Small, Medium and Micro Enterprises (SMMEs) are widely recognised as the driving force of the South African economy. The National Development Plan (NDP) has stipulated actions to stimulate the growth and sustainability of the SMME market, envisaging that SMMEs will create 90% of new employment opportunities and contribute between 60-80% to national Gross Domestic Product (GDP) by 2030.
The Broad-Based Black Economic Empowerment codes of good practice further support and promote SMMEs, as corporates are required to invest at least 3% of Net Profit After Tax towards the development of transformed SMMEs.
Currently, the number of SMMEs participating in the economy is unclear. The Small Enterprise Development Agency estimates 2.55 million SMMEs are in operation as of Q1 2019. However, some estimates suggest there are as many as 5.6 million SMMEs across the country, whilst a report by the Small Business Institute (SBI) states approximately 250 000 SMMEs.
The variance in this number highlights data visibility and integrity issues. Furthermore, according to the SBI, the definition of SMMEs is entirely inconsistent across 70 different laws, regulations and key government strategies. The gaps in SMME reporting and data tracking, combined with the scarcity of accurate SMME information, makes analysing and measuring the success of interventions aimed at promoting and sustaining SMMEs challenging.
Challenges within the SMME landscape
As of 2019, 59% of SMMEs were born as survivalist enterprises, contributing ~20% to GDP and accounting for ~30% of jobs. Additionally, the failure rate of emerging businesses is alarmingly high, as ~70% of businesses fail within their first two years of operation. These statistics are concerning because SMMEs represent more than 90% of all enterprises in South Africa. The reality is that South Africa faces a triple crisis of high unemployment, poverty and inequality and SMME contribution to job creation and GDP will need to treble if the NDP’s vision is to be realised in the next decade.
Letsema has conducted several studies to unpack and understand the challenges faced by SMMEs across different sectors. Current sentiment suggests there is a disconnect between SMME needs and the support provided by government and the private sector.
SMMEs often participate in multiple support programmes with the intention of gaining market access through supply chain integration. However, there is an opportunity cost as SMMEs usually have a limited number of staff who lose vital operating hours within the business when participating in support programmes. From a technical perspective, there are instances of SMMEs fundamentally changing their business models to serve market demand pressure for specific products and/or services, resulting in a customer concentration risk.
From a financial perspective, a Global Entrepreneurship Monitor report indicated that in 2016, ~28% of entrepreneurs closed businesses due to financial constraints. Furthermore, more than 90% of available SMME support is in the form of debt funding.
It is evident that current isolated approaches in itself will not promote long term SMME growth and sustainability. Without an enabling environment, targeted growth measures will fail to produce the desired outcomes.
The challenges faced by SMMEs will likely become more critical in light of the recent global COVID-19 pandemic. It is expected that 92% of SMMEs have been impacted by COVID-19 and considering the majority of SA’s SMMEs operate in the Trade and Accommodation sector, as well as the informal sector, the failure rate is predicted to escalate.
Catalysing SMME growth and sustainability
The solution to promote and sustain SMMEs needs to be based on an ecosystem approach where collaboration is encouraged to maximise value chain benefits. Collaboration is widely emphasised by government., however, the practicality of collaborative mechanisms needs to be carefully considered. An SMME-centric approach, one that is tailored to their needs, must be adopted when formulating support programmes.
For instance, there are opportunities to combine Enterprise and Supplier Development (ESD) initiatives between different entities in value chains and leverage economies of scale. Entities within similar industries need to coordinate their business support offerings with the aim of integrating SMMEs into local and global supply chains. In order to successfully integrate SMMEs into supply chains, a phased approach needs to be adopted based on SMME maturity.
In the short-term, SMMEs need to be supported to effectively navigate the impact of COVID-19 on their environment, customers and operations. From a strategic perspective, SMMEs require support in diagnosing the impact of COVID-19 on their businesses, determining potential scenarios and planning their recovery and growth strategies. Resources and capital are also required to manage cashflow, sustain workforces and manage production.
In addition to managing the implications of COVID-19, existing ESD initiatives need to be tailored to cater to evolving SMME needs. The COVID-19 pandemic may serve as an opportunity to reduce single sourcing from multinationals, and localise and diversify supply chains. However, to capitalise on this opportunity, an intentional effort should be placed on supporting SMMEs to provide core strategic services and products, as opposed to peripheral services/products.
Focus needs to be placed on strategic alignment between SMME service offerings and corporate supply chain needs. Corporates should have sight of SMME development effort requirements estimated timeframes of when SMMEs will be integrated. Understanding integration pre-requisites and timeframes is critical considering the rapid rate of change in most businesses.
For example, by the time an SMME becomes the supplier of a specific commodity, the demand for that supplied commodity could change, depending on how long it takes to integrate the supplier. Thus, communication of changing business needs is important to enable SMMEs to find alternative routes to market and reduce their customer concentration risk. This preparation will assist in effective strategic and supply chain management.
It is also important to integrate and optimise financial and non-financial support mechanisms so that SMMEs receive support in a wholistic manner. This approach provides opportunities for private and public sector players to support SMMEs by leveraging a combined resource pool to provide long term support to SMMEs.
Operational support needs to be enabled by financial support (preferably debt alternatives), market access support, and legal and compliance support to enable effective SMME participation. From the supply side, SMMEs need to form integrated networks to enhance participation rates across value chains. Cross-skilling, reskilling and upskilling in line with market demand will be core to success.
To learn how your organisation can support its and other SMMEs, contact Shenelle at economic.development@letsema.co.za. You can also learn more about the Economic Development, connect with Letsema via LinkedIn or call us on 011 233 0000.
