Challenges of business development in SMEs

According to Storey (2000) and Julien (1998), typical problems in SMEs are a lack of resources, money, technology and time. Also the SMEs’ short-term perspective may cause problems. Hannula and Rantanen (1998, 90) found in their research carried out in the Päijät-Häme and Pirkanmaa regions that the most common internal obstacles to productivity improvements in SMEs are the lack of time and a general lack of resources. Workers' shortcomings in knowledge and education were also found to be significant.

Many authors have recognised the lack of management skills as one main problem in SMEs (Winch & McDonald 1999, 49; Youssef, Mohamed, Sawyer Jr. & Whaley 2002, 303). While larger firms are likely to have experienced a major change at the some point in their company history, smaller firms, either because of their newness or their slow-growth histories, may not have. A SME may easily find itself with limited indigenous management skills - not only in change management itself, but also in the new skills that will be necessary to manage the enterprise after a change has taken place (Winch & McDonald 1999, 49). The SMEs will more likely to engage in informal management practices than to adopt sophisticated planning and control techniques (Martin & Staines 1994, 26). Berman, Gordon and Sussman (1997, 1) add that most small enterprises not only lack sophisticated planning processes, but also almost any planning processes. The SMEs are susceptible to business failure primarily due to the poor risk management associated with inadequately informed decision-making (Barnes, Coulton, Dickinson, Dransfield, Field, Fisher, Saunders &

Shaw 1998).

According to Youssef et al. (2002, 303), many SME-owners have little formal management training. The limited size of the management team means that the individuals are often responsible for a number of different functions with either little or no backup. A small number of de-motivated or uncommitted staff can disproportionately affect the outcome. The centralisation of the decision-making

process within the SMEs means that the manager can either be the main stumbling block to change or the main catalyst for the change (Ghobadian & Gallear 1997, 127). The lack of extended hierarchy offers the top management the opportunity to build a strong personal relationship with the employees, but it also increases the potential for interpersonal conflict (Ghobadian & Gallear 1997, 127 - 129).

The SMEs typically have the less formalised internal and external information and communication systems. According to Winch and McDonald (1999, 50), the shorter internal lines of communication and the faster response times allow speedy problem solving and reorganisation. Martinsuo and Karlberg (1998, 7) continue that the SMEs’ decision-making process is effective, but disadvantages in SMEs are their limited capacity for marketing, strategy, acquisition of the new knowledge and technology, and finally sensitivity to external pressures and risks. Nooteboom (1994, 344) warns about risks due to the absence of specialised staff and the lack of outside criticism. Lang, Calantone and Gudmundson (1997, 20) discovered that when facing a threat or an opportunity, the small firm managers must gather the data outside of the organisation due to the lack of internal information systems.

The lack of resources causes problems for the SMEs in developing their products and utilising new technology. It is a potential barrier to innovation and adaptability (Acs et al. 1997). Hyvärinen (1993, 1) continues that SMEs can manage only one innovation project at a time. They have to choose the project very carefully so that it will not turn out to ruin the whole enterprise. Some SMEs never develop a new product or other innovation, and even small development projects can be problematic to them. According to Nooteboom (1994, 338), small firms participate less in R&D projects than large firms, but when they do participate, it happens with a greater intensity and a greater productivity than in large firms.

An SME is often strongly based on the owner’s know-how and expertise. The role of the owner is important. SMEs are often subcontractors for large firms and they operate in a great hurry in tight competition dictated by the markets. In a hardening and internationalising competition, new skills and knowledge are needed (Rantanen, Ukko & Rehn 2001). Especially the pursuit of growth requires that the owner can learn new skills and change from a doer to a manager – he or she must spend less time doing and more time managing (Churchill & Lewis, 1983, 38).

Pennings, Lee and Van Witteloostuijn (1998, 437 - 438) have discovered that the industry-specific human capital and the social capital of the owners contribute more

to a firm’s survival than those of the employees, but the contribution of a firm-specific human capital to the firm’s survival does not depend on who holds it.

Human capital is defined as the knowledge and skills that can be used to produce professional services, and social capital refers to the supporting relationships with other economic actors, the clients as one important group of the actors.

