Empowering SME Managers in Palestine

Farhad Analoui, Mohammed Al-Madhoun

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781351940399
• Edition: 1
• Topic: Business
• Subtopic: Management
• Index: Business

SMEs create employment, wealth and a potential for future growth. In Palestine they can also mean survival and freedom. In Palestine they are not a choice but a necessity for sustainable development. But by their nature SMEs are vulnerable in a business environment characterized by uncertainty. To give the managers of SMEs in Palestine a realistic chance of success they need training to enable them to meet the challenge of running their enterprises effectively. Drawing on original research undertaken within Palestine this book explores how the challenge is being met (and considers how it might be even more successfully met) by enabling and empowering the owners and managers of these pioneering businesses.

Chapter One
Small and Micro Enterprises

Introduction

There is no doubt that small and micro enterprises (SMEs) play a crucial economic role, especially in developing countries and economies where low income is the greatest problem and economic growth is at its lowest. In this context the question of heterogeneity is often raised. In this respect, in the SME’s universe, it is imperative to recognize that different categories of enterprises tend to offer different contributions to the dual goals of poverty alleviation and economic growth. And as will be explored, the role of management training and all that it entails to develop managers and improve their managerial skills and effectiveness was the central focus of the novel study on which this volume is based.

What are they?

SMEs in their most fundamental forms have been recognised as a major contemporary source of employment and income in a growing number of developing countries and economies. Yet relatively little is known about their characteristics, changing forms, and, more importantly, about the people who manage the daily activities in these enterprises. Arguably, SMEs are the backbone of the economies, especially within the developing world where they account for more than half of the total employment created and over 80 per cent of employment growth in the past decade (Analoui and Karami, 2003). This is why SMEs’ much taken for granted contribution, in particular the dynamics of SMEs in the development process, requires serious examination.

Small firms are also claimed to make up the bulk of the total enterprises in all economies in the world (Storey, 1994). It is not therefore difficult to accept the proposition that in the latter half of the last century, the increasingly important roles of small firms and enterprises could not be in any way understated (Bygrave, 1994; Timmons, 1994). Consequently, in recent years there has been a renewed interest in SMEs that has led to an increasing number of studies aimed at examining the various orientations that tend to pre-dominate the settings in which they usually operate.

Definition: A problematic notion

The consensus amongst scholars and policy makers on the usefulness and importance of the SME in a given economy does not preclude the problematic notion associated with its definition. A review of the literature confirms that there is a wide range of definitions emerging from research conducted throughout the world. However, the term ‘small’, as expected, denotes a relative term and varies from one country to another and worse still, this characteristic may differ from one sector to another even in the same economy. It is very difficult, if not impossible, to make valid comparisons of the importance given to SMEs in various countries, because there are variations in the definitions used (Storey, 1986). Not surprisingly, more than fifty different definitions have been cited in studies conducted in seventy-five countries (Neck, 1977). Some definitions tend to offer more insight into the dynamics and processes involved in their organisation and management.

An example of a useful definition is one that is cited by Bolton (1971) who contends that a small firm can be described as having the following three characteristics:

1. Possessing a relatively small share of its market;
2. Managed by its owners or part-owners in a personalised way, and not through the medium of a formalised management structure;
3. It is independent, in the sense that it does not form part of a larger enterprise. By definition the owner-managers should be free from outside control in taking their principal decisions.

Other studies have shown more concern for quantitative criteria purely for practical purposes; thus adopting some statistical limits in defining SMEs. Arguably, these yardsticks are often set on the low side. For example, Bolton in 1971 posed three criteria: the number of employees, turnover, and the number of vehicles used. The employment criterion used has two upper limits: for manufacturing 200 employees, and for construction and mining 25 employees. In another study by Curran (1986) the definition of ‘small’ adopted is that of firms employing fewer than 50 people and with an annual turnover of less than £3m. However, since the early 1970s most researchers concerned with small firms in manufacturing have adopted either the ‘100 or less’ criterion or a number lower still to define small firms. These descriptions accord with most definitions used by various relevant professional bodies concerned with small enterprises in the Republic of Ireland. Often the best decided criteria are based on the limitations of SMEs as their common characteristics. This is best exemplified by Carson and Cromie (1989) who suggest that the small firm is actually characterised by three types of limitations – their impact (on markets), finance, and their physical resources.

