Business Growth Factors: Internal vs. External Constraints in Pietermaritzburg, Lecture notes of Business

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THE INTERNAL AND EXTERNAL ENVIRONMENT

FOR SMALL BUSINESS GROWTH IN

PIETERMARITZBURG

By Morgantheran Kumaruguru Pillay

Submitted in partial fulfilment of the requirements for the degree of master of Business Administration At the school of Management, UKZN, Pmb October 2006

Supervisor: Professor D. Mahadea

EXECUTIVE SUMMARY

This study investigated the internal and external constraints facing small business owners in the Pietermaritzburg (PMB) region. An attempt was further made to determine: whether the internal constraints or external factors constitute a greater burden on growth; whether policy focus should concentrate more on the internal constraints or external factors and determine the association between average growth (in terms of the number of employees) and the educational level and training of the owner/ manager, gender, ethnicity, business activity, legal status of the business and sources of start-up capital. Knowledge of the relative role of personal and environmental factors of this study in bringing about growth and expansion provides directions for government policy on Small and Medium Enterprise (SME) development.

By means of factor analysis the numerous internal and external environmental variables affecting business growth in PMB were reduced to a set of three factors, classified as management, financial and external. Collectively they accounted for 59.21% of the total variance of the model. The internal factors (management and finance) accounted for 48.95% of variance and it was concluded that internal factors are more burdensome to growth than external factors. As a result government support should focus more on the internal constraints facing the small business sector.

Further, multiple regression analysis was used to arrive at a parsimonious model that 'best' explained the regression model which accounted for 45.4% of variance with average growth. Average growth, in terms of the number of employees, was found to be a function of, the level of education of the owner / manager, legal status of the business, source of start-up capital, exposure to training and business support.

Internal factors such as obtaining finance, cash flow, recruiting and retaining staff, shortage of managerial skills I business expertise and lack of financial understanding prevent growth of the business. External factors such as the economy, taxation, regulation and laws, technology, competition, lack of business support and crime were found to inhibit the growth of the business.

DECLARATION

I, Morgantheran Kumaruguru Pillay, hereby declare that the contents of this dissertation are my own work, and that all sources utilised, have been accurately reported and acknowledged. This dissertation has not, nor is submitted for any degree / examination at any university.

Signed: d~

iii

Date: ':>+-)_'~~'f-?ti?J_I,

ACKNOWLEDGEMENTS

The following people made the final completion ofthis dissertation possible:

~ My supervisor, Prof. D. Mahadea for his sound supervision, guidance, patience and inspiration.

~ My family and friends, who were always a source of inspiration and motivation, throughout my studies.

~ To Almighty God, who gave me the opportunity to reach this level of study.

IV

CHAPTER THREE

CHAPTER FOUR

THE ENVIRONMENTAL CONTEXT OF ENTREPRENEURSHIP

4.1 Introduction 32 4.2 The Internal Environment 32 4.2.1 Business Age and Industry Sector 32 4.2.2 Education, Experience and Training 32 4.2.3 Access to Finance (^35) 4.2.4 Financial Management 35 4.2.5 Management Skills 36 4.2.6 Human Resource Management (^37) 4.2.7 Innovation and Technology (^37) 4.3 The External Environment (^38) 4.3.1 The Economy (^39) 4.3.2 Taxation (^40) 4.3.3 Regulation and Laws (^42) 4.3.4 Crime (^42) 4.3.5 Business Support (^43) 4.3.5.1 Khula (^43) 4.3.5.2 Brain (^44) 4.3.5.3 Frain (^44) 4.3.5.4 Business Partners Limited (^44) 4.3.5.5 Small Enterprise Development Agency (SEDA) (^44) 4.4 Conclusion (^45)

CHAPTER FIVE RESEARCH METHODOLOGY

Introduction Statement of the Problem Research Objectives 5.3.1 Primary Objectives 5.3.2 Secondary Objectives

VII

6.5.7 Average Growth Vs Exposure to Training Factor Analysis Reliability Analysis Conclusion

CHAPTER SEVEN DISCUSSION OF RESULTS

93 94 97 97

7.1 Descriptive^98 7.2 Growth of the Business 99 7.3 Constraints 100 7.3.1 Internal Constraints 101 7.3.1.1 Finance 101 7.3.1.2 Staff Development and Training 101 7.3.1.3 Managerial Skills 102 7.3.1.4 Recruiting and Retaining Staff 102 7.3.2 External Constraints 103 7.3.2.1 The Economy 103 7.3.2.2 Regulation and Laws 104 7.3.2. .3 Taxation 104 7.3.2.4 Technology and Innovation 104 7.3.2.5 Crime 105 7.3.2.6 Business Support 105 7.4 Conclusion 106

CHAPTER EIGHT CONCLUSIONS

Introduction The Evaluation of Internal Conditions The Evaluation of External Factors An Evaluation of the burdensome nature of internal and external factors.

