Marketing Challenges for Small Businesses

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Marketing Challenges for Small Businesses

  1. 1. Marketing Challenges for Small BusinessesPresent affiliation of AuthorDr. Atish Chattopadhyay, Professor of Marketing, SPJIMR, India, email: atishc@spjimr.orgIntroductionSmall businesses are much easier to describe than to define and to this day there is no generallyagreed operational or numerical definition of what constitutes a small business. Countries, and inmany cases individual institutions within them, have developed classifications and definitions thatreflect their own particular requirements. These criteria tend to reflect the nature and compositionof the country’s economy on one hand, as also the context and need of the market underconsideration on the other. This is clearly reflected in Table 1. Table 1: Definition of small-scale industries in different countries COUNTRY CRITERIA OF DEFINITIONUSA No official definition exists, but generally refers to < 100 employeesUK A manufacturing unit employing < 200 employees, having < 50,000 pounds turnover in retail trade or < 200,000 pounds turnover in wholesale trade A construction unit employing < 25 employees, and in transport unit having < 5 vehicles.Japan A manufacturing unit employing < 300 employees, having < 100 million Yen investment A mining and wholesale unit employing < 100 employees, having < 30 million Yen investment A retail trade unit employing < 50 employees, having < 10 million Yen investmentKorea A manufacturing unit employing < 300 but > 5 employees, having < 500 million Won investment A construction unit employing < 50 but > 5 employees, having < 500 million Won investmentMalaysia No ceiling on employment, investment limit 250,000 RMSri Lanka Mainly run by power, investment limit Rs 2 LakhSource: Hussain, S.V.(2003):“Small Scale Industries in the New Millennium”, Sarup & Sons, pp.4-5 1
  2. 2. Small business sector is regarded as the fundamental ingredient in the establishment of a modern,progressive and vibrant economy. According to Graham Beaver (2002) there are a number ofreasons why there is considerable interest in the creation and management of small businesses.They are:• Small firms help to diversify a nation’s economic base and provide it with the opportunity of responding to a variety of market conditions.• Small firms assist in employment creation• It promotes an element of local control and accountability• The over dependence on large enterprise supported by international finance can be unhealthy and deprives regional economies of their dynamism and independence.• It provides an opportunity to transcend social inequality and unemployment trap• It is an expression of healthy and necessary competition against the excesses of large business, monopolies and exploitation• It helps in the development and dissemination of new forms of technology• Small firms are the natural avenues for self-development and individual achievement, being the natural expression of entrepreneurship.However, small firms are not merely large firms in miniature. They have special characteristicsthat may make them inherently riskier than large ones. Beaver and Jennings (1995) identified thefollowing vulnerabilities.• Small businesses are frequently dominated and controlled by one person. He thus has an overwhelming influence on all aspects of the firm’s direction, development and performance.• They are heavily dependent on a small number of customers• Due to their small market share they are unlikely to exert much influence in their concerned sector• They have problems in raising capital that significantly restrict their choice of strategies of business development• They fail to diversify under changing conditions 2
  3. 3. The following section deals with the challenges faced by small firms in detail.The ChallengesThe small business sector by its very basic nature has to confront a large number of challenges.According to Hewitt (2000), ‘small firms find it difficult to get access to the information andfinance they need. They are often unable to draw on the same range of expertise and experience aslarge companies. They have fewer resources to get to grip with regulations and fewer opportunitiesto influence government thinking.’At the heart of most business start up lies the problem of lack of credibility for the founder indealing with the new business stakeholder community. While a track record may be one of themajor sources of reassurance in these circumstances lack of one may turn out to be a majorobstacle to overcome. The ‘credibility merry go round’ of Birley (1996) illustrates this pointparticularly well. The concept (check exhibit 1) clearly shows the inter-related nature of theresources, factors and stakeholders involved in the process and how the event is essentially adynamic one. Exhibit 1. Credibility Merry Go Round Money Suppliers Credibility Premises Customers Source: Birley, S. (1996): ‘The Start Up’, Small Business and Entrepreneurship, 2nd Edn., McMillan, Ch 2.How the individual responds to this difficult and unique challenge is also a good indicator ofentrepreneurial skill, determination and flair.Lack of relevant knowledge and skill may be reckoned to be another challenge in the start upprocess. Storey (1994) stresses on the need of providing management training to the small business 3
