An army of ants

Inclusive Economy24 Sep 2014Will Mutua

SMEs are the lifeblood of most economies. Thankfully, there is no limit to human capacity for innovation – the bedrock upon which entrepreneurship is built. Enabling entrepreneurship should be of foremost importance to governments and can be promoted by establishing three main pillars, which will lay the foundation for sustainable business growth.

SMEs are the lifeblood of most, if not all economies. Even where an economy is built on extractive industries, natural resources are finite, and sooner or later they will diminish, run out or lose value. On the other hand there is no limit to human ingenuity, imagination and capacity for innovation – the bedrock upon which entrepreneurship is built. It stands to reason therefore that enabling entrepreneurship should be of foremost importance to nations.

Entrepreneurs, most of whom run small and medium-sized businesses, are perhaps among the most critical factors to the dynamism of economies. To use an analogy, entrepreneurs are like an army of ants, each ant on its own is capable of the amazing feat of being able to carry several times its own body weight – entrepreneurs take upon themselves what to others seem to be irrational chances. But taken together they can build amazingly complex structures! In the same manner, taken together, entrepreneurs are able to transform economies and give them a dynamism and sophistication that cannot be without their input into the economy.

The trouble with entrepreneurship is that it is simply tough. It is tough to start a business and even harder to sustain it. There’s a Swahili proverb that illustrates this point: “kuzaa sio kazi, kazi ni kulea” (literally: the real work is not in giving birth, the work is in raising the child).

Having been an entrepreneur myself and having studied innovation & entrepreneurship particularly in Africa over the last 5 or so years. I have come to the conclusion that there are 3 basic pillars to sustainable business growth. Any intervention, by government or other players, would do most to help SMEs become sustainable by helping them establish these pillars:

1. Capacity
Economists would call these the ‘factors of production’ – land, labor (human capital), capital, entrepreneurship. Of these factors, I would say the two most critical are human capacity (skills, talent) and financial capacity (capital).The Omidyar Network carried out a study on entrepreneurship in Africa whereby they concluded that the greatest challenge facing entrepreneurs across Africa is the state of ‘entrepreneurial assets’: financing, skills & talent and infrastructure.

2. Productivity
This is basically the ability to make the most out of available capacity to execute the business model effectively and efficiently. Investopedia provides a succinct definition of productivity: An economic measure of output per unit of input. Whereas there may be limits to various forms of capacity, say financial capital, entrepreneurs can find creative ways to make the most out of what they have, e.g. by getting rid of operational inefficiencies. One entrepreneur for instance found that driving through the world famous Nairobi traffic stole a good chunk of productivity out of their day. Their solution: they sold their car and bought a motorcycle, instantly reclaiming about 2-3 hours of their day with which they could get work done. Another entrepreneur found that they lacked certain skills but did not have the cash to pay for training or hire new staff. Their solution: they bartered their services to another entrepreneur who had this skill and needed their services in exchange for bringing in the other entrepreneur’s skill sets.

3. Consistency
It is not enough to be productive, however, the bigger challenge is to be productive repeatedly, a ‘repeatable business model’. The growth of an enterprise can be summarized simply as a series of consistent phases of execution at successively higher levels: execute consistently as a startup, expand, execute consistently as a small business, expand… and so on.

Take the example of a restaurant business, the entrepreneur may be doing great with a relatively small operation, producing great quality food. Soon word about his consistently great quality food spreads, and demand increases. In a rush to meet demand they might lose sight of being consistent with the high quality of food – their real competitive advantage – just to meet the quantity of demand. Over time, customers – especially those who have been there the longest – will take note of declining quality and they may go elsewhere.

Many businesses fail as a result of scaling disproportionately, prematurely or too late – hiring new staff or getting a bigger space too soon, taking on more clients without increasing consultants on staff etc. There are two key questions the entrepreneur needs to ask himself when it comes to scaling: 1) is this the right time to scale? and can my business sustain the cost structure brought on by scaling further?