Nooteboom (1994, 337) proposes that particularly in the small business much of the operating knowledge is tacit, and that is connected to the craftsmanship. By tacit knowledge he means the knowledge typically acquired in learning by doing.

Often the person is even not aware that she or he has that knowledge.

Furthermore, in the small business the knowledge tends to be shallow, meaning that there are no functional specialists. The required special knowledge can be compensated by supplementing it from external sources.

Most small business owners start their own business on their knowledge to produce something, which they have gained e.g. as production managers. Such persons are interested in the techniques, and their typical problems lie in the marketing. Also, taking care of financial matters and accounting is difficult for them. They lack the skills of interpreting the various calculations and the balance sheet. Also pricing and making budgets are difficult for them (Hyvärinen 1993, 23).

The most important person in the SME is the owner-manager. She or he participates in most of the SME’s operations. However, much of her or his time is spent in solving various everyday business problems. Thus, finding time for development projects can be a problem. The SMEs have the best chances with production development projects, because that is the field they usually know best.

Projects aiming at business not previously known to the small enterprise very seldom succeed (Hyvärinen 1993, 36). Ghobadian and Gallear (1997, 161 - 162) warn against becoming over-ambitious with improvement efforts. Unrealistic objectives lead to a situation, where the expectations start to exceed the achievements. Hyvärinen (1993, 20) defines a good development project as an effort harmonious with the SME’s plans and resources, which supports its strengths and other activities, and helps it to overcome the difficulties arisen, often with the help of outside specialists.

2.5 Summary

In this study the definition of the SME has been adopted from the European Commission using the size of personnel, the turnover and/or the amount of total assets as the criteria. An enterprise is seen as a system consisting of a detector, a selector and an effector as introduced by Salminen (2000). This system describes the environment where the business development projects are implemented. The system acquires and receives information about changes in the economic environment. These changes can be interpreted as new business opportunities or as problems.

Prior knowledge feeds positive opportunity recognition. The entrepreneur’s values, beliefs and goals have an effect on which opportunities will be selected to be important for consideration. Many researchers have emphasised the importance of connecting the decisions with the strategy. On the other hand, many researchers have recognised that SMEs do not have a strategy. Anyway, due to the lack of resources, enterprises need to be very focused in the selection phase and have a clear sense of direction, written or unwritten.

Many researchers have emphasised the importance of the management skills, sophistication of the planning practices and the knowledge of the entrepreneur. The owner-managers’ strength of intention and the opportunity environment have been found to be sources of the success. The business ability is needed to realise the owner-manager’s intentions and opportunities. The selected business opportunity can generate results for the performing organisation, varying between the edges of success or failure. Both these edges are supposed to have an effect on the performance of the enterprise. Success is seen to relate to the achievement of objectives. Because the entrepreneur’s values and beliefs affect the objectives, she or he is seen to be in the main role in defining the success or failure (cf. Jennings &

Beaver 1997).

Often growth is seen as the main source of improvements in the business success, but as described above, growth, especially growth in the employment, is not an objective for many entrepreneurs. They are targeting at survival in the long run.

This chapter highlighted the enterprise as a system, describing the environment where business development projects are implemented. This chapter also introduced the characteristics of business development in the SME-context. It explained that the essential aspects of successful business development connected to the industry evolution and the characteristics of the owner-managers can be summarised under three central issues:

1. The strength of the intention

2. The richness of the opportunity arena

3. The business ability to realise the recognised opportunities

These three issues constitute a compact whole for examining the business development success in SMEs, later called the entrepreneurial success dimension.

This chapter also displayed some essential aspects to be considered before management decisions. Due to the lack of resources SMEs have to choose their projects very carefully. They need to be well focused and have a clear sense of direction. In order to avoid over-ambitious projects leading to project failure, the balance between project goals and resources need to be rated well. Prior knowledge gives a good pillar for successful business development project implementation.

These aspects can be summarised under three issues:

1. Clarity of the business impact

2. Balance between project goals and resources 3. Prior knowledge

These issues constitute a domain later called the project preparation success dimension.