  4. 4. owners that would enable them to formally learn the competencies and thus perform better thanuntrained individuals.Access to finance is another important influence on start up success and subsequent development.There is no optimal capital structure that the small firms should try to achieve. However when thefirm value and competitive advantage is based on intangible assets such as its people, then due tolack of opportunity to leverage upon tangible assets, debt finance should be used less. It is almostimpossible to overrate the importance of bank finance to small business. Burns and Dewhurst(1989) in their text on small business finance clearly say, “At present some 60 % of the fundsneeded by small businesses come from the bank. Small firms turn to their local branch manager,not only for short term funds, but increasingly, for medium and long term funds. It is evident thatthe relation the proprietor has with the local branch manager is of crucial importance.”However commercial banks have been frequently criticized (Stanworth & Gray 1991) for failing toprovide adequate funds for newly formed enterprises. The banks usual response to such criticismsis that this is a function of poorly constructed business proposals, rather than a lack of willingnessto lend funds. There are a number of difficulties that the small business may also face in starting abusiness. While in the start up phase everything takes longer than planned, gaining marketcredibility is also very difficult. Lack of accurate forecasts, demanding supplier relationships,internal conflicts, and excessive credit payments may also hinder the progress of the firm.It has been showed that firms that have succeeded in surviving 2 – 3 years and have gone through anumber of crucial phases attain a stable foundation from which they can continue to develop(Mayer and Goldstein, 1961, Freeman et. al, 1983, Hall, 1995). However Daft (1995) cites thework of Land and Jarman (1992) in the US that suggests that 84 % of the business that makes itpast the first year still fail within ten years. Consequently early development process is of primeimportance to any small business.According to Kimberly and Miles (1980), early development process is one of the most importantperiods in the life of a small firm and the thoughts and the driving forces implemented then can bedecisive for the continued growth and development of the firm. In fact in such introductory stage, afirm may attain a position of strength by satisfying two criteria: 4
  5. 5. a) Securing an input of resourcesb) Developing an ability to manage and utilize such resources.After this basic position of strength is achieved, a firm has a good deal of leeway in generating andmanaging its resources.Gibb and Scott (1986) introduced the concept ‘base for potential development’ as an expression ofsuch stabilization. According to them, a development base is said to be attained when the newlydeveloped firm has developed adequate resources, experiences, control, leadership and idea. Withthis, the firm then has the possibility to develop and to manage future environmental changes andthereby may be considered to attain stability.Klofsten (1992) too reinforced this view. The fundamental thesis of his ‘Business Platform Model’is that the firms are vulnerable in their early life and continually run the risk of disappearing fromthe market. Their success is determined by how well this vulnerability is overcome. Klofstendefined eight firm level cornerstones that determine a firm’s early development process. This hasbeen shown in Table 2.Table 2: The 8 Cornerstones of Small Business Development in the Early Stage 5
  6. 6. Cornerstones Minimum Levels to AttainFormulation and The idea must be clarified so that the special springboard isClarification of the understandable and can be communicated internally and easilyBusiness IdeaDevelopment to Finished Once the product is available it must gain acceptance by one or moreProduct reference customers. The firm then has proven it is capable of meeting needs and wants.Definition of Market The firm must define a market that is large and profitable enough to ensure survivalDevelopment of an The organizational structure should facilitate functional co-Operational Organization ordination. It should take advantage of firm’s inherent flexibility and innovative ability and ensure internal co-ordination to maintain and develop external relations.Core Group Competence A business firm must have technology and commercial competence to develop its products and markets. It is crucial to have access to expertise for solving the firm’s real problemCommitment of the Core A basic requirement for development is that at least one person isGroup and the Prime highly motivated and the other key factors are committed to theMotivation of Each Actor business ideaCustomer Relations A customer base must be qualitatively and quantitatively strong enough to generate operating revenueOther relations The firm may sometimes need additional capital, management know-how or other oil in its machinery to complement the customer’s relationshipSource: Klofsten M. & P.Davidsson: ‘The Business Platform: Developing an Instrument to Gauge and to Assist the Development of Young Firms’, Journal of Small Business Management, 41(1), pp 4-5.A new venture can be seen either as an entirely new identity