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107 107 108 109

CHAPTER NINE

LIST OF TABLES

LIST OF FIGURES

• 2.7 Conclusion
  • 3.1 Introduction THE SME SECTOR IN SOUTH AFRICA
• 3.2 The Contributions of the SME Sector
• 3.3 The Global Entrepreneurship Monitor Studies (GEM) - 3.3.1 The Findings of GEM - 3.3.2 The Findings of GEM - 3.3.3 The Findings of GEM - 3.2.4 The Findings of GEM - 3.2.5 The Findings of GEM
  • 3.4 The Investment Climate Survey (lCS) - 3.4.1 Worker Skills - 3.4.2 Macroeconomic Instability - 3.4.3 Labour Regulations - 3.4.4 Crime
  • 3.5 The Small Business Project's: Counting the Cost of Red Tape - 3.5.1 The Findings of SBP - 3.5.2 Efficiency Costs - 3.5.3 Compliance Costs
  • 3.6 The Pietermaritzburg (pMB) Perspective - 3.6.1 Introduction
    • 3.6.2 The Quarterly Economic and Business Report - 3.6.2.1 Provincial Government Expenditure in Kwa-Zulu Natal - 3.6.2.2 Turnover and Renumeration - 3.6.2.3 Business Investments - 3.6.2.4 Labour Markets - 3.6.2.5 The Economic Performance Indicator for PMB.
• 3.7 Conclusion - 8.5 An Evaluation of the Focus of Small Business Policy - 8.6 Variation in Average Growth and Gender - 8.7 Variation in Average Growth and Activity - 8.8 Variation in Average Growth and Ethnic Groups - 8.9 Variation in Average Growth and Legal Status - 8.10 Variation in Average Growth and Educational Level - 8.11 Variation in Average Growth and Exposure to Training
  • 8.12 Variation in Average Growth and Sources of Start-Up Capital
  • 8.13 The Determinants of Growth
  • 8.14 Conclusion
  • 9.1 Introduction RECOMMENDATIONS
  • 9.2 Recommendations - 9.2.1 Lack of management Skills / Business Expertise - 9.2.2 Financial Management - 9.2.3 Human Resource Practices - 9.2.4 External Environment - 9.2.5 Innovation - 9.2.6 Use of Technology - 9.2.7 Crime - 9.2.8 Business Support - 9.2.9 Educational Level - 9.2.10 Regulation and Laws
• 9.3 Conclusion - Table: 3.1 Cost of Crime and security relative to Labour Costs and Value Added PAGE - Table: 3.2 Cost of Crime and Security in Millions ofRands - Table: 4.1 Entrepreneurial Level of South Africans according to their Education - Table: 4.2 Educational Level of Entrepreneurs compared to South African Population - Table: 6.1 Age of Business - Table: 6.2 Sources of Start-Up Capital - Table: 6.3 Average Growth
  • Table: 6.4 Training Vs Average Growth
  • Table: 6.5 Chi-Square Test Statistics for Internal Factors
  • Table: 6.6 Chi-Square Test Statistics for External Factors
    • Table: 6.7 Test Statistics for Regression Model
  • Table: 6.8 Test Statistics of Av. Growth Vs Gender
  • Table: 6.9 Test Statistic of Av. Growth Vs Ethnic Groups
  • Table: 6.10 Test Statistic for Av. Growth Vs Activities of Business
  • Table: 6.11 Test Statistic for Av. Growth Vs Legal Status
  • Table: 6.12 Test Statistics for Av. Growth Vs Educational Level
  • Table: 6.13 Test Statistic for Av. Growth Vs Sources of Start-Up Capital
  • Table: 6.14 Test Statistics for Av. Growth Vs Exposure to Training
  • Table: 6.15 Total Variance Explained
  • Table: 6.16 Rotated Component Matrix
  • Table: 6.17 Factor
• Table: 6.18 Factor
• Table: 6.19 Factor - Figure: 2.1 A Multidimensional Entrepreneurial Process PAGE - Figure: 3.1 Contributions of the SME Sector - Figure: 3.2 Major Obstacles to Growth - Figure: 3.3 Annual Regulatory Compliance Costs as a Percentage of Turnover - Figure: 3.4 Annual Regulatory Compliance Costs / employee by Number of Employees - Figure: 3.5 Level of Economic Activity - Figure: 4.1 Annual Cost of Tax Compliance as a percentage of Turnover - Figure: 6.1 Gender of Respondents - Figure: 6.2 Ethnic Distribution - Figure: 6.3 Educational Level of Respondents - Figure: 6.4 Legal Status - Figure: 6.5 Exposure to Training - Figure: 6.6 Distribution per Sector - Figure: 6.7 Distribution of Employees per Sector - Figure: 6.8 Means plot for Employees - Figure: 6.9 Average growth per Sector - Figure: 6.10 Educational level Vs Labour Employment
  • Figure: 6.11 Average Growth Vs Labour Employment
    • Figure: 6.12 Methods of Growing the Business
  • Figure: 6.13 Requirements for Growth
  • Figure: 6.14 Sources of Funding for Growth
  • Figure: 6.15 External Environmental Factors
  • Figure: 6.16 Internal Factors
  • Figure: 6.17 Taxes that Constrain Growth
  • Figure: 6.18 The Impact of Taxation on Business Growth
  • Figure: 6.19 Other Regulations that Constrain Growth
  • Figure: 6.20 Is Crime a Problem?
• Figure: 6.21 Types of Crime
• Figure: 6.22 Effects of Crime on Business Growth