SMEs' contributions to development

Indeed, there is no one right way to undertake an entrepreneurial approach to the issue of development. There are certainly lots of wrong ways of providing assistance to bring about assumed development that may not really help. Equally, there are seemingly right approaches to providing assistance that is useful but is very expensive. Therefore it appears that there is no one approach that can be identified, let alone generalised or sustained. This lack gets in the way of development that could provide assistance to more people (Liedholm and Mead, 1999).

SMEs are continuing to play an increasing role in the development of western economies (Hill and Wright, 2001). The question is, would they play a similar role in the developing countries and economies of the twenty first century? Indeed, are these small enterprises worthy of study? To answer this question, Liedholm and Mead (1999) optimistically state that SMEs have the potential to contribute in a number of important ways to the development process. Among the most significant of these are the following:

1. Contribution to household income and welfare;
2. Contribution to self-confidence and empowerment of the individual;
3. Contribution to social change, political stability, and democracy;
4. Contribution to distribution or developmental objectives;
5. Contributions in the area of demographic change.

In recent years, approximately 40 per cent of the increased number of workers in the labor force in developing countries have found work in SMEs. On the other hand, the closure rates of SMEs in developing countries are between 9 and 10 per cent per year (Liedholm and Parker, 1989).

From the above debate, it can be deduced that SMEs, despite their variations in forms, size and nature, offer valid and important contributions to the process of development. Of course, they face different needs, and require different ways of being helped. The design of effective policies and programs for their assistance and growth, therefore, must be built on an understanding of their complexity.

Jovanovic (1982) assumes that entrepreneurs have different managerial abilities, yet entrepreneurs are unsure about these abilities when a new business is established. Entrepreneurs gradually ‘learn’ about their abilities by engaging in the rough and tumble of the business world and observing how well they perform. Pakes and Ericson (1987) have extended this to allow managerial ability itself to be augmented through human capital formulation. Unfortunately, neither Jovanovic nor Pakes and Ericson indicate what the key determinants of this managerial ability might be or how other important variables might affect firm dynamics.

In reality, when asked about the principal problems that constrain their development, entrepreneurs in all countries focus on three main areas:

1. Markets for the products they sell;
2. Access to input required for making these products;
3. Finance.

The relative emphasis placed on these three variables varies from country to country and naturally tends to change from one subgroup to another within a given economy. Never the less, these three indicators have been consistently identified and reported as the most important problem areas SMEs are faced with (Liedholm and Mead, 1999). For example, in Jordan, a study has identified four major problems, namely managerial incompetence, lack of finance, competition and government regulations. The managerial problems highlighted by entrepreneurs were marketing, accountancy, supervisory skills and consumer behavior (Ashi, 1989).

Other studies

Various empirical works have focused on managerial problems and the most frequently voiced reasons for SME failures. For example, data compiled by Dun and Bradstreet (1987) points to management incompetence, rather than lack of capital, as the predominant cause of SME failure. Burr and Heckman (1979) concur with this view and state that perhaps the most frequent cause of failure is general lack of managerial ability. These statements have been supported by many researchers (Krentzman and Samaras, 1960; Pomeranz and Prestwich, 1962; Anderson, 1970; Broom and Longnecker, 1979; Edmunds, 1979; Solomon, 1982; Dickson, 1983; Ashi, 1987; Hodgetts and Kuratko, 2001).

Dun and Bradstreet (1987) classified primary categories of management weaknesses as follows:

Incompetence

About 43 per cent of the SME owner-managers did not have the basic knowledge and skills to plan, manage and control their operations.

Lack of management experience

Approximately 13 per cent did not have sufficient experience in supervisory job responsibilities to deal with the everyday, on-the-job application of management.

Unbalanced experience

Roughly 23 per cent had either considerable formal education but little or no practical experience, or had extensive job experience but inadequate formal training to give meaning and perspective to their work experience.

Broom and Longnecker (1979) carried out another study, comparing ten firms that failed with ten similar companies that succeeded during the same period of time. The results revealed 18 management weaknesses, which were related to three major areas:

1. Poor financial planning;
2. poor co-ordination;
3. poor general administration.

However, it must be also noted that the average small business owner is by nature one who likes to be where the action is. He or she does not like detailed work, including record keeping and analysis, and will avoid it consistently (Dickson, 1983).

