Proceedings of Annual South Africa Business Research Conference 11 - 12 January 2016, Taj Hotel, Cape Town, South Africa, ISBN: 978-1-922069-95-5 An investigation into the challenges faced by micro-enterprises Turfloop Plaza, in South Africa 1 Kgomotlokoa Linda Thaba and 2Tlakamoleke Tshepo Leshilo Economic growth depends on sustained expansion in businesses, Small Medium Micro Enterprises (SMME) in particular. A phenomenal contributions made by SMMEs to GDP, unemployment, and poverty alleviation warrant sustainability and support to SMMEs, particularly, a vast informal micro businesses South Africa has. For micro businesses to expand into the level of big businesses, support is required to make them withstand a turbulent business environment crammed with cutthroat competition. The support in the form of access to funding and training is required if micro business have to be sustainable. A qualitative case study research was conducted on ten purposively sampled micro businesses in Turfloop Plaza. The narrative analysis of the inquiry reveals that competition was found to be very rife in this area, and has caused gatekeeping that limit new business entrants and add more challenges to existing micro businesses. It is concluded that competition impacts negatively on businesses success and causes gatekeeping to new market entrants. We therefore recommend that government and NGOs should take up responsibility to provide support to emerging small and micro businesses and to mitigate cut-throat competition. Entrepreneurial Development 1. The context of the study The study aim was to establish the extent to which competition influences business market entrants and businesses’ success. The purpose of the study was threefold. It intended to investigate the challenges experienced by emerging entrepreneurs within Turfloop Plaza; to establish the extent to which competition affects business sustainability; and to establish the nature of the support service offered to SMEs in the vicinity. The first question we wanted to understand what micro and micro-business means. According to Merriam-Webster Dictionary (2015) micro means very small. The concept micro business refers to all very small businesses that are either formal or informal. The White paper 1995 on national strategy for the development and promotion of small business in South Africa identified the development of SMMEs as important strategy to promote economic development and economic growth; and alleviate poverty and unemployment (Department of Trade and Industry (DTI), 1995, 2008). In support of the envisaged role of SMMEs in South Africa, Global Entrepreneurship Monitor (GEM) South Africa Report (2008) further clarifies the role of SMMEs in South Africa when it asserts that given the failure of the formal and public sector to absorb the growing number of job seekers in South Africa, increasing attention has focused on entrepreneurship and its potential for contributing to economic growth and job creation. ________________________________________________________________________ 1Ms Kgomotlokoa Thaba, 2Mr Tlakamoleke Tshepo Leshilo Department of Language Education, Social Sciences and Educational Management University of Limpopo, P O Box 1106, Sovenga, 0727, 1lindathaba@ yahoo.com; 2leshilo.scm@gmail.com. Phone numbers: 27152683287/ 27716053083 Proceedings of Annual South Africa Business Research Conference 11 - 12 January 2016, Taj Hotel, Cape Town, South Africa, ISBN: 978-1-922069-95-5 The good intentions by South African government to have identified SMEs to generate economic activity were underscored by their failure to prioritise the creation of SMEs and to support and promote SME’s activity. Failure to create SMEs activity indicates that the prevailing SMEs operate below capacity. Olawale (2014: 94) argues that the creation rate of new SMEs in South Africa is one of the lowest in the world. Olawale and Garwe (2010) state) succinctly the importance of SME when they say: ‘The innovative activity of entrepreneurs feeds a creative ‘‘destruction process’’ by causing constant disturbances to an economic system in equilibrium, creating opportunities for economic rent. New SMEs introduce new products and develop new technologies. As an important source of innovation, new firms bring competitive pressure to bear on established firms’ (p.729). When South African government acknowledges the submissions of Olawale and Garwe (2010) on the benefits to develop SMEs, since 1995 when White Paper on SMEs was publicised, it has done little to support and promote SMEs activities. South Africa’ total entrepreneurial activity (TEA) shows that South Africa’s rate in 2011 (9.1%) has remained constant (8.9% in 2010). When creation rate of new SMEs is low, the TEA rate is far below the average of comparable economies around the world Herrington et al (2011). The Global Entrepreneurial Monitor Report (2011), published by the University of Cape Town Centre for Innovation and Entrepreneurship states that: ‘The 2011 South African GEM report includes a comparison of entrepreneurial activity between the BRICS countries (Brazil, Russia, India, China and South Africa), for the years 2006 (before the global economic crisis) and 2011. It shows that Brazil’s TEA rate increased by 28.0% between 2006 and 2011. Reasons for this include well-managed government programmes to stimulate and support the development and growth of small businesses, as well as numerous business