The importance of SMEs in economic growth and job creation can not be over emphasised. Data from the Federal Office of Statistics in Nigeria, revealed that about 97% of the whole enterprise in the country are SMEs, and they employ an average of 50% of the total workforce, contributing 50% to the countries industrial output.
Nigeria has since been experiencing its own economic crises even before the global economic crises in the 21st century. The country is faced with a high rate of unemployment and low wage rate, which resulted in a conscious effort by Nigerians in recent times to carve out a niche for themselves. However, the big question or challenge facing these SMEs is "how do they survive amidst
stiff competition and tight budget?". Consequently, many SMEs fail within their first three years. Various reasons have been attributed to this failure, but in simple terms, I have presented below four reasons why most SMEs fail in Nigeria.
1. Lack of Strategy: I carried out a mini survey on a sample size of 500 SMEs in Nigeria, and found out that 74% of SMEs start a Business without a business plan. Out of the 26% with a plan, 10% actually get one because it was a requirement in order to obtain loan for their business.
Now, if you don't have a clear road map of where your going, and how you will get there, then achieving goals and surviving becomes a big challenge in a highly competitive market. In terms of marketing, most SMEs don't have clear cut model for marketing that meets up with current trend. They are not able to clearly define their target market, demographics, buyers persona, and execute accordingly.
As a result, they operate a business without a direction which will definitely lead to failure and disaster.
2. Lack of Innovation and Creativity: Don't get me wrong on this, Nigerians are highly innovative and creative people. But when it comes to business, most SMEs want the easy way out. Only few businesses are willing to take the risk to introduce new innovative ideas that will take their business to the next level. For example, a travel agency company not being able to see the benefit of a mobile app for its business, yet admires a new entrant (Wakanow) who has become a market leader. The question is how did Wakanow achieve its success? It's simple; they invested in IT to automate their business and help serve customers better. They had the right strategy, implemented the right innovations, then with the funds available, they were able to execute and succeed.
Also, in terms of innovation and creativity, I think a lot of work needs to be done by the government to support new and bright ideas. Most Nigerians have made notable inventions, that with a little support, will improve efficiency in the society and the way we do business. However, due to lack of support, they are unable to bring this innovations to lime lite. It is highly important for us to localise our own technology to invent things that solve common problems customised to our own environment and business requirements.
3. Over Ambitious About Growth: Most SMEs are over ambitious and obsessed about growing their business. They are eager to start big and grow as fast as possible. As a result, they start their business on a scale that is bigger than their ability to manage. The ideal start would have been to build up cash reserves, and carefully map out an expansion plan. However, in the case of most Nigerian SME's, they rush into expansion, spending all the funds at their disposal even before the business starts generating revenue. Consequently, when the business is faced with tough times, they get discouraged and lack the strength to survive. This over ambitious blunder, leads SME's to display a poor level of financial management and intelligence, which is critical for the survival of any business.
4. Funding: It will be an unbalance argument if funding is eliminated from this list. I purposely placed it at the bottom four, but does not in any way imply it is less important than all the above mentioned. SME's in Nigeria are faced with serious funding challenges, and this affects start ups. First, obtaining a bank loan is difficult, and for start ups, it is almost impossible. Even when loans are available, interest rates are high. To obtain a bank loan, a start up needs to start the business with his own fund and run the business for six months. Currently, Diamond banks seems to be the most friendly in terms of issuing Loans to SMEs, but more work still needs to be done. Lets go to the venture capital and equity firms; they hardly make funds available for start ups, they prefer to finance existing businesses. (You are free to quote me wrong on venture capitalist that finance start up by stating your argument in the comment section). The government has however introduces a few initiative to finance SMEs and start ups. Example of such initiatives are YouWin program, and through the Bank of Industry.
Subsequently, I will be discussing on internationalization of SMEs in Nigeria, with a focus on opportunities and challenges.