Small Business Success and Challenges Project (1)

Small Business Success and Challenges in Saudi Arabia

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Abstract

Small businesses are unquestionably critical to the growth of the economy of any nation, since they are good source of generating employment, assisting in local technology development, and improve indigenous entrepreneurs. Small businesses create a tempestuous section of the national economy due to the large-scale in and out movements in the sector. A number of novel ventures are developed each year though about equally huge number of small businesses shut down for different reasons. Small businesses are associated with a number of challenges which limit their rate of survival compared to the rate in which they are created. Small businesses experience challenges which are combination of external and internal less controllable factors, originating from management competencies, technical skills, personal attributes, as well as owner-entrepreneur behavior which impact the entrepreneurship growth chances. They also experience challenges particularly in people management, marketing, finance, and accounting. This paper focuses on establishing factors that influence small business success, and challenges faced by small business in the world, focusing more at Saudi Arabia. A qualitative online survey is conducted to assist in gathering answers to respond to the research questions. The research identified three main challenges which affect small businesses at the global and regional level. The data discussion is evaluated that there are challenges that can be change by changing the internal aspects of a business while others may require government intervention. Thus, effective government support is also essential for prosperity of small businesses in the world.

Table of Contents

List of Tables and Figures

Table 1: Deduced responses for the survey question in general survey……………..51

Table 2: Deduced Response for Saudi Arabia based survey………………………..54

Figure : Comparison of the main small business in Saudi Arabia and the World…57

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 been increase in the emerging small business in all industries, particularly in household industry and others that include agribusiness industry, retailing industry, processing industry, and information technology industry among others. These businesses normally start as family or personal business, and they are normally run within the household, before they are expanded furthers, especially those small businesses that manage to thrive. But what exactly is a small business. According to Adisa et al. (2014), 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 values 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 (Oesteryoung & 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 workers. 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 economy in almost all countries across the globe. These business serve people customized needs in different industries. While emphasizing on the significance of small business, Agwu and Emeti (2014) stressed that small businesses improve capacity building since they serve as avenues to entrepreneurial training. They are said to generate extra employment chances per investment unit, due to their labor exhaustive operations. Small businesses attain operations with a much more moderately high added value, since they are pushed by primary economic activities which normally rely on raw materials that are locally sourced. They also give services to feeder industries since they function as main intermediate components, and give goods supply to industries of large scale and major final products distribution agents of these industries. Small businesses also offer chances for the technology acquisition and local skills development via adaptation. In spite small businesses catalytic role in the countries’ economic emancipations, most of these businesses experience a number of main operational challenges that limit their growth and ability to survive (Agwu & Emeti, 2014).

Just like in most parts of the globe, most 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. 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 (Al-Saleh, 2012).

Small businesses in Saudi Arabia experience a number of challenges. According to Al-Saleh (2012) small business owners in Saudi Arabia 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 Al-Saleh (2012), 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 another 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 promote skills and knowledge in human resources, primarily due to expensive training institutes. Saudi Arabian institutions are said to charge up to 3000 dollars for a short period of training planning or accounting course. Bureaucracy policies and governmental requirements in establishing and running small businesses are also regarded as the other main obstacles in the development and growth of small businesses in Saudi Arabia (Al-Saleh, 2012).

1.2. Statement of the Problem

Small businesses are said to be the main source of employment and contributors to economic growth across 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 operations. 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 seventh year of establishment. Although highly beneficial to individuals and the country in general, 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. Based on these assumptions, 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?

What challenges are small businesses in Saudi Arabia experiencing?

What is hindering the small business survival and growth 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. However, in Saudi Arabia, there are no standard measures for small businesses definition, since the definition varies based on organizations. Some include employees and turnover values that could be regarded as medium size business values in a different organization, while others include values would be regarded as small business by other organizations. 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, while a medium size business is regarded 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 small businesses 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. A comprehensive case study targeting small businesses from different industries across the country could have provided a clear picture of small businesses situation in the country. However, this is considerably extensive based on the limited research time period.

