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International Council of Small Business World Conference  2010Cincinatti, USA Emerging Market SME Turnaround and Growth in a Recession: Theory and Practice 27 June 2010 Guy Pearce Chief Executive: New Business Development JD Group Ltd, South Africa http://www.jdgroup.co.za
Motivation and Approach The Business Challenge Two SMEs in need of turnaround The Approach To study international research into SME turnaround with the expectation of achieving a “first time right” outcome To understand the scope of existing research and the relevance of it for practioners In Summary Current turnaround research does not meet practitioner needs at the implementation and process levels
EntrepreneurshipBridging Global Boundaries Link to the Conference Theme The problems facing entrepreneurs in developing countries are often similar Benzing, Chi and Kara 2009:63 The Value of the Study SMEs are more vulnerable to financial distress than large firms as evidenced by their high mortality. Any interventions that help reduce failure are therefore welcome  Chowdhury & Lang (1993:8), Boyle & Desai (1991:33)
So why do SMEs fail? Internal (efficiency) External (entrepreneurial) Most causes of SME failure seem to be internal to the firm Boyle and Desai (1991:39) … with the major reason for failure being lack of management practice Lawrence (2008:89) … specifically lack of control over operations, without which business has little chance of survival in a competitive market Boyle & Desai (1991:40) Sustainable turnarounds usually involve substantial strategic repositioning of the business Gadiesh, Pace & Rogers (2003:42) Strategy is leadership’s clear view of the future, and moving the business model towards this. Equally important is that the operating model evolve to enable the growth strategy required of the business model Kapuret al (2006:11) The literature finds the internal/external focus  of turnaround classified into efficiency strategies and into entrepreneurial strategies (Smith and Graves 2005:305, Harker and Sharma 1999:37)
The big gap in turnaround research leading to the practioner’s challenge, is process The Practioner’s Challenge Overarching Issues Turnaround aspects are not equally researched – past research highlights content, while work on the process and context of turnaround are rare Pandit (2000:51-52)  Process concerns actions that can be taken to ensure that failure is not inevitable - that turnaround can be effected Chowdhury & Lang (1993:8) Ironically, aspects around processhave been part of the literature since the 1980’s Boyle and Desai (1991:33) Turnaround research offers results that are unconvincing and of little assistance to turnaround managers O’Kane (2006:118)  An improved understanding of the action (process) of turnaround is needed Spremann (2004:14) Turnaround action (process) has received little systematic attention Latham (2009:182) There is still insufficient knowledge about turnaround Chowdhury (2002:263)  Process is a fundamental in practical turnaround: What action is needed? When does it need to happen? What is it dependent on? How is it measured and who is accountable?
Research into turnaround in a recession and into developing countries is rare Developing Countries Recession Turnaround is a more complex undertaking in a recession, with this one possibly being one of the worst since the 1930s, with the world in a “prolonged slowdown of unpredictable duration” Reeves & Deimler (2009:10)  While turnaround in a recession is not a new area of study, research is scarce Latham (2009:180-181) The global recession impacted developing countries through declines in foreign direct investment, export revenue and tourism income. The resulting economic contractions saw significant job losses, and also South Africa’s first recession since 1992 Gable et al (2009:1).  Primary data on turnaround is scarce for businesses in developing countries Pretorius (2008:20) The consequences of recession are often more dire for small business Latham (2009:181-183)
Turnaround begins with a strategy Turnaround Strategy Turnaround strategies can be classified as efficiency strategies and entrepreneurial strategies (Smith and Graves 2005:305, Harker and Sharma 1999:37) Efficiency strategies rectify inefficient operations, i.e. cost-cutting and asset reduction, while entrepreneurial strategies reposition the business with respect to its current or new markets Poor business outcomes occur when there is a mismatch between resource deployment (e.g. finance) and the competitive priorities of the business - an area of scarce research Lawrence (2008:89-90)
