Research: SME growth, success and failure

“Growth” in the SME is usually related to an increase in turnover, profitability, number of employees, and/or financial assets – the same criteria in fact as is used as “success” indicators. A high growth rate within SMEs is not unusual because if the firm is small a relatively modest amount of growth may result in a high growth rate. Thus the main reason for the high rate of growth may be more to do with the original size of the SME, than with “tripling a little [being] much easier than doubling a lot”.

It is generally accepted that SMEs grow more quickly than larger ones, and that young firms grow more quickly than old ones. While growth within SMEs is often eulogised it is not without risk. Rapid growth within (even highly profitable) smaller firms has often led to their premature collapse through cash flow imbalance, with immediate finance requirements causing a cash crisis and crippling the firm.

It is recognised that as a SME grows instinctive management becomes insufficient with the need for well-designed and managed systems, controls and procedures becoming paramount. The firm must become more “institutionalised”, more bureaucratic, and systematic, these kinds of structures and systems being the antithesis of many SMEs which paradoxically have flourished while being flexible with inherently informal management processes.

Growth of the firm to beyond a level where the owner/manager can manage it effectively often sparks a crisis. The pervasive influence of the SME owner/manager has already been noted. His/her capacity to change as the company grows will have a significant bearing on the success of the company. More fundamentally, his/her attitude to growth of the firm will largely determine whether or not the firm is actively “grown”. Evidence suggests that the many owner/managers seek to restrain the growth of their firm and that this is connected to their attitudes towards growth and control.

Intuition versus planning

Generally he/she does not believe that formal strategic planning will benefit his/her business, despite recommendations that the small firm owner/manager should “adopt a judicious balance of the formal and informal in their planning systems”. Evidence suggests that many successful small businesses do not practice what is conventionally described as strategic management.

Attitudes to growth

Growth itself, however, is not necessarily a goal for small firm owner/managers, as they attempt to maximise success (as defined in their own personal terms) while restricting the size of the company to a level with which they are comfortable. The size of the business will be a function of two factors – the owner/managers’ image of the business itself and the marketplace within which the firm operates. The goals and aspirations of the owner/manager have significant implications for small firm growth.

There is no doubt that SMEs are considerably more vulnerable than larger businesses largely through undercapitalisation and inadequacies in marketing, the former problem often an identifiable cause of the latter, and arguably vice-versa.

Additionally, current bankruptcy regulations require that secured creditors be paid first resulting in the collapse of one firm often causing the subsequent collapse of other (usually small) firms, exposing SMEs to still further inherent financial vulnerability. These inherent weaknesses, combined with factors such as unfavourable economic conditions, inadequate business planning and managerial capability are often associated with failure of SMEs.

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