By: Dr. Balraj Kistow, Lecturer and Programme Director, Arthur Lok Jack Graduate School of Business, The University of the West Indies.
The Oxford dictionary defines a definition as describing the exact nature of something or marking out the limits or outline of something. The redefinition of something would therefore connote an alteration to the nature and limits of the concept or phenomena. The Small and Medium Enterprise sector has evolved and developed so rapidly in the regions that it has forced a challenge to its existing norms and limits. This challenge is not only about the legal form of an SME but also the very nature, purpose and sustainability of these enterprises.
The Small and Medium Enterprise sector has long been cited for its valuable contribution to the development and well-being of regional economies. The overwhelming majority of Caribbean firms fall into the category of SMEs. According to the Economic Commission for Latin America and the Caribbean (ECLAC), SMEs contribute about 61% of employment in Latin America and the Caribbean. It is estimated that in CARICOM, micro and small enterprises account for more than 45% of jobs in the region. If medium-sized enterprises are included, the sector arguably contributes more than 70% of jobs.
The Executive Secretary of ECLAC, Alicia Bárcena notes however that the SME’s only contribute 29% of region’s Gross Domestic Product (GDP). She suggests that regional SME’s need to remake itself by moving towards digitization to improve productivity and the quality of jobs created. While this is surely a good suggestion, Caribbean SME’s also need to remake its basic structure and processes in order to ready itself in the 21st century. Two major areas that needs attention are:
• Informality – poor management structures and systems
• Framework – administrative structures are often restrictive, bureaucratic and duplicated
The need for proper organisational and governance structure has long plagued SMEs in the region. A major reason for this has to do with the genesis of many small and medium family run businesses. In most cases it would have been started by a patriarch of the family, be it from necessity or from an ingrained entrepreneurial spirit, and would have grown with little formal structure regarding business administration or governance. In many cases there is no sharp boundary between where family and business starts and ends. The informality of structure then becomes the culture of the business and when this happen often enough it becomes the culture for the sector.
The irony of this is that it turns out to be a catch 22 situation. If the business fails there is hardly a chance to recognise that there was the need to change and the informal structure would be the last factor to be identified as the reason for the failure. Where the business grows rapidly and becomes a roaring financial success, the owners are likely to see the informality of the structure as a source of its competitive advantage and a major reason for their success. The question then becomes why fix it if it is not broken?
We all know that entrepreneurs are often single minded, determined persons, who may find it hard to accept the error in their ways (in local parlance, hard headed), especially when they thing seems to be working. It is commonplace to find small family run or one man operations where one or two persons are doing every known function in the business. This may work for a while but as the business grows it becomes too burdensome and diseconomies start taking place – invoices are not sent, bills are not paid, customer orders are not filled etc. Pretty soon customers become disenchanted and leave, staff losses focus and morale falls and the bottom line is affected.
This scenario pretty much sums up a situation where the informal structure has outlived its usefulness and becomes a hurdle to success. So how do we prevent these weaknesses of informality and improper business and governance structure from becoming embedded into the culture of the business? Businesses need to establish proper practices and procedures early in the game. That is easier said than done but as more and more people, especially the children and grandchildren of business owners, engage in business education we should gradually see the formalization of business structure becoming more commonplace in SMEs.
Programmes like the Masters of Small and Medium Enterprise Management at the Arthur Lok Jack Graduate School of Business can go a long way in making proper procedure more of a norm than an exception. This programme is geared towards owners of new and existing businesses, persons who are in line to inherit a family business and budding entrepreneurs. While the programme is built on academic rigour and relevance, it is designed to be practically oriented. Classes are done in the online environment to cater for the ever-busy entrepreneurs and the assessments are not exam centric but rather are designed to address practical business problems and issues in the various functional areas.
As with most things there is good and bad. Business structures are no different. The challenge is to be able to harness the benefits of quick decision making and the personalized touch of the informal culture while maintaining sound business practices. No one said that running a business was easy.
Dr. Balraj Kistow is a Lecturer at the Arthur Lok Jack Graduate School of Business. He teaches courses in Caribbean and International Business Management, Financial Management and Accounting in the International Master of Business Administration (IMBA) programme. He is also the Programme Director for the Master of Small and Medium Enterprise Management (MSMEM).