Small enterprise growth : the critical role of the owner - manager a case study of the construction sector in Gauteng, South Africa

Abstract

Small and Medium Enterprises (SMEs) and the role that they play in the economy have been widely studied. SMEs are of particular interest because they are seen as greatly contributing to innovation, economic competitiveness, equity and redistribution, employment creation. Given the positive role that they are seen as playing in the economy, the growth and transformation of small enterprises into medium enterprises is welcomed. It is seen as increasing the benefits of the SMEs to the economy and society in general. The research sought to analyze and draw insights on the growth of enterprises from small to medium size. This issue has been widely studied but as late as 2007, reviewing the state of knowledge about growth in small businesses, Dobbs and Hamilton (2007, p.296) observed that despite the growing volume of applied research, our knowledge base still lacks a body of theory capable of explaining the growth of small businesses. This research therefore responds to this call by Dobbs and Hamilton (2007) for new theoretical perspectives and alternative types of research. It does so by focusing on the practical role that the entrepreneur plays in facilitating or hindering growth. It also responds to this call by using a methodological approach that has not been widely used in this field to date. In addition, not sufficient attention has been paid to the role of the entrepreneur as the dynamic element in the growth and transformation process, neither globally but even less so in the Southern African case in general but even less so in the South African construction setting specifically and in Gauteng in particular. The lack of sufficient attention to the role of the entrepreneur in facilitating or hindering the growth and transformation process is very pronounced in the context of the Southern Africa region. This thesis therefore seeks to address this gap. This thesis takes as its departure, the decisiveness of the entrepreneur in the business system. It places the entrepreneur at the centre of the enterprise and analyses the role that the entrepreneur plays in facilitating or hindering the growth of the enterprise from small to medium size. Freel (2000: p.321) observed that more significantly, the internal dynamics of firm growth have remained something of a 'black box'. Focusing on growth, this research seeks to identify the key drivers of why some firms grow and others do not. It seeks to unravel the "black box" of small enterprise growth in the context of South Africa. In this process, the research sought to focus on the role of the entrepreneur in facilitating or inhibiting growth. The main question that this research sought to answer is: Is the entrepreneur the main driver of small enterprise growth and graduation, and what role does he or she play and how does he or she facilitate the growth and graduation of small into medium enterprises in South Africa? Building on the main and sub research questions the research sought and successfully proved the following Propositions: Proposition One (P 1): The entrepreneur is the key driver of small enterprise growth and graduation in South Africa. Proposition Two (P 11): The entrepreneur is the main inhibitor of small enterprise growth and graduation in non- growth small enterprises in South Africa. Proposition Three (P 111): Macro - economic environmental factors are a key but not the decisive driver for growth and transformation of SMEs. Proposition Four (P 1 V): The growth and competitiveness of the industrial sub sector is a key but not decisive driver of growth and competitiveness of SMEs. This research was undertaken within the framework of qualitative research. It was undertaken in four phases, namely: Phase One: Sector and SME Selection Phase Two: Individual Interview Phase Three: Document Analysis Phase Four: Case Study Development focusing on the role of the Entrepreneur in the Growth Process The data analysis was driven by the model of the drivers of SME growth and transformation already outlined above. It sought to apportion qualitative weightings to key already identified drivers of growth and transformation: macro-economic environment, industry sub sector, access to finance, technology, and BDS and the entrepreneur's motivation and skills. The data analysis delved deeper into the last category of drivers, entrepreneur's motivation and skills. It dissected the role that the entrepreneur's skill played in the overall growth and transformation of the enterprise. The data gathered from the three methods, namely individual interviews, follow up telephonic interviews and the document analysis were analyzed to arrive at the role that the entrepreneur's skills played in the growth and transformation process. Qualitative analysis of the entrepreneur's responses was undertaken to apportion the weighting given to the key drivers of the growth and transformation process. The data analysis also sought to unravel the key constituents of the entrepreneur's skills. It identified what constitutes the entrepreneur's skills that are crucial to the growth and transformation process. Focus was on the technical, managerial or leadership aspects. Findings from the data analysis assist in the conclusions and recommendations. This study was limited to Gauteng province of South Africa. It is hoped that this province will represent the best construction macro-economic environment in South Africa. This study concentrated on the sectors that were selected from the sector selection process. The study interviewed entrepreneurs and enterprises that are exclusively in the selected sector. The study was limited to medium sized enterprises that grew out of small enterprises that were formal - registered, licensed and operating within the framework of the law. The medium enterprises that this study focused on were not subsidiaries of larger conglomerates. This study also did not focus on medium enterprises that were created as medium enterprises and did not grow in size. The study is based on three key assumptions: the growth in employment is a sufficient reflection of the growth process, changes in the structure of the business are a direct result of the growth in employment and what the entrepreneur does directly reflects itself in the growth or lack of growth in the enterprise. This study has the following limitations: the peculiarities of the selected sector construction, growth in employment may not capture the entirety of the growth process and the fact that the study was conducted in the period of the Soccer World Cup 2010 affected the perceptions of the owner managers to be more positive than could have been experienced outside of this unique event. This research has proven through the data gathered, presented and analyzed that the owner manager of the respondent enterprises is the fulcrum upon which all the major decisions in the enterprise revolve. It is the quality of these decisions that drive or hinder the growth process. The owner manager makes the key decisions regarding: - the role and nature of interaction with the government, - the structure of the enterprise and the roles