Note even the best turnaround strategy is useless without implementation Turnaround Implementation Studies on strategy implementation are lacking (Getz, Jones & Loewe 2009:18; Sharma 2009:iii; Khadem 2008:29; Moore 2008:3, Parnell 2008:1278, Gumbus & Lussier 2006:407) This is a critical gap because the effectiveness of a strategy depends on both its formulation and its implementation. Indeed, the implementation of strategy may be more important than the strategy Ulrich, Brockbank and Johnson (2009:25)  Strategy implementation is a source of competitive advantage - the best strategy is ineffective without implementation Caruth & Humphreys (2008:24)  Again there is an emphasis on the process / action research gap. There appears to be little academic work to support a practitioner in implementing best practice turnaround
Lack of Research Two Turnaround Categories So what does this mean so far? Operating Model Business Model The implementation and process of turnaround  Turnaround in SMEs Turnaround in recession Turnaround in developing markets Nothing of use for practitioners at this point. However, there seems to be good potential for research into emerging market SME turnaround practice in a recession
However, there are many more aspects of turnaround research being discovered The more that is discovered though, the more the line seems to blur between SME turnaround and SME development…
Literature bemoans insufficient access to capital for SMEs, but it is not the only factor The Role of Finance Finance is often cited as the driving factor of SME growth Morgan 2010; Agrebi 2009; Watson, Newby and Mahuka 2009:46; Beck and Demirguc-Kunt 2006; Lafferty 2005 But it is not the only one! Even a cursory literature review shows that growth could be constrained due to ownership structure (Niskanen and Niskanen 2010; Abor 2008), gender discrimination (Watson, Newby and Mahuka 2009), the development of a meaningful mission statement and a relevant strategic operating context (Analoui and Karami 2002) and even to the characters of the entrepreneurs (Širec and Močnik 2010).  A mismatch between resource deployment (e.g. finance) and the business’ competitive priorities can cause failure – this is an area of scarce research. Lack of finance is not the only reason nor necessarily the biggest reason for failure Lawrence (2008:89-90)
People are critical, even before researching the role of top management in turnaround   The Role of Human Resources Employee morale and productivity are amongst the most important predictors of small business turnaround (Lawrence 2008:93; Gadiesh, Pace & Rogers 2003:42) For a strategy to succeed, it must begin with people with ability, i.e. a strong management team (Gadiesh, Pace & Rogers 2003:42) . In terms of the role of people in the execution of strategy, Moore (2008:4) writes that when there is confusion, the link between strategy and execution is compromised. Properly aligned human resources are key to the successful strategy implementation (Caruth & Humphreys 2008:24-25)
Turnaround demands transformational leadership The Role of Leadership Transformational leadership revitalises a company. Successful turnaround leaders are energetic, take action on many fronts, are disciplined in terms of measurement and analysis, are open-minded and are willing to learn Harker and Sharma (1999:44), Daft (1994:499)  Improving company morale is an important part of turnaround, repeatedly communicating a simple and powerful set of messages to employees Gadiesh, Pace & Rogers (2003:42),  Successful turnaround leadership develops organization-wide conviction that helps translate intent into action Kapuret al (2006:11). There’s that word, ‘action’, again
But do SMEs need turnaround, or are they just experiencing growing pains? First Challenge: What exactly is Turnaround? There is no standard definition for turnaround, with many authors depending instead on the readers’ general understanding of the term Pretorius (2009:4) Pretorius proposes that turnaround occurs when a venture recovers from a decline that threatens its existence, where decline means ‘operating under distress’, i.e. where the business experiences decreasing resource slack Pretorius (2009:10-11) Resource slack – operating capacity Business growth needs its infrastructure to grow and to change to keep up with the growth Flamholtz & Hua (2002:527,530). Is growing from capacity, albeit perhaps below break-even, a case of turnaround, or is it simply a case of small business growing pains?