Chapter 2: Literature Review

2.1 Introduction

There is a great variation between the number of establish small business in any country and their rate of survival after a number of years, mostly ten years. Most established small businesses in different parts of the world do not survive to see their tenth year in business, while those that survive; their profit margin is considerably lower than it could have been anticipated. This demonstrates that there are various challenges experienced by small businesses across the globe that interfere with their survival. It also demonstrates that there are certain approaches that can be given in the establishment and management of these businesses that can enhance their positive growth. Thus, small business survival may be highly determined by how well a business is able to circumvent the challenges experienced by these kinds of businesses across the globe. This section focuses reviewing literature materials to determine factors that determine small businesses failure or success, and how small business success is measured, challenges experienced by small businesses across the globe, and measures that can be employed to increase the rate of small businesses survival in the world.

2.2. Small Business Success and Failure

Small business success or failure can be evaluated based on three unique but complementary views. These views include managerial characteristics, organizational configuration, and the task environment. The three can be said to provide the main small business framework across the globe. Task environment refers to the environmental parts that possibly pertinent or relevant to goal attainment or goal setting in a business. 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, small businesses do spends more of their times adjusting to instability, rather than controlling or predicting it. Thus, the success of small business based on this factor is highly determined by the individual business ability to control instabilities.

Organization configuration is defined as the informal and formal organization structure of a small business. 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 (Gibb, 2013).

Management is one of the most important aspects of small business framework. Normally small businesses are managed by their owners, who have very little knowledge on business management. Operating and starting a small business involves likelihood of failure or success. Due to the small size of these businesses, a simple management error is probable to result to guaranteed death of a 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).

2.3. Aspects 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 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 a business to be considered successful, the financial measurements need to register an 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 the 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.

2.4. Factors that Influences the Success or Failure of Small Businesses

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 counter 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 businesses, for instance personal satisfaction. The effectual measurements are not essentially substitute for financial goals but their complements (Walker & Brown, 2004).

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 compared to 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 recording high growth 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, 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 thus, 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 is not to develop them to a higher economic height, but 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 a better position to take small businesses to a greater financial 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). Beside this, business location also plays a great role in determining the available infrastructure which highly determines the quality of services given in a business. Remotely located small businesses experience infrastructure issues which limit their efficiency. Location can also determine the security level of a business, with business located in remote places experiencing more security challenges. In this regard, they end up spending more to employ resources. Location can thus determine the business ability to expand due to space limitation or availability, and cost of operation due poor infrastructure and the need to pay more to enhance security (Walker & Brown, 2004).

Another factor determining the success of small business is education. Education according to Gibb (2013) contributed 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. Education highly determines individual’s ability to manage a business in general. This includes the ability to manage business finances, human resource, and to enhance customer services. Education also determines individual’s ability to make sound decisions regarding aspects that can impact business operation. However, according to Gibb (2013), it is important to note that business success is not determined by just of education, but also the individual training on business management and control. Education in this case lean more on business related training which includes business management training, entrepreneurship, financial management and book keeping, and human resource management among others. In this regard, small business owners should have extensive knowledge on business management, particularly in cases where the business cannot manage to higher specialist to handle different business management sectors.

2.5. Challenges Facing Small Business in the World

According to the analysis, small business success and failure are determined by factors that are almost similar across the globe. However, different small business experience different challenges based on their location in the globe. The challenges that small businesses in developed nations experience are considerably different from those experienced in the developing nation. Thus, this section will evaluate challenges that small businesses experience in different parts of the world.

Similar to other parts of the world, there has been tremendous growth of small businesses in across Africa. This great growth of the small businesses in the continent has been attributed by many factors, unemployment being one of them. Challenges of the small businesses located in Africa range from Lack of capital, poor infrastructures, poor information management and record keeping, inability to differentiate between personal money and business capital, and lack of skills on business management. Although there are some similar challenges experienced across Africa, small businesses in some countries do experience some unique challenges. According to Adisa et al. (2014), despite the extensive and commended small business beneficial impacts on indigenous entrepreneurship development, local technology improvement, and economy development, most small businesses in Nigeria have documented a gross under performance for years due to poor funding. Business financing is considered to be highly important in the establishment and expansion of a small business. According to Gichuki et al. (2014), lack of enough finances makes it hard for small business owners to build a good business foundation. Although there are various alternatives to raise business capital, for instance the use of credit, the credit cost in most African countries is quite high for small businesses to maintain. In addition, most of the credit providers demand that the borrowers should have security for the borrowed money, which is considerably hard, since most of small business owners are young people without previous investment (Gichuki et al