Small Business Success and Challenges Project

Small Business Success and Challenges in Saudi Arabia

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Abstract

Table of Content

List of Figures

Chapter 1: Introduction

1.1 Background of the Study

Small businesses have recently played a great part in the development of national economy across the world. This has been attributed by extensive growth of small businesses worldwide, creating employment and extending the market and competition in various industries. There has never been a consensus on the small business definition among scholars. However, most of them define small business based on the number of workers and the company’s turnover. Despite this, the value used to define number of employees and company’s annual turnover differs greatly per country. Among various provided definitions, the most commonly used definition refers small business to a business that is independently operated and owned, but not dominant in its operation field. It is also regarded as the business that lack public negotiability of public stock, and in which the owner has to individually guarantee any planned or any existing financing (Sdteryoung & Newman, 1993). Generally, a small business in developed nations is said to employ a maximum of 500 individuals and manages sales of not more than 20 million dollars. Nevertheless, in Islamic countries, small companies are regarded to have a maximum of 50 employees, while in Saudi Arabia this definition varies based on organization, and thus, the country also lacks a standard definition for a small business. The maximum number of workers in a small business based on different definitions from organizations in Saudi Arabia ranges from 20 to 60. Some organization also defines small business based on turnover, and based on their definition the maximum turnover for small business in Saudi Arabia ranges from SR 100 thousands to SR 5 million.

Small businesses are regarded as the main element of the in economy in various countries across the globe. These business serve people customized needs in different industries. Most of businesses in Saudi Arabia are part of the small businesses sector, as they account for 92% of businesses in the country, and employ over 80% of the workforce in the country. Nevertheless they only make a minimal contribution to the economy of the country. These businesses are said to contribute just 33% of the Saudi Arabia GDP. Moreover, the average small businesses age in Saudi Arabia is seven years. This implies that the small businesses aptitude to grow and survive in this country is highly limited.

Small businesses in Saudi Arabia experience a number of challenges. According to () they lack some significant aspects to assist them to develop and continue their businesses. The country’s commercial bank as well as other financers evade from giving small businesses loans. According to 2011 analysis as presented by (), the small business debt capital was below 2% of the entire banks’ lending rate in the country. Moreover, management, business planning, and innovation issues are the other major problems facing small businesses in the country. The behavior of ‘copycat’ has resulted to a huge number of outlets and shops that are very similar established next to one other has killed innovation among small businesses in the country. Most small businesses in the country center on simple selling and buying of standard services and goods. They therefore obtain very low profit margins which are characterized by limited development and growth. Small business diversification and specialization suffer from a distinctive lack of managerial information, technology and marketing. The strategy of knowledge management is not frequently employed in Saudi Arabia small businesses. Moreover, there is funds limitation to promotion human resources, primarily due to expensive training institutes. Saudi Arabian institutions are said to charge up to 3000 dollars for a short planning or accounting course training period. Bureaucracy policies and governmental requirements in establishing and running small businesses are also regarded as the other main obstacle in the development and growth of small businesses (Al-Saleh, 2012).

1.2. Statement of the Problem

Small businesses are said to be the main source of employment and contributor to economic growth in over the world. They have highly played a main role in reducing unemployment, enhancing social life by ensuring a balance between family management and earning particularly among women who are the main managers of household operation. Small businesses have also been associated with improved lifestyle, increased job satisfaction and general life satisfaction. However, despite all these advantages, it is considerably hard to establish and develop a small business in Saudi Arabia. Most of these businesses are said to die before they reach their seven year of establishment. Although highly beneficial to individuals and the country in general, these businesses are experiencing a number of challenges that limit their development and sometimes their survival. This paper focuses on studying small businesses with intention of establishing the aspects that contribute to their success and failure. The main purpose of this study is to establish challenges experienced by small businesses in the world, and particularly in Saudi Arabia, with intention of identifying possible measures that can be employed to improve their rate of survival and growth. The study of the factors that determines small business success and failure in the world will assist in the development of the best measures to employ to enhance small business success in Saudi Arabia.

1.3. Objectives of the Study

The main objective of this study is to establish measures that can be employed to enhance small business survival and growth in Saudi Arabia. To obtain this, the following sub-objectives will be employed:

To identify the aspects that influence small business success and failure across the world

To identify causes of small business failure in Saudi Arabia

To determine ways the identified global small business success and failure factors can be used to enhance small business survival and growth in Saudi Arabia

1.4. Hypotheses of the Study

Although there is no consensus in the definition of small businesses in the world, small businesses in the world are said to have similar framework. In this regard, the success and failure of small businesses in the world are anticipated to be influenced by similar factors. In this regard, it will be anticipated that those factors that determine success and failure of small businesses in the world are identical to those influencing the performance of these businesses in Saudi Arabia. With this regard, it would be anticipated that the measures employed to enhance small business success in other countries can be duplicated in Saudi Arabia to enhance small business survival and development. In this the three main hypotheses to be employed to guide this research in this case include:

Hypothesis 1: The determinants of small business success and failure are similar across the globe

Hypothesis 2: Factors influencing small business success and failure in Saudi Arabia are similar to those determining failure or success to other small businesses in the globe

Hypothesis 3: small business success and survival rate in Saudi Arabia can be enhanced by employing measures employed by successful small businesses in the world.

