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26 Jun 2015 00:00
The N2/Edgecombe interchange construction site in KwaZulu-Natal. (Photo: Brett Eloff)
The relationship between small to medium enterprises (SMEs) and large organisations is often volatile and fraught with issues. This partnership has the potential to ignite growth across both levels of industry, but it can often be perceived as David versus Goliath as big business takes large bites out of small pies. However, the National Development Plan 2017 has made it clear that the small business and co-operative sit at the centre of the war against unemployment and broad based black economic empowerment codes encourage the enterprise to invest in the SME.
It’s now time for both sides to look at building new clichés and fences rather than to focus on the mistakes of the past.
“In the current economy it is more sustainable to have SMEs and big businesses working together,” says Zinzi Mgolodela, Woolworths head of BEE and transformation. “In a changing business environment with automated processes and cost efficiency strategies becoming an increasing trend, we have found that we are making a better contribution to job creation through the development of SMMEs.”
Woolworths has built a name on their engagement with the SME and have fostered a number of relationships across South Africa. The company works with small firms to assess their capacity, skills, business acumen and technical capabilities to serve the market and provides start-up loans to kick start their entry into the market. This investment underscores the value in the relationship between big and small — if the enterprise is willing, it can provide the SME with a rich resource for growth.
“SMMEs can acquire skills by working with big business,” says Paolo Destro Cappellano, project manager at CMC di Ravenna. “These include new ways of thinking, working with targets, quality assurance and non-conventional methods of construction. SMEs can also develop higher standards by partnering with larger enterprises.”
CMC di Ravenna was the primary contractor for the Mount Edgecombe Interchange on the N2 and their contract stipulated that 12% of the total expenditure had to be on sub-contractors that were SMEs. To date 15% of this expenditure to date has been generated by seven companies in the SME sector.
“SMMEs create more than 50% of all employment opportunities in South Africa while contributing 45% of the country’s gross domestic product,” says Frans Borain, director of Duncan’s Industrial, one of the SMEs currently working on the Mount Edgecombe project.
“Big business gives us the opportunity to be part of a large contract alongside invaluable experience and transfer skills.”
Enterprise investment also supports the SME when it comes to economies of scale. For Borain, the SME is not in a place to afford to purchase all of the materials needed on a site and the larger corporate addresses this challenge. For Jules Newton, chief executive of Avocado Vision, the principle is the same.
“Big business is where the resources are. Although there are also many SMEs who manage to earn a living in the retail and retail services sectors where their consumers are, even they may depend on big business for providing elements in their supply chain.”
Alison Deary, chief executive of MOM Diary, agrees, but she has held the sting in the tale: “The only way that I can come in at a reasonable price to my direct customers is to have a retail or corporate order to piggy back on. However, after building a steady market with a large retailer over a four-year period, they decided to stop buying from me and manufacture a similar product of their own. All the risk was on me and, once the market had been established, they then did this to increase their bottom line.”
Another common complaint by the SME is the money issue. The cash flow of the small firm is central to its success and often complexities around payment and contract terms can see the enterprise potentially signing the SMEs death warrant.
“Big business determines payment terms and often stretches these, putting the small business under huge pressure,” says James McKerrell, chief executive at CRS Technologies. “Fixed prices and hard payment terms can be detrimental to the success of the business.”
Borain agrees: “A major challenge for SMMEs is limited credit facilities and this creates cash flow problems to pay for materials and wages. Big business can hurt the small one by making short payments which can affect cash flow.”
Deary’s situation is a case in point. Her payment terms with the printer were a 50% deposit on placing the order and the balance on receipt of the stock. The retailer paid only 90 days after delivery and only once the goods were sold and kept the full amount of the rebates. From an expected payment of R110 000 she received only R19 000 and had to wait for the rebate refund that was calculated in the retailer’s time frame, not one that would keep her in business.
“There should be more balance in the profit making as it is completely unacceptable that the retailer makes almost double what the manufacturer makes and carries no risk,” says Deary.
This particular situation is not unusual and has the potential to see the end of a brand or a business as their cash flow dries up. However, many organisations — big and small -— are quick to emphasise how important it is that this change and how things are already starting to change.