CHAPTER ONE INTRODUCTION 1.1 Background Small, medium and micro-enterprises (SMMEs) represent an important vehicle to address the challenges of job creation, economic growth and equity in our country. Throughout the world, one finds that SMMEs are playing a critical role in absorbing labour, penetrating new markets and generally expanding economies in creative and innovative ways (Horton et aI, 2000: 1). At the heart of the small business is the entrepreneur / owner / manager. Since 1994 the government has devoted considerable resources to support small enterprises. However, Storey (1994: 79) states that the failure rate of the small business is large. Therefore knowledge of the relative role of personal and environmental factors in bringing about growth and expansion is important for boosting the SMME sector as well as to the field of entrepreneurship.

By conducting this study, the researcher provides evidence on the links between the external and internal environments with respect to growth. Knowledge of the relative role of personal and environmental factors of this study in bringing about growth and expansion provides insights for government policy. This cross-sectional, quantitative and multivariate study utilises a questionnaire and the survey method to obtain data.

1.2 Research Question The research question can be stated as follows: "What are the perceptions among Pietermaritzburg small business owners / entrepreneurs of the internal and external business environments with respect to the growth of their ventures."

1.3 Objectives To achieve the above the researcher has formulated the following primary objectives:

~ To evaluate the internal environmental conditions that favour or constrain entrepreneurship and small business development in the Pietermaritzburg region.

~ To evaluate the external environmental conditions that favour or constrain entrepreneurship and small business development in the Pietermaritzburg region. ~ To investigate whether the internal or external set of factors constitute the greater burden on business growth. ~ To examine whether policy on small business / entrepreneurship should focus more on the internal conditions or external factors.

1.4 Overview Chapter Two begins by examining the term 'entrepreneur' and explaining the entrepreneurial process of entrepreneurship. It also links the concept of entrepreneurship to the Small Medium Enterprise (SME). The SME is defined in terms of this study and a brief history and nature of the small business sector is provided.

Chapter Three reviews the SME sector in South Africa and the factors that constrain the growth thereof. This is achieved by reviewing the various studies that have been conducted in South Africa. The chapter begins by examining the contribution made by the SME sector to employment and the Gross Domestic Product. Secondly, it highlights the main fmdings of the Global Entrepreneurship Monitor (GEM) reports on the state of entrepreneurship in South Africa, the salient findings of the Investment Climate Survey (lCS) and the findings of the Small Business Project's (SBP): Counting the Cost of Red Tape. Finally, the chapter evaluates the economic climate ofPietermaritzburg, the site for this study.