1.5. Significance of the Study

Just like in all other parts of the world, Saudi Arabia has experienced growth in the rate at which small businesses are being established. However, the rate of small businesses survival in the country is considerably low. Moreover, those small businesses that survive beyond seven years do not grow at the required rate. This has resulted to a huge downgrade in the definition of small business in the country to that with not more than 60 worker and with a turnover of not more than SR 5 million compared to the standard definition of not more than 500 workers and a turnover of 20 million dollars, since; most of them do not grow to the required height. The main aim of this study is to establish a solution to challenges facing small businesses in Saudi Arabia with intention of increasing their rate of survival and success or development. The significance of this study is to ensure that the main challenges influencing the growth and survival of small businesses in Saudi Arabia have been identified and counter measures have been established. This will improve small business contribution to the country’s economy and also enhance the livelihood of those who depend on small businesses to survive. It is also anticipated to improve in the rate of employment in the country, enhance innovation, and business diversification in the country. The study will also offer a clarification on whether successful small business development measures from one part of the world can be directly imported to a small business in another part of the world and enhance similar level of success in the new region.

1.6. Research Questions

The following research questions will be used to guide the research development in this case:

Are determinants of small business success and failure similar across the globe?

What factors influencing small business success and failure in Saudi Arabia?

Are factors influencing small business success and failure in Saudi Arabia similar to those determining failure and success to other small businesses in the globe?

Can small business success and survival rate in Saudi Arabia be enhanced by employing measures employed by successful small businesses in the world?

1.7. Limitation of the Study

One of the main challenges faced in this research involves defining a clear cut between small and medium sized businesses in Saudi Arabia. Different countries have a defined number of employees and turnover of both small businesses and medium business. In Saudi Arabia, there is no standard measure for small businesses since the definition varies based on the organizations. Some include what could be regarded as medium size business in their definition while others include what would be regarded as small business in their definition of medium size business. For instance, the Eastern Province Chamber of Commerce and Industry Small and Medium Enterprises Development Center in Saudi Arabia refers small businesses as that which contains a maximum of 20 employees and a medium size business as that which contain a minimum of 21 workers and a maximum of 100 workers. Nevertheless, the General Investment Authority of Saudi Arabian defines small business to contain a maximum of 60 workers while medium size business is said to contain a maximum of 100 workers and a minimum of 61 workers. The annual turnover classification of small business also varies widely with the industrial Development Fund of Saudi Arabia defining them as those businesses with annual turnover of maximum of SR 20 million while the country banks classify small enterprises as those with a maximum annual turnover of SR 5 million and with minimum employees of two and a maximum of 49 employees. This variation in definition will make it hard for the researcher to differentiate small business from medium size businesses in the country (Al-Saleh, 2011). Another major challenge is lack of separate data for small businesses in the country since most scholars prefer addressing both small and medium sized businesses together, and thus it is considerably hard to draw a line between the two. Another major limitation is lack of enough time to conduct a comprehensive primary study of small businesses challenges in the country.

1.8. Definition of the Terms

Chapter 2: Literature Review

2.1 Introduction

Small Business Framework

Small business success or failure can be evaluated based three unique but complementary views. These views include managerial characteristics, organizational configuration, and the task environment. Task environment refers to the environment parts that possibly relevant or relevant to goal attainment or goal setting. The task environment is consisted of regulatory bodies, competitor, suppliers, and customers. Generally, small businesses are more susceptible to the environment effects. With its limited human and financial resources, they do spends more of their times adjusting to instability rather than controlling or predicting it. Organization configuration is defined as the informal and formal organization structure. Hierarchy is frequently contracted in small businesses and the process of decision making is usually centralized. The organization chart of a small business is seldom formalized, but normally it involves three to four levels, specifically in manufacturing. Due to their small size, small enterprises have less structural and interpersonal differentiation in reaction to diversity of task, and interdependencies of the department are frequently more personalized compared to large companies. Managerial characteristics entail the actions, objectives, goals, and motivations of the business owner. A manager in small business is regarded as a skillful craftsperson that is basically concerned with reputation and quality. The owner-manager importance in small enterprises cannot be exaggerated. Due to the owner-manager’s central function, a higher comprehension of the owner-manager role will improve the small business understanding (D’Amboise & Muldowney, 1988).

Small Business Success and Failure

Operating and starting a small business involves a likelihood of failure and success. Due to the small size of these businesses, a simple management error is probable to result to guaranteed death of a small business. Poor management, improper financing, and lack of planning have been cited as the main causes of small businesses failure. Another identified cause of small business failure is lack of credit. Credit plays an essential role in enhancing the expansion of business and its lacks hinders the growth and development of this business (Bowen et al., 2009).