reforms that have focused on making it easier to start businesses’ Herrington et al (2011: 4). The outstanding reports of the impact of SMEs on unemployment and poverty reduction and improved economic activity, should make South African government to put the creation and acceleration of SMEs activities on their agenda. The fact that the government has not succeeded to provide reliable statistics on informal sector/ businesses (DTI, 2008) is clear indication that SMEs are neglected. The biggest challenge facing the micro businesses is ever changing business world and cutthroat competition. The small enterprise sector is rapidly changing and dynamic in nature (DTI, 2014, p.8). A success of business operations, absorbs more labour force, alleviates poverty and promotes economic growth. Therefore it is crucial for micro enterprises to have competent entrepreneurs who will be able to adjust their micro enterprises in accordance with markets’ and customers’ demands and make their businesses’ survival and sustainability. In view of the above, the study attempted to answer two questions, namely: Proceedings of Annual South Africa Business Research Conference 11 - 12 January 2016, Taj Hotel, Cape Town, South Africa, ISBN: 978-1-922069-95-5 a) To what extent does competition affect new market entrants and success of existing micro businesses? b) How support structures could mitigate challenges faced by emerging entrepreneurs? 2. Literature review Small and Medium Enterprises (SMEs) need sufficient support structures to have any impact on the South African economy and address the problems of poverty and unemployment through sustainable job creation. SMEs account for 60 to 70 per cent of jobs in most The Organization for Economic Cooperation and Development (OECD) countries, with a particularly large share in Italy and Japan, and a relatively smaller share in the United States. In Germany this sector is state-supported and the impact is great in job creation and economic growth. SMEs are doing well in other countries because they receive required support. Germany, as already indicated, has a good record in relation to the activities of SMEs. The Deutsche Bank Magazine (2013) reports that: Medium-sized enterprises and large family businesses are the trump cards for the German economy. A good 20% of all those employed in SMEs work in small and medium-sized industrial enterprises. This puts Germany out in front of many EU countries (France 17%, Britain 15%). Industry is even more heavily represented among large family businesses (Bräuninger, D. 2013). When this study attempted to answer the question on ‘to what extent competition affects new market entrants and business successes of the existing small businesses in South Africa’, issues which were raised at the inception of democracy in South Africa relating to economic development of small businesses in South Africa in the White Paper on National Strategy for the Development and Promotion of Small Business in South Africa (1995) were revisited and reviewed and the contemporary structure of SMEs as stipulated in the National Small Business Act of 1996 as amended in 2003 and 2004 was also looked into. Literature was reviewed to answer the question on how the collaboration between South Africa and OECD could benefit SMEs. Lastly, an empirical study was conducted in Turfloop Plaza next to the University of Limpopo in South Africa to investigate the extent to which competition impacts on new market entrants and business successes of the existing small businesses in South Africa, current SMEs challenges and how SMEs in this area are offered support service. This study acknowledges what was said by OECD Global Forum on Investment (2008: 3) in their report entitled ‘Why is competition important for growth and poverty reduction.’ The report submits: Competition is central to the operation of markets, and fosters innovation, productivity and growth, all of which create wealth and reduce poverty. However, markets do not always work well, and uncompetitive markets are often those that matter most for the poor. Proceedings of Annual South Africa Business Research Conference 11 - 12 January 2016, Taj Hotel, Cape Town, South Africa, ISBN: 978-1-922069-95-5 However we differ with them when the investors relate competition with growing economies and unfair competition. In this report, the question on how competition and policy is linked to growth and poverty reduction was raised. The response was: Many developing countries now prioritize growth in their national poverty reduction strategies. Because effective competition is a driver of productivity, competition policy should be an essential component of any pro-poor growth strategy. Crucially, competition facilitates greater equality of opportunity by breaking down the barriers to fair competition that often help to protect incumbent elites. A dichotomy arises when we believe that developing economies’ approach to economic growth has to consider many aspects before it allows cut-throat competition to take over. South Africa that has adopted neo-liberal policies which favour capitalism and competition, and had intentions to grow SME through entrepreneurial development is lacking as far as support and development of SME’s are concerned. Factors such as economic development, small business development and developing emerging entrepreneurs are not prioritised at the required national level. The South African government