Chapter Four evaluates the internal and external factors under investigation in this study. Specifically, the educational level and training of the entrepreneur / business owner, the economy, access to finance, taxation, regulation and laws, human resource practices, technology and innovation, lack of managerial skills and crime, are examined.

Chapter Five provides a clear and detailed description of the research design followed by the researcher in order to test the formulated hypotheses. It explains the research methodology, the units of analysis of the study, the instrument used for data collection, the statistical approaches

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CHAPTER TWO

THE ENTREPRENEURIAL PROCESS

2.1 Introduction An understanding of the terms entrepreneur, entrepreneurship and the process of entrepreneurship is vital in determining the resources, skills and management competencies required to start and grow a business venture (Fry et aI, 2001: 13). The aim of this chapter therefore, is to examine the term 'entrepreneur', explain the entrepreneurial process and link the concept of entrepreneurship to the Small Medium Enterprise (SME). Such an approach reveals the skills, resources and management competencies required for business growth.

2.2 Entrepreneur

A look at the vast array of research on entrepreneurs indicates that there is still no standard universally accepted defmition of an entrepreneur. The defmition used in a particular study is dependent on what one's intent is, or what one hopes to accomplish. For the purpose of this study, a compact defmition of an entrepreneur provided by Pickle and Abrahamson (1990: 59), will be used: "An entrepreneur is one who organizes and manages a business undertaking, assuming the risk, for the sake of profit. The entrepreneur evaluates perceived opportunities and strives to make the decisions that will enable the business to realize sustained growth. "

2.3 Entrepreneurship

From the viewpoint of growth-oriented innovative companies, one of the best defInitions of entrepreneurship is found in Ronstadt (1984: 28): "Entrepreneurship is the dynamic process of creating incremental wealth. The wealth is created by individuals who assume the major risks in terms of equity, time and / or career commitment or provide value for some product or service. The product or service may or may not be new or unique but value must somehow be infused by the entrepreneur by receiving and allocating the necessary skills and resources. "

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Central to this defmition and those provided by other authors are the following characteristics that consistently appear.

2.3.1 Creation process: Entrepreneurs will identify an opportunity and then create a product or service, a process or something of value for some market (Hisrich and Peters, 2002: 10). Creativity, innovation and vision are fundamental traits required by entrepreneurs, argue Hodgetts and Kuratko (1998: 32). The entrepreneurial process begins with an entrepreneur's ability to identify an opportunity. The entrepreneur will creatively devise ways to bring this opportunity to fruition (Timmons, 1999: 38). The importance of creativity and innovation cannot be overemphasized. Glancey and McQuaid (2000: 9), advocate that it is imperative for entrepreneurs to be creative in the multiple areas of the entrepreneurial process if they are to achieve their growth-oriented goals. Therefore, constant environmental scanning is required.

2.3.2 Acceptance of risks: The process of bringing the identified opportunity to fruition has its own unique set offmancial risks, personal risks and social risks. Timmons (1999: 27) argues that, although the entrepreneur should accept both personal and fmancial risks, what is important is that the odds are manipulated in the entrepreneur's favour by creatively and innovatively using the resources available. Glancey and McQuaid (2000: 6) stress that it is important for entrepreneurs to be able to calculate, manage and minimise the risks associated with the entrepreneurial venture. Hisrich and Peters (2002: 10) emphasise the importance of taking calculated risks that reduces the potential for failure.

2.3.3 Rewards: Entrepreneurs accept the risks, allocate the resources and create the product or service for a reward. These rewards may be in the form of profits by growth of the venture, independence or personal satisfaction (Hisrich and Peters, 2002: 10). Timmons (1999: 27) adds that entrepreneurs create, enhance and realise their rewards, not only for themselves but also for all the relevant stakeholders. The result of entrepreneurs accepting the risks and uncertainty of their new venture is that they receive the potential benefits (Glancey and McQuaid, 2000: 6).

2.3.4 Resource allocation: Entrepreneurs will draw on all available resources to realise the opportunities that they have recognised (Hisrich and Peters, 2002: 10). Entrepreneurs will allot

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