“The biggest threat is to run out of cash,” says Judi Sandrock, co-founder and joint chief executive at MEDO. “The department of trade and industry has introduced incentives to pay small businesses within 15 days and big business should take advantage of this.”
Many organisations have worked towards making the relationship between the SME and the enterprise into one that can be more sustainable and rewarding. Woolworths has established programmes to support the SME and its entry into markets and supply chains with a number of initiatives such as their business development support, financing, business case development and assessment of capacity requirements. The Sanlam-ASISA Enterprise and Supplier Development Programme provides small firms with in-depth business development support over an eight to twelve month period and Standard Bank backs The Growth Engines TV Series that examines entrepreneurial activity across key sectors of the South African economy.
“It makes good business sense for big business to outsource certain services to an SMME to ensure profitability and efficiency in the value chain,” says Mgolodela. “Our role as big business does not end at being good corporate citizens, but it extends to our responsibility to create a sustainable economy.”
There is value in entrepreneurship and in the development of the small to medium enterprise in South Africa and the corporate has a role to play. SMEs can learn from the enterprise, a truth that’s almost painfully obvious, but this goes both ways.
Raubex Construction is currently working on the rehabilitation of the N8 between Sannaspos and Thaba Nchu and has exceeded its contractual obligation of 12% of total contract expenditure on black owned SMMEs at 15.6%. “Big business needs the small contractors to perform the smaller jobs within the main contract so that it – the larger enterprise – can concentrate on the more specialised tasks,” says Konkie Fourie, contracts manager at Raubex Construction. “Also SMMEs can more easily provide the workforce that is needed on site and help us meet the contractual obligations imposed by SANRAL which is committed to promoting and implementing government programmes for BBB-EE and sustainable development.”
One of the organisations currently working with Raubex is Women’s Pride Civils and the owner, Martha Mhlauli, says: “Big business needs the SMME for their BEE ratings. I challenge big business when they want to unnecessarily make things difficult. If the small business owner is confident that it is performing its work properly, then there should be no fear of big business. When I notice that big business wants to use its muscle, I sit down with them and explain why we need each other.”
Mhlauli is not alone in recognising the power of the small firm, understanding that the relationship works both ways and that sometimes the enterprise is in need of what the SME can provide.
“Small businesses are typically more agile and thus more able to innovate,” says Jenny Retief, chief executive of Riversands Incubation Hub. “Together with the high level of focused customer service that the small business is better able to provide, big business can benefit greatly from a diversified supply chain that includes the SME. In addition, terms of BEE legislation means that the larger enterprise stands to gain valuable scorecard points when procuring from small black-owned businesses and providing them with supplier development support.”
The issue that remains is that many SMEs are bitter about the relationship with the enterprise, often claiming that their power is unfairly used to dominate the terms and conditions of contracts and deliverables. The next step needs to be in building up a far better rapport and finding ways of managing the challenges.
“Past encounters with potentially predatory big businesses may hinder future relationships and partnerships with SMMEs,” says Ethel Nyembe, head of small enterprise at Standard Bank. “The adage — once bitten, twice shy — rings true in this scenario and may prevent growth trajectories for the SME. Overcome this by doing your homework, reading the fine print and voicing concerns before entering into a contract. Understand what aces your business brings to the table — if you don’t know what value your business has, big business will quickly figure this out.”
“SMMEs need to realise that they are essentially in control of their own destiny and the extent to which they will engage with large corporate enterprises,” says André Fourie, operations manager at Network Alliance. “The only way to do this is to be perceived as credible, respected and trustworthy, which is achieved by offering innovative solutions and products and by building a track record of demonstrated delivery.”
Sandrock adds: “All relationships are built on trust and this takes time to build. Both parties need to be trustworthy and manage expectations, never promising what you cannot deliver. Don’t say ‘yes’ when you should say ‘no’. Business relationships may not take long to build, but they can be broken equally as fast.”
While the challenges remain, the fact is that both the enterprise and the SME need each other, especially in the South African context. The relationship can be sustainable and built on mutual trust, it can result in growth for both businesses and it can be mutually beneficial in learnings across the board.
“If the SME gets it right, they are able to build a sustainable business that will have great opportunities for growth,” says Amanda Pillay, programme manager for the Sanlam-ASISA Enterprise and Supplier Development Programme.
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