by customers or as an establishedcorporate identity venturing into a new market with a new product. The ability of a corporateidentity to provide an umbrella for new product development and new venturing has long beenrecognized (Belch and Belch, 1987, Keller and Aaker, 1994) and may be reckoned to be a sourceof competitive advantage. Though competitive advantage may be concerned with developing avalue creating strategy (Porter, 1985) by uniquely combining bundles of valuable firm resourcesand skills to yield positional advantage, yet for a new firm convincing the customers of theirsuperior value proposition may not be an easy task i.e. even if they have the requisite skills andresources.According to Suchman (1995), uncertainty that individuals possess regarding a new venture maybe mitigated if customers know and trust the individuals running a venture. Shepherd and 6
  7. 7. Zacharakis (2003) too reiterates this point. According to them, a corporate venture into anunrelated industry, while still considered a new venture, can be viewed as more familiar tocustomers than a venture in which the customers are completely ignorant of the organizationlaunching the venture. A known and well-reputed management team has greater legitimacy than anunknown management team.Stichcombe (1965) argues that a newly found small business suffers from “the liability ofnewness”. Being unable to provide clear evidence of its ability to compete against moreestablished firms, an information gap or “information asymmetry” prevents stakeholders fromjudging the full capabilities of a firm (Dixon, 1991). Consequently, these businesses lackrecognized institutional legitimacy and have problems in attracting money, customers andcompetent personnel (Zimmerman, 1997).In the absence of history of success, small business management can endeavor to strengthen themarket status by establishing a positive corporate reputation in the shortest time possible. Thisreputation defines a company’s identity – as seen by important stakeholders – in the marketcompetitiveness of its products, the efficient management of its resources and its potential forfuture success. A good reputation is perceived by others as an indicator of the firm’s overalleffectiveness. It attracts investors, decreases costs, ensures better terms from suppliers, encouragescustomers to buy and assists in the recruitment of skilled manpower (Dollinger et al., 1997).However Goldberg et al. (2003) complain that despite its attractiveness, few small businessesfollow a reputation building strategy. Few managers make a pragmatic and premeditated decisionto invest in building a corporate reputation as one of the primary objectives during early stages ofbusiness development. This thus is another major challenge confronting small businesses.Multiple and often conflicting objectives pursued by the Government may also fail to cater to allthe needs, wants and deficiencies of the small firm sector. Storey (1994, pp.315) clearlyrecommends that ‘the government in its dealing with the small firms, needs to do less and better,rather than more and worse. The very clear message that comes across discussions with smallfirms, is in creating a suitable macroeconomic framework within which firms can prosper.’ 7
  8. 8. This has been endorsed by other writers (Deakins, 1999) that confirm that small firms seek anenvironment with low inflation, low interest rates, steady economic growth and a high level ofaggregate demand. This macro-economic framework appears to be the acid test by which smallfirms judge the economic effectiveness of the government.Having the appropriate organization structure and the necessary resources are other challengesfaced by the small firms. From a contingent theory perspective (Drazin and Van de Ven, 1985) EXHIBIT 2: The Small Firm Management Process ENTREPRENEURIAL SKILLS OWNERSHIP SKILLS (adaptive and organic) (predictive and mechanistic) Strategic Management Thinking Innovation Objective setting Risk-taking Policy Formulation Tactical Planning Strategic planning Common Core Skills Required Decision-making Problem solving Information processing Management Skills and Abilities Negotiating Organising Trouble shooting Coordinating Interpersonal communications Monitoring Issues of organizational formalities Source: Beaver, G. & Jennings, P.L. (1995): ‘Picking Winners-The Art of Identifying Successful Small Firms’, Rethinking Strategic Management – Ways to Improve Competitive Performance, Chichester: Wiley, Ch. 4One could argue that there is no uniformly best organization structure for all firms in allcircumstances. Instead, one has to find the appropriate fit among and within contextual factors(environment, technology etc), design factors (strategy and institutional models) and structuralfactors (complexity, centralization, and formalization).Management in the smaller firm is essentially an adaptive process, concerned with adjusting alimited amount of resources in order to gain the maximum short-term advantage. In the small firm 8