is blamed (or blames itself) for not allowing competition in the strategic environment of the country. The OECD (2015: 10) reports that: Public ownership of companies is still significant, even in markets that could be opened for competition. This occupies scarce administrative capacity on all levels of government and is a potential source of inefficiency. The philosophy of liberalism which favours competition makes its proponents see to it that the country moves into free market despite other impeding factors, such as lack of skilled labour force, underdeveloped SMEs, lack of government coordination of support structures to SMEs. There is therefore a need to know where these SMEs are coming from and how strategically they could position themselves for a competitive edge. Since the inception of democracy in South Africa in 1994, small businesses have been faced with multiple challenges. The White Paper on National Strategy for the Development and Promotion of Small Business in South Africa (1995) outlines constraints facing the smallbusiness sector as follows: the legal and regulatory environment confronting SMMEs, lack of access to markets, finance and business premises (at affordable rentals), the acquisition of skills lack of managerial expertise, lack of access to appropriate technology, the lack of quality of the business infrastructure in poverty areas and, the tax burden. Location of entrepreneurs in rural areas, and the paucity in women entrepreneurs. In the Department of Trade and Industry (DTI) report which reviewed the support and impact of SMEs in South for period 1994 to 2004, the DTI (undated) reveals that many challenges have not been addressed. The report reveals that: Proceedings of Annual South Africa Business Research Conference 11 - 12 January 2016, Taj Hotel, Cape Town, South Africa, ISBN: 978-1-922069-95-5 The close interaction of political, social and economic changes is felt particularly strongly at the grass-roots level of small and micro enterprises – in the townships, in city centres, in the new upmarket shopping malls and in backyard industries. At the same time, small enterprises could not be shielded from the impact of global economic and technological transformations as well as the rise in competition in virtually all sectors, places and operational spheres which South Africa experienced after its reintegration into the global economy. The constrained situation which prevailed in 1994 is still very common in 2015, especially in rural parts of South Africa. Main findings of the OECD Economic Surveys: South Africa 2015 reveals the following challenges faced by SMEs in South Africa. It says: Domestic barriers to firms entering markets are still high, in particular for black entrepreneurs despite policies to foster black economic empowerment, despite the National Development Plan that provides an ambitious framework for stronger, more inclusive growth…The government has identified SMEs as key to bolstering growth and employment but SMEs face high regulatory burdens, and the pattern of social housing hinders business opportunities. Publicly owned network industries, especially electricity but also some transport sectors, have on-going capacity problems and are characterised by cross-subsidies, insufficient oversight by regulators and limited access of independent service providers to the infrastructure (OECD 2015:10). In this recent report in which OECD has collaborated with South Africa through research the challenges are still too vast for new business to emerge, and for emerging entrepreneurs to succeed in business and for SMEs to be grown into viable and sustainable businesses. This has a negative impact on innovation and economic growth and job creation. The desired impact would have a positive impact on unemployment and poverty, which, if not addressed, might lead to many social challenges such as crime. 3. Support provided by the government to small businesses Prior 1994, ‘support for small enterprises existed in South Africa long before 1994, practised through the national Government Department of Trade and Industry as well as the Small Business Development Corporation (SBDC), the Development Bank of Southern Africa (DBSA), the Industrial Development Corporation (IDC) and a whole range of regional development corporations (Department of Trade and Industry, undated). White Paper issued in March 1995 opened new avenues in South Africa, as far as SMEs are concerned. As a result, the National Small Business Council, a Small Business Development Agency (SBDA, later called Ntsika Enterprise Development Agency, or just Ntsika), a finance agency (later called Khula Enterprise Finance) and a national grid of “local service centres” (which became known as Local Business Service Centres or LBSCs) were established. There are a number of Non-Government Organisation (NGOs) institutions in South Africa that offer support service to emerging entrepreneurs and small businesses in South Africa: the Small Enterprise Development Agency (SEDA), South Africa's new small business agency, Fetola NGOs and the Small enterprise Foundation, (SEF). The next discussion would focus Proceedings of Annual South Africa Business Research Conference 11 - 12 January 2016, Taj Hotel, Cape Town, South Africa, ISBN: 978-1-922069-95-5 on the nature of the service support they offer. Nevertheless, they are not made available and accessible to rural SMEs. Therefore they don’t service all SMEs in South Africa equally. 