But do SMEs need turnaround, or are they just experiencing growing pains? Business Lifecycle Theory Business life cycle theory considers the problems businesses encounter as they grow, providing insight into the options facing businesses over time (Hill, Nancarrow & Wright 2002:362-363). Management’s ability to solve problems enables a business to survive and to grow, thereby moving between lifecycle stages Rutherford et al (2003:327) , Chen and Hsieh (2005:157)  Are the problems being experienced by the SME merely about, in this case, capacity and channel expansion, or is their a real turnaround issue at stake?
e.g. the hurdles below seem as applicable to business growth as to turnaround… Business Growth from Small to Medium For a business to move from being small to being medium-sized, it needs to overcome at least five hurdles Eirich (2004:16) : access to capital growing from a small market presence to a larger market presence increasing the skill of its labour force increasing its access to cutting-edge technologies developing a unique value proposition The hurdles above relate, in list order, to resources, to the business model, to resources, to resources and to the business model. Arguably only two are applicable to efficiency (people and IT), the rest are more applicable to entrepreneurial strategies
Emerging observation From a practitioner perspective: Given no standard definition of turnaround, and being aware of the business lifecycle metaphor, it seems that many aspects of turnaround in the research are common to disciplined business growth … Is a growing business looking for the secrets to growth, while a turnaround business has merely lost its way and is looking for them again if it indeed ever had them?
Conclusion Has the research been useful in practice? No, not at a practitioner level for turnaround even after almost 70 journal articles have been read to date. Indeed, it was initially very discouraging given some of the gaps identified However, as the scope expanded, good insights emerged on many different business disciplines and concepts There is a research gap that should be filled by further study if what is taught in even the world’s best business schools is to have any relevance in the field There is a research gap in turnaround studies that should be filled if what is taught in even the world’s best business schools is to have any relevance in the field

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Emerging Market SME Turnaround in a Recession: Theory and Practice. Cincinnati, USA, 2010

  • 1. International Council of Small Business World Conference 2010Cincinatti, USA Emerging Market SME Turnaround and Growth in a Recession: Theory and Practice 27 June 2010 Guy Pearce Chief Executive: New Business Development JD Group Ltd, South Africa http://www.jdgroup.co.za
  • 2. Motivation and Approach The Business Challenge Two SMEs in need of turnaround The Approach To study international research into SME turnaround with the expectation of achieving a “first time right” outcome To understand the scope of existing research and the relevance of it for practioners In Summary Current turnaround research does not meet practitioner needs at the implementation and process levels
  • 3. EntrepreneurshipBridging Global Boundaries Link to the Conference Theme The problems facing entrepreneurs in developing countries are often similar Benzing, Chi and Kara 2009:63 The Value of the Study SMEs are more vulnerable to financial distress than large firms as evidenced by their high mortality. Any interventions that help reduce failure are therefore welcome Chowdhury & Lang (1993:8), Boyle & Desai (1991:33)
  • 4. So why do SMEs fail? Internal (efficiency) External (entrepreneurial) Most causes of SME failure seem to be internal to the firm Boyle and Desai (1991:39) … with the major reason for failure being lack of management practice Lawrence (2008:89) … specifically lack of control over operations, without which business has little chance of survival in a competitive market Boyle & Desai (1991:40) Sustainable turnarounds usually involve substantial strategic repositioning of the business Gadiesh, Pace & Rogers (2003:42) Strategy is leadership’s clear view of the future, and moving the business model towards this. Equally important is that the operating model evolve to enable the growth strategy required of the business model Kapuret al (2006:11) The literature finds the internal/external focus of turnaround classified into efficiency strategies and into entrepreneurial strategies (Smith and Graves 2005:305, Harker and Sharma 1999:37)
  • 5. The big gap in turnaround research leading to the practioner’s challenge, is process The Practioner’s Challenge Overarching Issues Turnaround aspects are not equally researched – past research highlights content, while work on the process and context of turnaround are rare Pandit (2000:51-52) Process concerns actions that can be taken to ensure that failure is not inevitable - that turnaround can be effected Chowdhury & Lang (1993:8) Ironically, aspects around processhave been part of the literature since the 1980’s Boyle and Desai (1991:33) Turnaround research offers results that are unconvincing and of little assistance to turnaround managers O’Kane (2006:118) An improved understanding of the action (process) of turnaround is needed Spremann (2004:14) Turnaround action (process) has received little systematic attention Latham (2009:182) There is still insufficient knowledge about turnaround Chowdhury (2002:263) Process is a fundamental in practical turnaround: What action is needed? When does it need to happen? What is it dependent on? How is it measured and who is accountable?