  9. 9. efforts are concentrated not on predicting but controlling the operating environment, adapting asquickly as possible to the changing demands of the environment and devising suitable tactics formitigating the consequences of any change that occur. The key skills and abilities required forsmall firm management process is shown in exhibit 2.While it may be argued that the identified attributes in exhibit 2 are generic to all managementsituations, the complexity of the small business operating environment demands a unique blendingof these qualities to succeed in exploiting competitive advantage to achieve and sustain superiorperformance.Consequently a critical aspect of strategic implementation of small firms is, among other things, torecognize that firms can, in different industries, pursue different competitive strategies and theadministrative mechanisms used by small business managers to follow a competitive strategy maydiffer (Hanks and Chandler, 1994). At least two different administrative mechanisms are availablefor the small business manager to develop and pursue a competitive strategy. One refers tomanagerial skill needed to implement and follow the strategy developed (Govindrajan, 1988). Theother refers to the design of organization structure i.e. how job tasks are divided grouped andcoordinated (Dodge & Robbins, 1992).From a strategic research perspective, one could argue that the small business manager must havethe knowledge about the firm (internal conditions like resources, control systems, operations etc.)and the industry in which it operates (external conditions like competitors, suppliers, customersetc) and must have the managerial skills to develop a competitive strategy (Luo, 1999). Otherwise,how could the small business manager know for which resources to strive and how to structurethem?Based on this knowledge it is also argued that when the small business manager has thisknowledge about external and internal conditions can he develop a competitive strategy and astructure that fits together (Check Exhibit 3).Lastly another major challenge before small business managers is their apparent apathy towardsrisks, change, aggregation, and innovation. Gasse (1982) believed that the major differences 9
  10. 10. between managers and entrepreneurs were three psychological constructs: achievementmotivation, risk taking propensity and innovations. Cavin and Slevin (1988) too subscribes to thesame view. They suggest that intention to grow and innovation orientation are characteristics ofentrepreneurial behavior. However this was lacking in the small business managers.Exhibit 3: Fit among competitive strategy, administrative mechanism and performance Administrative Mechanisms COMPETITIVE MANAGERIAL STRATEGY SKILLS FIT SUPERIOR ORGANIZATION PERFORMANCE STRUCTURESource: Barth H.: “Fit among Competitive Strategy, Administrative Mechanism and Performance: A Comparative Study of Small Firms in Mature and New Industry”, Journal of Small Business Management, 2003, Vol.41, No.2, pp.136.Stewart et al. (1998) found that small business owners were more comparable to managers whosemain concern is to secure an income to meet their immediate needs than to entrepreneurs who arehigher in achievement motivation, risk taking propensity and preference for innovation. Hodgettsand Kuratko (2001) while describing small businesses mentioned that small businesses arebusinesses that are independently owned and operated, are not dominant in their field and usuallydo not engage in many new and innovative practices. This risk aversion nature of small businessesresults in its losing out on a number of opportunities. 10
  11. 11. Marketing ChallengesFor those firms whose main aim is growth, there are a number of challenges that have to be faced.In 1994 Churchill proposed a six-stage model for company growth. Each stage of the model ischaracterized by what Churchill describes as “an index of increasing size, complexity and ordispersion”.The model allows owners to assess the type of challenges facing them at current and future stages:1. Conception / existence2. Survival3. Profitability and stabilization4. Profitability and growth5. Take - off6. MaturityThe model outlines expansion of customer base and increase in turnover as one of the keychallenges faced in the conception / existence stage.Churchill’s (1994) six-stage model clearly outlines expansion of customer base and increase inturnover as one of the key challenge faced by small firms in its conception / existence stage.Zeithaml and Bitner (1996) too states that client contacts are not enough. There actually must beconsumers buying continuously. Consequently, the customers hold the key to the success or failureof any small business.Now the aspect that makes new ventures into the small businesses so risky is the uncertaintyregarding the rate at which the customers will adopt the new (Lambkin and Grey, 1989). In otherwords, their doubt is to what extent and how quickly will customers switch from a product withwhich they are familiar to an unknown one? This uncertainty stems from the lack of knowledgeregarding both the performance and the benefits of the new product (Bentler, 1990), Rogers, 1983,Slater, 1993). Customers may not even know that the product can meet their needs or be able to 11