Many studies have also been undertaken in the USA, Canada, UK, and Jordan (Bolton, 1971; Kennedy et al, 1979; Dickson, 1983; Kiesner, 1984; Dey and Harrison, 1987; Ashi, 1987) analysing the problem areas and managerial training needs of small businesses. They have related these to four major areas:

Management skills

Including leadership and personal management, human relations, communication, information use, planning, building self-confidence, negotiating contracts and computer techniques.

Financial issues

Including costing and control, budgeting, accounting, bookkeeping, cash flow management, bank relations, capital allocation and tax planning.

Marketing

Including advertising, promotion, pricing, selling, import and export, and marketing research.

Production/operation management

Including production and quality control improvement.

The above findings suggest that those managerial problems and the training needs of SMEs in the USA, Canada, UK, Europe and Jordan are similar, if not identical in nature. This conclusion is supported by the findings of Gray (1989), who discovered that the training needs and the managerial problems of SMEs are the same.

Managerial training for SMEs

SMEs generally are not interested in a recommendation to stop offering credit and switch to management training. Growing business requires expanding knowledge about and mastery of improved production technologies, and a variety of associated management skills (Liedholm and Mead, 1999). In the same vein, vertical commercial linkages between independent enterprises can enable small enterprises to specialise in those functions that they perform best. Effective assistance programs can contribute to the spread of such market-based linkages (Grierson et al, 1997).

On the downside, as in many larger companies, small firm owner-managers usually lack the necessary skills to carry out effective performance reviews and in the short term may perceive such a system as taking up too much time. In the long run, however, the benefits of efficient training needs identification, clarity for employees on what needs to be achieved, and linking productivity to rewards in an objective fashion are ones which this research has shown would be positive, as they have been identified as crucial to survival and growth (MacMahon and Murphy, 1999).

Most management Training Programmes (MTPs) are designed to increase generic skills and behaviors relevant for managerial effectiveness and advancement (Yukl, 2002, p.371). However, MTPs have generally been proven to provide only limited benefits while operating at high costs. Effective programmes to address the non-financial needs of this group must operate primarily at a systems level (Boomgard et al, 1992). For this upgrading, Liedholm and Mead (1999) suggest two approaches:

1. Concentrate on providing experience for those considering setting up a new business, before they start out on their own, by developing internships or on-the-job training programmes;
2. To the extent that one seeks to assist new start-ups, build on existing experience, both in terms of any training offered and in terms of the selection of particular enterprises to support.

Hence, the starting-point for this book is the reflection on what kind of influence or contribution the MTPs have on the life cycle of SME managers. In this context, abundant literature and study materials demonstrate the positive effect of participating in management training and individual counselling programs on the entrepreneurial and managerial attitudes of SME-managers (Fuller, 1993; Gibb, 1995; Iredale and Cotton, 1995; Atherton and Hannon, 1996). Some contributors even consider post-experience management training (MT) to be an important explanatory element for a higher survival rate and chances for growth (Van Clouse, 1990; Crant, 1996; Rosa et al, 1996). Because training is a form of education in general, over the last two decades institutions of higher learning have experienced an increased demand for courses dealing with entrepreneurship and new venture creation (Schamp and Deschoolmeester, 1998).

In the past, such arguments have often led to a suggestion for the promotion of cooperatives or of business associations. In spite of their obvious appeal, each of these institutional arrangements has had a checkered past in developing countries and economies, mainly because they have often been promoted in a heavy-handed, ‘top-down’ manner (Liedholm and Mead, 1999).

A number of analysts have argued that these geographical concentrations of enterprises in related activities have provided significant benefits to those who participate in them (Schmitz, 1995; McCortnick and Pedersen, 1996; Van Dijk and Rabellotti, 1997).

While Liedholm and Mead (1999) also recognize the great advantages that some enterprises have derived from such networks, particularly in developed countries (for example, Italy), but also sometimes in developing countries (for example, Brazil and India), they have seen little evidence of the advantages of such networks in their survey results; nor have they found it to be very easy to promote their establishment in new locations in the Third World.

There is often a tendency to think in terms of long-term relationships, providing training and advice over a period of several months or even years. Such long-term, ‘hand-holding’ programs can be very expensiv...