  • 6. Research into turnaround in a recession and into developing countries is rare Developing Countries Recession Turnaround is a more complex undertaking in a recession, with this one possibly being one of the worst since the 1930s, with the world in a “prolonged slowdown of unpredictable duration” Reeves & Deimler (2009:10) While turnaround in a recession is not a new area of study, research is scarce Latham (2009:180-181) The global recession impacted developing countries through declines in foreign direct investment, export revenue and tourism income. The resulting economic contractions saw significant job losses, and also South Africa’s first recession since 1992 Gable et al (2009:1). Primary data on turnaround is scarce for businesses in developing countries Pretorius (2008:20) The consequences of recession are often more dire for small business Latham (2009:181-183)
  • 7. Turnaround begins with a strategy Turnaround Strategy Turnaround strategies can be classified as efficiency strategies and entrepreneurial strategies (Smith and Graves 2005:305, Harker and Sharma 1999:37) Efficiency strategies rectify inefficient operations, i.e. cost-cutting and asset reduction, while entrepreneurial strategies reposition the business with respect to its current or new markets Poor business outcomes occur when there is a mismatch between resource deployment (e.g. finance) and the competitive priorities of the business - an area of scarce research Lawrence (2008:89-90)
  • 8. Note even the best turnaround strategy is useless without implementation Turnaround Implementation Studies on strategy implementation are lacking (Getz, Jones & Loewe 2009:18; Sharma 2009:iii; Khadem 2008:29; Moore 2008:3, Parnell 2008:1278, Gumbus & Lussier 2006:407) This is a critical gap because the effectiveness of a strategy depends on both its formulation and its implementation. Indeed, the implementation of strategy may be more important than the strategy Ulrich, Brockbank and Johnson (2009:25) Strategy implementation is a source of competitive advantage - the best strategy is ineffective without implementation Caruth & Humphreys (2008:24) Again there is an emphasis on the process / action research gap. There appears to be little academic work to support a practitioner in implementing best practice turnaround
  • 9. Lack of Research Two Turnaround Categories So what does this mean so far? Operating Model Business Model The implementation and process of turnaround Turnaround in SMEs Turnaround in recession Turnaround in developing markets Nothing of use for practitioners at this point. However, there seems to be good potential for research into emerging market SME turnaround practice in a recession
  • 10. However, there are many more aspects of turnaround research being discovered The more that is discovered though, the more the line seems to blur between SME turnaround and SME development…
  • 11. Literature bemoans insufficient access to capital for SMEs, but it is not the only factor The Role of Finance Finance is often cited as the driving factor of SME growth Morgan 2010; Agrebi 2009; Watson, Newby and Mahuka 2009:46; Beck and Demirguc-Kunt 2006; Lafferty 2005 But it is not the only one! Even a cursory literature review shows that growth could be constrained due to ownership structure (Niskanen and Niskanen 2010; Abor 2008), gender discrimination (Watson, Newby and Mahuka 2009), the development of a meaningful mission statement and a relevant strategic operating context (Analoui and Karami 2002) and even to the characters of the entrepreneurs (Širec and Močnik 2010). A mismatch between resource deployment (e.g. finance) and the business’ competitive priorities can cause failure – this is an area of scarce research. Lack of finance is not the only reason nor necessarily the biggest reason for failure Lawrence (2008:89-90)
  • 12. People are critical, even before researching the role of top management in turnaround The Role of Human Resources Employee morale and productivity are amongst the most important predictors of small business turnaround (Lawrence 2008:93; Gadiesh, Pace & Rogers 2003:42) For a strategy to succeed, it must begin with people with ability, i.e. a strong management team (Gadiesh, Pace & Rogers 2003:42) . In terms of the role of people in the execution of strategy, Moore (2008:4) writes that when there is confusion, the link between strategy and execution is compromised. Properly aligned human resources are key to the successful strategy implementation (Caruth & Humphreys 2008:24-25)