The success of a small business is determined by a number of factors. One of these factors is what motivated the establishment of the business. The aspect of being ‘pushed’ or ‘pulled’ into establishing a business has extensively been used in small business literature. A ‘pull’ inspiration is related with a person experiencing a strong reasonable internal positive desire to establish a business venture. A ‘push’ is an opposite inspiration that is related with a probable equally strong need, though founded on negative external reasoning. There are various pull motivation aspects said to influence small business establishment. They include higher job satisfaction, extra flexible and less rigid lifestyle, personal satisfaction, independence attained from being own boss, and personal freedom. Others include desire to earn more, desire to encounter new business challenges, curbing unemployment or creating new employment opportunities, and executing new own interests in life. These non-financial scales have traditionally been frequently related with businesses which have been known as lifestyle enterprises. Lifestyle enterprises are allegedly not fascinated by financial profit and they contain no intent of developing their businesses into bigger entities. The mention effective-founded criteria that are connected to intrinsic lifestyle aspects are outside the conservative economic paradigms. The non-financial aspects are also termed as psychic income or rewards are useful in explaining individual goals and objectives in small business operations. They are frequently employed by individuals that have not essentially been successful financially to measure their business based on monetary terms, though they are still pleased with other forms of rewards obtained from business for instance personal satisfaction. The effectual measurements are not essentially substitute for financial goals but their complements.

Factors Used to Measure Small Business Success

The success of a small business can be measured by non-financial and financial criteria though the later has received more literature attention. Traditional business success measures have been founded on either on number of employees or financial performance that includes return on investment, turnover, or profit. All these measures are based on the growth assumption where it is presupposed that all owners of small business need or want to advance their businesses. Thus for businesses to be considered successful, the financial measurements need increase in turnover or profit, or/and an increase in the number of workers. According to Bowen et al. (2009), the most apparent success measures are growth and profitability. In terms of economy, this is perceived as maximization of profit. According to Walker and Brown (2004), economic performance measures have normally been popular because of ease in which they can be applied and administered as they are considerably hard measures. Moreover, all businesses need to be viable financially to some degree for the sake of their continuity. Nevertheless, based on the fact that some enterprises contain no growth interest, it is considerably right to conclude that financial profitability is not the only or primary motivation of all small businesses. In this regard, there have to be other non-financial standards used by small business operators to measure the success of their business.

According to Walker and Brown (2004), some measures used to gauge the success of the business are not viable based on the fact that this may not have been the initial goal of the business owner. For instance, a number of small businesses may deliberately abstain from taking on workers, even if a decision of this kind could be financially harmful to the business. Thus, utilizing number of employees as a business success measure is neither applicable nor accurate to all small businesses. There are other non-financial business success measures used by owners of small businesses. They include the aptitude to balance family and work responsibilities, job satisfaction, or autonomy. These measures are said to be personally defined and subjective and thus, they are more complex to quantify. In addition, the non-financial criteria assume that there is a provided financial security level which already exists or that the business is not considered as the prime source of income.

Another factor that influences the success of small business is gender. Recently the growth rate in self-employment has been higher among women compared to men. Nevertheless, more men are still probable to be in self-employment compared to women. Although information on the comparative chances of survival for men and women headed business are scarce, information on the challenges and disadvantages women face while managing businesses demonstrate the likely hood that men headed businesses do better the women headed businesses (Kalleberg & Leicht, 1991). According to Walker and Brown (2004), men owner-managers are different from women owner-managers, where it is presumed that women frequently control micro enterprise from a home-based view. In Walker and Brown (2004) views, gender might be a significant aspect which influences success perception of small business owners. Among the myths regarding small business or enterprises that are not high growth enterprises is that they are frequently managed by women. Nevertheless this perspective is not shared by all researchers in small business gender operation field. According to Walker and Brown (2004) women account for 33 percent of all operators of small business in Australia, and they do lean on operating the minor end of the spectrum of small business. Nevertheless, in Walker and Brown (2004) view does not imply that businesses controlled by women are stagnant businesses, reasonably, in overall women have not been managing businesses for a similar time period as their male colleagues, and they have not experienced the same chances as men to establish corporations. Moreover, women well-recorded motivation to establish a business in the first place it the demand to balance home responsibilities. In this regard the main factor of their success has frequently been non-financial effectual measures. Women in formal paid workforce in most cases are also the prime family caregivers and thus, their aptitude to be self-employed normally eliminates some of the stress and pressure which they experience in formal workplaces particularly those in the level of management. Men are also found to prefer own businesses as a way to increase their ability to spend more time with their families. Nevertheless, their level of family engagement is considerably low and thus, they are in better position to take small businesses to a greater height compared to women (Kalleberg & Leicht, 1991).

Business location is another aspect that can be used to measure the success of small businesses, since there are various financial pressures involved to accommodation expenses paid by the business. Normally, most small businesses being as small enterprises and frequently from humble home-base enterprises. Thus, the decision to develop and possibly transform from a home-base contains personal inferences for the owner-operator in association to factors that include extra risk which include risks that are emotional and financial in nature (Walker & Brown, 2004).

Another factor determining the success of small business is education. Education according to () contribute a lot in the positive development of a company. Small business with large human capital stocks, based on vocational training and education are in a better place to adapt in continuously changing business settings.