and responsibilities of the staff within the enterprise, - the marketing strategy, - the quality and skill level of the staff, - the role information technology, the nature and type of communication within the enterprise and between the enterprise and its external stakeholders, - the culture of the enterprise, - the interaction between the business and family and, - the management of the book of accounts. It is the cumulative impact of these decisions that the owner manager makes that propel the enterprise to growth. This confirms that the entrepreneur is the main driver of enterprise growth and graduation from small to medium enterprise size through the decisions that he or she makes. This research has also identified that it is not only the decisions that the owner manager makes that matter. It is also the management style that the owner manager adopts that facilitates or hinders growth. The owner manager needs to adopt a participatory management style which empowers the staff, to facilitate enterprise growth and transformation. Based on the data gathered this research has dealt with the issue of the impact of the macroeconomic environment on the growth of the owner managed construction enterprises. Focusing on growth, this research has identified the key drivers of why some owner managed construction enterprises firms grow and others do not. The research has identified the macroeconomic environment as a key driver of the performance of the whole economy. A key element of the construction industry which positively benefitted the enterprises in the period 2002 - 2010 is the construction boom experienced because of the Soccer World Cup 2010. The construction bonanza was based on the ten new stadia to be build or renovated and the accompanying road infrastructure. This played a key factor in the positive growth experience by most of the firms in the industry. The South African economy performed well in the period 1994 - 2008. The good performance of the economy in the period 1994 - 2008, had a positive spillover effect on the construction sector and the enterprises in that sector. This proves that the macroeconomic environment is a key driver of growth and competitiveness. However, starting in 2008, the GEFC set in. The impact of the GEFC on the economy was very severe. The GDP declined dramatically and the inflation rose. This impacted the whole economy. Added to this was the impact of the newly introduced National Credit Act. The National Credit Act made access to credit especially for housing loans more difficult. Despite the combined negative consequences of the GEFC and the National Credit Act, the majority of the respondent enterprises continued to experience growth. One respondent enterprise suffered a dramatic decline in sales and growth in this period. This was more because of the 'wrong' marketing strategy it chose to respond to the overall down turn in the economy. Significantly, when the owner manager adjusted the marketing strategy, sales and growth have begun to pick up again. This proves that a positive macroeconomic environment is crucial as a driver of growth but is not a decisive factor because even when the macroeconomic environment turns negative, growth firms are able to maintain their growth path. So, in conclusion, the macroeconomic environment is a necessary but not sufficient condition for enterprise growth. The above conclusion on the macroeconomic environment is also true of the sector competitiveness and growth's impact on the growth of enterprises in that industrial sub sector. As the economy has grown, so has the construction industry. Within the period 2000 - 2008, the construction industry has also been performing well on the back of the good macro economic performance. As a result the RMB / BER and the FNB / BER Business Confidence Indexes have been on a gradual upward trend. The Respondent Enterprises in this research clearly benefited from this gradual upward trend in the economy in general and the construction industry in particular. The Respondent Enterprises experienced sustained growth in this period as well. This confirms that growth enterprises benefit from a growing and competitive industrial sub sector. However, the industrial sub sector took a negative turn on the back of the GEFC, the National Credit Act and the end of the 2010 Soccer World Cup construction boom in the pperiod 2008-2010. Despite this, the majority of the respondent enterprises continued to enjoy significant growth. This leads to the conclusion that the growth and competitiveness of the industrial sub sector is a key but not decisive driver of growth and competitiveness of SMEs. This research has therefore unraveled the "black box" of owner managed small construction enterprise growth of the South Africa context by analyzing the role of the macroeconomic environment, the growth and competitiveness of the industrial sub sector and the owner manager. In this process the research has focused on the role of the entrepreneur in facilitating or inhibiting growth and highlighted the entrepreneur's centrality to the growth process. Through the use of the case study method this research has been able to address the how and why of construction enterprises growth in Gauteng. This study has added value to the existing body of literature on enterprise growth by delving deeper into many already known factors driving enterprise growth. This research in most of the identified areas has been to analyze deeply and give greater insight into the dynamics of how growth actually happens within the enterprise through the role of the owner manager. Through this process this research has helped in opening Freel (2000)'s 'black box" of enterprise growth with particular reference to the construction sector in Gauteng, South Africa. This study contributes to the growing body of literature on the growth and transformation of SMEs globally. But specifically it makes a contribution to the understanding of the growth and transformation of the construction SMEs in Gauteng province of South Africa where there is a dearth of such studies. In a country and province where the issues of increasing black participation in the economy is topical, this study will increase society's understanding of how construction SME growth and transformation can contribute to the realization of this goal. This study assists in creating awareness within society of how entrepreneurship development can play a major role in achieving the goal of equitable distribution of the region's wealth. It contributes to a realization of a society that is supportive of enterprise development and an enterprise culture. The study contributes to the debate of what policy measures can assist in the development of a construction entrepreneurial class. The BEE policies attempt to create an environment which facilitates the growth and graduation of SMEs. This study will assist in informing how these policies can best be shaped. This study contributes to a greater understanding of this phenomenon in the context of the construction sector in South Africa. By focusing on the qualltative approach this study seeks to bring a different angle to the largely quantitative approach which has dominated the study of SME growth thus far.