  • 13. Turnaround demands transformational leadership The Role of Leadership Transformational leadership revitalises a company. Successful turnaround leaders are energetic, take action on many fronts, are disciplined in terms of measurement and analysis, are open-minded and are willing to learn Harker and Sharma (1999:44), Daft (1994:499) Improving company morale is an important part of turnaround, repeatedly communicating a simple and powerful set of messages to employees Gadiesh, Pace & Rogers (2003:42), Successful turnaround leadership develops organization-wide conviction that helps translate intent into action Kapuret al (2006:11). There’s that word, ‘action’, again
  • 14. But do SMEs need turnaround, or are they just experiencing growing pains? First Challenge: What exactly is Turnaround? There is no standard definition for turnaround, with many authors depending instead on the readers’ general understanding of the term Pretorius (2009:4) Pretorius proposes that turnaround occurs when a venture recovers from a decline that threatens its existence, where decline means ‘operating under distress’, i.e. where the business experiences decreasing resource slack Pretorius (2009:10-11) Resource slack – operating capacity Business growth needs its infrastructure to grow and to change to keep up with the growth Flamholtz & Hua (2002:527,530). Is growing from capacity, albeit perhaps below break-even, a case of turnaround, or is it simply a case of small business growing pains?
  • 15. But do SMEs need turnaround, or are they just experiencing growing pains? Business Lifecycle Theory Business life cycle theory considers the problems businesses encounter as they grow, providing insight into the options facing businesses over time (Hill, Nancarrow & Wright 2002:362-363). Management’s ability to solve problems enables a business to survive and to grow, thereby moving between lifecycle stages Rutherford et al (2003:327) , Chen and Hsieh (2005:157) Are the problems being experienced by the SME merely about, in this case, capacity and channel expansion, or is their a real turnaround issue at stake?
  • 16. e.g. the hurdles below seem as applicable to business growth as to turnaround… Business Growth from Small to Medium For a business to move from being small to being medium-sized, it needs to overcome at least five hurdles Eirich (2004:16) : access to capital growing from a small market presence to a larger market presence increasing the skill of its labour force increasing its access to cutting-edge technologies developing a unique value proposition The hurdles above relate, in list order, to resources, to the business model, to resources, to resources and to the business model. Arguably only two are applicable to efficiency (people and IT), the rest are more applicable to entrepreneurial strategies
  • 17. Emerging observation From a practitioner perspective: Given no standard definition of turnaround, and being aware of the business lifecycle metaphor, it seems that many aspects of turnaround in the research are common to disciplined business growth … Is a growing business looking for the secrets to growth, while a turnaround business has merely lost its way and is looking for them again if it indeed ever had them?
  • 18. Conclusion Has the research been useful in practice? No, not at a practitioner level for turnaround even after almost 70 journal articles have been read to date. Indeed, it was initially very discouraging given some of the gaps identified However, as the scope expanded, good insights emerged on many different business disciplines and concepts There is a research gap that should be filled by further study if what is taught in even the world’s best business schools is to have any relevance in the field There is a research gap in turnaround studies that should be filled if what is taught in even the world’s best business schools is to have any relevance in the field