Why businesses succeed or fail: a study on small businesses in Pakistan – Article review

If you are studying through iQualify UK for an ABE qualification then you have free access to a database of academic journals on business topics. This is a great way to keep up to date on the latest academic thinking. One such recent article, by Shabir Hyder and Robert Lussier, investigates why small businesses succeed or fail in Pakistan.

Professor Lussier has developed the Lussier (1995) Model of business success and failure. He has used the model in different parts of the world including the USA, Chile, Israel and Croatia and now applies it to Pakistan. The article highlights how small and medium enterprises (SMEs) are important in all countries, and provides a background on the Pakistani economy.

It mentions how the Pakistani Government has established a body, the Small and Medium Enterprises Development Authority (SMEDA) for the formulation of policies to promote SMEs as well as the facilitation of financing and the provision of training and education to entrepreneurs. However, it quotes other studies to report that SMEs are struggling in Pakistan. They blame the Pakistan Government for policies that are not supportive of innovation, which is a crucial ingredient for entrepreneurship, due to a fear of market failure. In addition the cost of doing business is higher in Pakistan because of restrictive local government bylaws making commercial land acquisition difficult.

It quotes World Bank reports on Doing Business and on entrepreneurship that Pakistan is performing better than its regional competitors in doing business, but worse on entrepreneurship, although it is still far behind countries such as Norway, Germany and the UK. The World Bank also reported that the top barriers to business performance in Pakistan are lack of consistent electricity and political instability.

The article also reports research on the impact of Pakistan’s culture. Thus uncertainty avoidance and collectivism are adversely affecting the growth of entrepreneurial businesses. The lack of social security means severe difficulties in the event of failure, hence the uncertainty avoidance, and individualism is still lacking as most people value collectivism. Pakistan society, in general, prefers jobs over self-employment.

The Lussier (1995) Model

The model identifies 15 variables. These are (1) Capital, (2) Record keeping and financial control, (3) Years industry experience, (4) Years management experience, (5) Business plan, (6) Use of professional advice (e.g. accountants, legal etc.), (7) Education, (8) Staffing, (9) Product stage, (10) Economic stage, (11) Age, (12) Partners, (13) If parents owned a business, (14) Minority and (15) Marketing skills.

The research was obtained through personal interviews using the Lussier (1995) research study questionnaire (translated into Urdu). A business making industry average profits was considered a success and any business not currently making a profit was considered to be a failure. Data was obtained from 143 randomly selected small business respondents from a group of cities. Of the respondents 70% were categorised as successful.

Results

The model was able to predict success and failure in Pakistan for 81.8% of the businesses. The results identified four statistically significant variables in the model (out of the fifteen). These were:

(1) The need for capital. Most of the failed businesses indicated lack of capital as one of the important reasons for failure. Formal sources of finance for small businesses are limited in Pakistan compared to other countries (due to lack of collateral or guarantees) so there is more reliance on informal sources.

(2) The need for business plans. Most small business owners do not know how to develop a business plan not least due to the lack of business education.

(3) The need for proper staffing. Usually there is a high turnover rate among employees working in smaller businesses due to lower wages and heavier workloads. There is a tendency to hire workers on a daily wage basis and to disown them at any time. Small business owners are not successful in acquiring or retaining employees because of low wages.

(4) The need for partners. Businesses which started as partnerships had a higher success rate through the pooling of resources.

The article noted the differences between the results from Pakistan compared with other countries. Thus the need for capital was especially relevant for capital poor country like Pakistan, but less relevant to other capital-rich countries. Very few owners had developed business plans themselves, but the majority realised the importance and were able to find others to do it for them. The need for business partners, which was found to be insignificant in the majority of other studies was significant in Pakistan and may indicate that low capital is usually compensated through the pooling of resources.

Recommendations

The article makes recommendations to Government to resolve the problems it identified:

(1) The need for capital – Government could provide subsidies and loan guarantees.

(2) The need for business plans – Government can introduce workshops and training materials for new start-ups as well as those already in business.

(3) The need for proper staffing – make and implement relevant and flexible labour laws to reduce the high turnover rates.

(4) The need for partners – the Government when introducing workshops and training materials for new start-ups (as well as those already in business) can encourage entrepreneurs to consider partners and help them to find each other.

SMEDA’s role should be enhanced by providing more resources. It is not an expense but rather an investment that will have great returns in growing the economy. There should also be a stated government policy on entrepreneurship.

Comments

Does the model work for all industries? Small businesses differ greatly especially as staff numbers increase (although the research was just based on micro businesses with one to five full time employees as most businesses in Pakistan have five or fewer employees). A breakdown by industry was not provided, but there could be significant differences between different industries. Similarly were there any service businesses included?

Are 143 businesses a big enough sample? The research did not include businesses in the big main cities such as Karachi, Lahore, Faisalabad, Rawalpindi and Multan. These cities are very dynamic and important economically, and so their omission must raise a question mark about how representative the respondents were of the country and its small businesses.

The article touched on the overlap between age, years’ experience and years in industry as variables which are potentially the same. However, other research states the importance of a range of alternative variables which could also affect success such as:

  • leadership
  • time management
  • product/service quality
  • customer focus
  • employee empowerment
  • hire and rewarding able employees
  • long working hours
  • good communication skills
  • flexible management
  • innovation/creativity
  • attitude to risks/risk management
  • niche marketing/segment
  • legal environment
  • demand for the product/service
  • the level of competition within an industry (Porters five forces)
  • financial control
  • supply chain factors
  • personality of owner (there are numerous examples of extrovert entrepreneurs!), and
  • selling skills

The article itself notes that different variables have different importance in different countries because of local factors. This list does not discredit the article and the research it explains, but perhaps warns that there may be more variables involved than those used in the model, so that while an Einsteinian general theory of business success cannot be established, we can successfully identify some of the factors.

Overall it is a very worthwhile read, and I recommend it to anyone interested in setting up their own business (not just in Pakistan) or in the reasons for success and failure in business.

Ian Fraser

Principal and Director

References:

Hyder, S. and Lussier, R.N. (2016), “Why businesses succeed or fail: a study on small businesses in Pakistan”, Journal of Entrepreneurship in Emerging Economies, Vol. 8 Issue 1 pp.82-100

By Ian Fraser, Principal and Director, iQualify UK