  12. 12. appreciate its true benefits (Athaide et al., 1996). Presence of well-established competitors withknown value proposition and established brand image does not help their cause.An entrepreneur needs to consider the following points with respect to marketing whileplanning a business.• The customer of the new venture.• Customer’s decision making process about buying the product or service.• The degree to which the product or service compels purchase for the customer.• The pricing of the product or service.• The strategy to reach the identified customer segment.• Cost (in time and resources) to acquire a customer.• Cost to produce and deliver the product or service• Cost to support a customer.• Ease of retaining a customer.How entrepreneurial small firms can achieve and sustain market growth is summarized in variousmodels proposed by (Coopers and Lybrand, 1994), and German versus UK firms (Brickau, 1994).The entry point in the model is to identify a market niche.Most small business starters do not make it past the entrepreneurial stage. Daft (1995) cites thework of Land and Jarman (1992) in the US that suggests 84% of business that make it past the firstyear still fail within five years. However failure is difficult to measure with any degree ofaccuracy.Murphy (1996) suggests two definition of failure: “A business can be said to have failed when it isdisposed of or sold or liquidated with losses to avoid further losses”; failure is defined as “thecondition of the firm when it is unable to meet its financial obligations to its creditors in full. It isdeemed to be legally bankrupt and is usually forced into insolvency liquidation”. 12
  13. 13. Birley and Niktari (1995) asked 486 bankers and accountants to give the reasons for client failure.Eighty seven individual reasons were listed as contributing to the failure of an owner - managedfirm. These were reduced to two dozen themes listed below. 1. Capital structure 13. Quality 2. Management team 14. Adverse publicity 3. The economy 15. Ill Health 4. Customer diversity 16. Partnership problems 5. Financial management 17. Obsolescence 6. Owner attitudes 18. Reliance on grants 7. Rising costs 19. Family succession 8. Lack of planning 20. Legislation 9. Pricing 21. Cost of money 10. Suppliers 22. Personal problems 11. Marketing 23. Fire, Flood 12. Growth 24. Industrial injuryThe study points out that marketing and factors which are related to marketing like customerdiversity, pricing and adverse publicity are the reasons for failure. The reasons for failure in thesmall firm have attracted much attention. Hall (1995) gave three explanations - one of them isrelated to the structure of markets and segments of markets they compete in. Hall also surveyed theowners of small business and their perceptions of primary cause of failure. His study pointed outthose external issues like lack of demand, reliance on a few customers, competitor behavior andpoor forecasting are the key contributors in failure. Peppard and Rowland (1995) identified a set ofobjectives a firm should set itself in order to remain competitive. Delivery, pricing, relationshipmanagement were identified as the key objectives of the firm. Peppard and Rowland identifiedthat all firms are built upon three broad pillars- people, technology and processes. When designingprocesses to meet customer’s requirements and the customers within it, four critical elements needto be considered-- customer requirements, pattern of demand, constraints, and efficiency targets.These elements set the deliverables for a product or service delivery process, known as the servicetask (Armistead, 1990). A clear understanding is critical if processes are to be redesigned to meetthe needs of the customers. For this many organizations focus on the customer care aspect. As JackWelch of General Electric remarked “The three most important things you need to measure in a 13
  14. 14. business are customer satisfaction, employee satisfaction and cash flows”, pointing the importanceof marketing for any successful organization.Strategic marketing is a market-driven process of strategy development, taking into account aconstantly changing business environment and the need to achieve high levels of customersatisfaction. It essentially focuses on organizational performances rather than the traditionalconcern about increasing sales and builds competitive advantage by combining the customer-influencing strategies of the business into an integrated array of market-focused actions. Marketingstrategy is defined as the analysis, strategy development, and the implementation activities inselecting target market strategies for the product-markets of interests to the organizations, settingmarketing objectives and developing, implementing and managing the marketing programs,positioning strategies designed to meet the needs of customer in each target market.A typical marketing strategy (Kotler, 1999) consists of:• Analyzing market and competition• Segmenting market• Market targeting and positioning strategies• Relationship strategies• Product/ Customer strategies• Distribution strategy• Pricing strategy• Advertising, service and sales promotion strategies• Research and development strategies• Marketing research strategiesThe marketing concept is a consciously articulated philosophy of business that says, in essence,“The customer is king”. Implicit in the marketing concept is the need to ensure the long-termcontinuity of predictable quality, sales and service, and in turn viability of the enterprise.The marketing concept is interwoven with an explicit assumption that every organization has aresponsibility to its constituent stakeholders. A stakeholder is “any individual or group who can 14
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