4. Research methodology 4.1. Research design A qualitative case study research was conducted on ten purposively sampled small businesses in Turfloop Plaza. In order to get better understanding and in-depth insight on the operations of SMEs in Turfloop Plaza, the same qualitative case study research was adopted. Qualitative case study methodology was adopted because it provides tools to study complex phenomena such as the experiences of entrepreneurs on how competition impacts business entrants and business successes and the extent of SMEs’ impact on local economy. 4.2. Sample and sampling The population consists of SMEs businesses in Turfloop Plaza and only ten SMEs businesses were purposively sampled based on business size and diversity. Different industries were investigated. The research inquiry was conducted at a salon, bread making business, a supermarket, a bottle store, a taxi owner, a hardware shop, a pharmacy, a mortuary, a catering business and a garage. One business venture was chosen from different industry. 4.3. Research method Interview was used as data collection instrument with unstructured questions to allow probing questions that would extend the depth of data. Research was conducted at business premises to give participants the opportunity to continue with their daily activities when interviews were also underway. Data collected was analysed using content analysis. 4.4. Limitation of the study Language was a barrier to many entrepreneurs because most of the foreign nationals from central and eastern Africa could not use English as a medium of conversation. It was found that half of the ten participants were foreign nationals. However, many try to speak “Sethathalapa” (mixture of all languages). One worker who was present when I introduced my research purpose to this business indicated that if I spoke pure English, ‘my friend’ (referring to the foreign national who uses ‘my friend to address the customers) would not understand the interview. This worker was able to interpret what I was saying to the business owner and vice versa. This language barrier was found to be very disturbing when I had to interview four more foreign nationals who had similar language barriers. 5. Results Proceedings of Annual South Africa Business Research Conference 11 - 12 January 2016, Taj Hotel, Cape Town, South Africa, ISBN: 978-1-922069-95-5 The results findings was grouped into three main categories namely, challenges, completion, and support services. 5.1. The challenges experienced by emerging entrepreneurs It was found that all ten SMEs experience a myriad of challenges ranging from: Long processes to register their businesses Lack of managerial skills High cost of rent in Mankweng takes all commission If unregistered they fail to compete as SMEs in many ways access to appropriate technology to contribute towards compensation fund to pay tax to access funding from government, NGO’s and banks communication links are closed – eventually they cannot be trained through government initiatives which registered business receive through short messages or electronic mail. 5.2. Access to appropriate technology Lack of access to appropriate technology was cited by six participants from six different businesses and business sectors as a great hindrance that disables participation with other emergent businesses on an equal footing. Participant 3 says: It makes me sick, when my customer who was willing to buy from me and cannot be helped because I don’t have swiping facilities. Once I hear a customer saying’ Do you have swiping facilities or can I swipe, then I know I lost business. Underdeveloped telecommunication infrastructure in this area denies many entrepreneurs access to electronic payment facilities - (swiping) and discourages many customers from buying from such businesses, because they cannot swipe). 6.1.3. High renting cost In a community which cannot offer adequate space, you can expect to find low cost housing and renting facilities. However, with Turfloop the situation is different. The reality is that a demand is high, a situation caused by students from the University of Limpopo who cannot be accommodated on the campus because of few available rooms which are offered on first come first serve basis. The cost of space which is rented in Turfloop is therefore extremely high. Participant 6: I pay R2000-00 a month in this room I run my business. I cannot afford to grow my business because the commission is taken up by rent and fees. I tried to buy myself a stand, however, I found I cannot afford. How do I raise R150 000 for empty stand and another amount of money to put a structure? The total of R250 000 will be needed. On the other side my business is not registered and the business is not doing well this side. Then a dream of owning a business area to run my business as I want has become a dream which cannot be attained. Maybe future can bring something best, but as I’m speaking, I have no hope. Most entrepreneurs, who were complaining of high cost of rentals were foreign nationals. They pay rent within a range of R1500 and R4000 per month depending on the nature of business they run. Such a cost is very high to run a business in Mankweng. Proceedings of Annual South Africa Business Research Conference 11 - 12 January 2016, Taj Hotel, Cape Town, South Africa, ISBN: 978-1-922069-95-5 5.3. The extent to which competition causes gate-keeping to new