Success in SMEs

As promised last week, I wanted to get a bit further into Watson's work on Small and Medium Size businesses (SMEs). This time, I want to expand on the measurement of success.

I actually don't like anything small. I figure that being small is not inspiring, so it does not work for me. Furhtermore in some countries being small is a threat. Yes, a threat. Things are harder when you are small, and more expensive. The power of leveraging does not work, time is less efficient because tasks are not specialized and usually larger investments do not make sense.

But let me go on with Watson before I close up with my own remarks.

SMEs success depends pretty much on the intention of the owners. Unlike large corporations that have a clear intent of creating shareholder value -in dividends or resale value- SMEs can be used, for example, to support a hobby, to support a small community, and to create personalized services. I don't mean the ones that are plugged into a databased so you can fit profile 134z so the solution is tailor made. I mean Trevor my hairdresser and Steve the post man, and Jenny at the grocery store and Amanda, the niece of the owner o the newsand who is studying law. How do I know? because she is 'personal'.

When Watson analyzed how business owners defined success and accounted for it in his data, he found out that the success rate was very high. Indeed SMEs were made to create the results the owners wanted, profits came second, almost always.

There was the case of a couple who came as immigrants and did not speak the language. They had a small stand, he worked fixing watches and organizing the inventory, she worked in the front desk and did sales and admin. They went to raise a family of four and closed the business to retire some 40 years later. They did not sell it, they had enough savings to be ok in their old age. Their business was quite profitable and provided them with a better than a regular salary alternative.

Other cases were aggregated, his findings showed that usually women where less risky and tended to be more efficient in their use of capital. The cost of capital for SMEs is usually higher, banks claiming their risk is higher. Watson also demonstrated that SMEs risk of failure was realated to the firm's age and not size.

after all it seems then than being small is not that bad.

As a customer I think about great corporations and small through a single lense, sorry: are they providing value for me and the community?

and with that in mind, I choose.

All the best, Alicia


next week, wealthingTM

Demystifying Failure in Small Businesses

I just finished reading a book that will be published in late 2009. What a fascinating read. The author, Dr. John Watson has embarked into a review of success and failure on Small and Medium Size businesses (known as SMEs). Read on to be surprised!

He has spent years evaluating, among other things, the myth of the high failure rate. Someone said a long time ago, that the failure rate of SMEs was 80%. I have heard this statistic in the U.S.A, where supposedly the rumor originated, in Chile, Venezuela, Mexico, Guatemala, Australia and even in Bahrain! So much for globalizing failure rates!

What striked me most was the consideration that a business closure was not a sign of failure. It is one of those reflections where one realizes that common sense is not that common. John found time and again that the closure of businesses could be ther result of many non-failure related decisions: the owners may decide to close a company to retire or to separate pieces of the company to sell separately (I have done both). they might also sell to move on to other ventures or to do something else (been there, done that too). Of the 9 companies that I started, I have sold 5 and I have closed 2 at a personal loss. So, my personal stats are 12% ... I have worked with hundreds of entrepreneurs some in the most uncertain circumstances: taking innovations into markets outside of a corporation, the 80% failure rate is a myth.

John statistics prove that the failure rate of SMEs, at least in Australia using his work and revising many others, is 3-28% with a peak at 3 years, where companies that are less profitable compel the owners to take two actions: either reinvent (aha! I also had to do this) or closed (in my case, one closed one on year 2 and the other on year 4).

Demystifying SME's failure rates is very imporant for entrepreneurs to be, policy makers and for the community in general. With the current economic crisis, chances are that many people will move to start a business, yet, more than ever, we need entrepreneurs, not to form companies, but to create wealth ... right?

That is why we are turning our company to a Wealthing company.... more to come soon...

I hope John's work will help reshape the way you view SMEs, it has changed mine.


Alicia


PD: Next week I'll cover his work on performance!


Alicia