financial institution will extend facilities to such businesses.
Poor work culture
This is characterised by poor or inadequate communication or poorly articulated core values that sometimes lead to narcissistic tendencies among employees who seek to manipulate the system and the company’s leadership to gain an advantage over others. In some cases, the business owner treats employees with condescension and hardly brooks any opinion or idea from them on how the company can innovate or improve operations. Such owners even demand adulation from workers and would expect them to kowtow; otherwise, they may lose job perks or even the job.
Overcoming structural deficiencies to build a strong business
The organisational structure and corporate strategy are the foundation of a strong business. A business with a strong foundation has a higher chance of survival even against the headwinds of a harsh operating environment, funding challenges, poor infrastructure, multiple taxation, and the government’s inconsistent policies. Thankfully, the business structure is an internal challenge that can readily be addressed.
It may take some effort, but then building a successful enterprise is not a piece of cake; it takes time, effort, and commitment. Business owners need to optimise the opportunities available by working with experts to develop the right strategy for the business and ensuring that the business is properly structured from the beginning.
Collaboration, not competition
The strategy must be robust enough to exploit partnership opportunities with similar businesses. The competitive advantage strategy, where a business focuses on highlighting its differential value to be more profitable than its rivals, is no longer as viable as it used to be. The effect of this type of strategy in the SME sector, considering the challenges operators face, is that collaborative opportunities are not being harnessed.
To optimise the opportunities available, businesses should consider a cooperative strategy to enable competing businesses within the same market to come together to increase their chances of growth. This strategic alliance is designed to help two or more competitors with complementary strengths enter an agreement to share common gains without losing their identity or individuality.
Most importantly, startups and even old SMEs need to be nimble enough to adapt quickly to changes and ensure relevance.
Kukoyi, a change manager and SME consultant writes in from Lagos
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