business entrants and its effects on business sustainability The challenges identified above cause gate keeping to keep out new business entrants. The most difficult hurdles to pass in this Turfloop Plaza are identified as: The access is very difficult. The cost of renting facilities is high, and failure to get to their businesses registered. A taxi owner who was new in the business shares his experiences: Participant 7 says: There was a move in my former workplace in Gauteng to retrench staff members as the business is no longer good and that we are many and cannot be shifted to other departments because of lack of skill. The management and workplace forum was consulted and they agreed that they start with volunteers; I opted to go because I had 35 years of service in that business and I already inquired about the pension I will receive. Because it was promising and I was already grown up, I wanted to come home to start a taxi business. It was not easy to belong to taxi organisation. The garage gave me two mini-buses and I wanted to register with Department of Traffic, who made it very clear that I must know which route I should operate and get a letter from the organisation which is registered in the very area I want to operate. I thought it will be a day or weeks thing. It took me two months, and I have to pay for two taxis which were not yet operating. I have to use my pension money to pay for instalments in two months which crippled my finances very much. When I approached my taxi association, I was told to pay R70 000 to register two vehicles with them. I had no such money and I asked them to let me pay half and pay the remainder through monthly payments over 12 months. I was called to many meetings because the members were in disagreement on this matter. The amount of money is fixed and it’s known by all members, the issue was to allow me to operate both taxis without full payment. However at last, I had other business opportunity which needed another of my taxi. I had to transport kids to school from Turfloop to Polokwane that minimises my stress, and I was able to register one taxi, and operate the route I desired. Many others were returned whereas others could not afford. I regard myself as fortunate to start with this business immediately I was released from my job, when I still have my entire pension fund. 5.4. The nature of the support service offered to SMEs in the vicinity. Many of the entrepreneurs in this vicinity are not aware of the support services offered by government, NGOs and local structures. There was no educational awareness in the surrounding and even the University of Limpopo which is situated in their vicinity is doing nothing to make this sector aware of the support structures available, or to offer support in one way or another. When I asked what support SMEs receive from government, she thought I was referring to the social grant. Proceedings of Annual South Africa Business Research Conference 11 - 12 January 2016, Taj Hotel, Cape Town, South Africa, ISBN: 978-1-922069-95-5 Participant 9 says: Do you think at my age, government can give pension grant. Or maybe you think I have younger children for whom I must get child grant. I had to clarify what support I was referring to and then he said: I don’t know of any of support provided by government. And further I never heard anyone of my friends in business talking of such support structures you are referring to. I don’t have clue, can you help. Today, you are not going to go by that door, before you help me. You said you are a student at the University of Limpopo and you study business, you must know. Tell me, I must get this help. The elderly lady waited to be told about support services offered by government and NGO’s. 6. Conclusion and recommendations South African business sector has an emerging trend where many new businesses are operated by foreign nationals. Many existing businesses fail to survive, and shut down. This gives leeway to foreign nationals to enter all existing business structures and family garages to make viable and sustainable businesses. The main cause of this is lack of support of the South Africans who are in business, whereas it is a known fact that for this economy to grow it needs all people to be economically active and SMEs to flourish. We therefore conclude that there are many challenges in South African SMEs which are very distinctive to all entrepreneurs in SMEs. The challenges experienced by entrepreneurs operating SMEs in Turfloop Plaza are similar to those outlined by White Paper on National Strategy for the Development and Promotion of Small Business in South Africa in 1995. It shows that the country is staggering in its attempt to address identified challenges. It is possible that in cosmopolitan areas conditions are better than in rural areas, but Rural Development Initiative should be seen to develop rural SMEs which are dominated by women. The new entrants in business arena cannot make it as the competition is stiff, and this has caused gate keeping against new business entrants to penetrate the business markets. Furthermore the new entrants have no access to information about how they can be helped. They do not know of government and NGO structures which should proactively support them. We conclude that competition impacts negatively on businesses success and causes gatekeeping against the new market entrants. 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