3

Introduction

A Cross Cutting Issues Group work that is going to focus on describing the characteristics that
shape the management of a small enterprise activities and on the evaluation of the performance
of a small enterprise, and also at the end it is going to answer some questions related to the
entrepreneurial environment.

It is result of a research in the different kinds of printed and digital materials available in libraries
and on the internet. It is organized in introduction, development, and conclusion.
 4

1. Management of a small enterprise activities

Small and medium enterprises (SMEs) operate in the same environment as their larger
counterparts, but without the associated benefits such as adequate capital and extended human
resources of the larger organisations. SMEs encounter increasing competitive pressure fuelled by
globalisation, legislation and the relaxing of trade barriers, as well as an increase in market
expansion due to emerging technologies and innovation (SMIT and WATKINS, 2012).

Small and medium enterprises often flourish on their adaptability and agility such as their close
proximity to their customers, their openness towards new ways of working, and their risk taking
approach, but many micro, small and medium enterprise are susceptible to major external shocks
(Berry, 2002; Laforet and Tann, 2006).

Although SMEs experience difficulties in absorbing and coping with these obstacles, they need
to develop an ability to deal with the ever increasing challenges, that is, risks faced by the
organisation (Leopoulos, 2006). SME owner-managers need to escalate the importance of risk
identification and minimisation in their organizations or they can suffer catastrophic
consequences if they are ill prepared for the outcome of a possible risk. This entails that
entrepreneurs in SMEs need to be conversant with risk identification and analysis to manage
risks from a diverse range of sources (Schultz, 2001). By incorporating risk management into
SMEs operations, SMEs are better equipped to exploit their resources, thereby enabling
organisations to transform an expenditure activity into an activity that can yield a positive return
(Kirytopoulos et al., 2001; Banham, 2004).

Now before going straight to the point which this part of the work is concerned with that is the
management of a small enterprise activities there is a need of defining what a small enterprise is.
The following part of the essay defines a small enterprise in general terms which means that the
characterization will come with one additional item that is the term medium because both small
and medium are terms that come together when it comes to small businesses.

1.1. Defining small and medium enterprises (SMEs)

Although the term SME or SMME is used inter- changeably worldwide, there is no common
definition of these terms. The geographical placement of SMEs as well as country specific
legislation influences the numerous SME definitions (Leopoulos, 2006). In South Africa, the
 5

National Small Business Act 102 of 1996 (South Africa, 1996) amended by Act 29 of 2004
(South Africa, 2004) categorise small organisations into four categories namely micro
enterprises, including survivalist enterprises; very small enterprises; small enterprises; and
medium enterprises. The differentiating factor between these categories, excluding micro
enterprises, is the number of employees. For micro enterprises, the criterion is turnover level
(South Africa, 1996, 2004; Von Broembsen, 2003) (SMIT and WATKINS, 2012).

As it appears above there was an attempt to bring the closest definition of what a small enterprise
is relating to the African continent approach because a small enterprise in Africa may differ from
a small enterprise in the other parts of the world as it shows bellow:

According to (PAIK, 2011) numerous countries have their own definitions of SMEs. The number
of employees is typically used as one of the major criteria. For instance, in the European Union,
SMEs are defined as companies with fewer than 250 employees. By contrast, in the United
States, SMEs often refer to those with fewer than 500 employees. In particular, a firm with fewer
than 20 employees is classified as a very small company, a firm with 20 to 99 employees is
considered a small business, and a company with 100 to 499 workers is a medium-sized
enterprise in the United States (Ghose, 2001). The literature also reveals similar definitions of
SMEs. Most literature defines SMEs by the number of employees. For instance, Park and
Krishnan (2001) and Arend and Wisner (2005) define small businesses as ones with fewer than
500 employees. Others (Freel, 2000; Quayle, 2002) use lower numbers of employees (either 250
or 200).

Now after defining small enterprise in both African and world perspectives it is crucial to state
its role in the economy of the countries which is also going to be a little tuned to the African
perspective.

1.2. Importance of small and medium enterprises (SMEs) to the economy

The importance of small businesses is recognised in numerous African countries such as Togo,
Uganda, Ghana, Cote d’Lvoire, Nigeria, Kenya, Malawi, Burkina Faso, as well as others.
According to Rwigema and Karungu (1999), SMEs are dominant in numbers in most economies.
In First World countries like the United States of America and the United Kingdom, small
enterprises play an important role in the economy, accounting for an estimated one third of
 6

industrial employment and a lower percentage of output. In Third World countries where SMEs
dominate economically active enterprises, the SMEs prosperity is considered far more important
than in First World countries (Rwigema and Karungu, 1999).

The activities of SME enterprises in Africa (Rogerson, 2001a), is of vital importance for the
promotion of economic growth, job creation and the mitigation of poverty. However, research
conducted on SMEs in Africa by Mead and Liedholm (1998) confirmed that on average, there
are more SME closures than expansions, with approximately only 1% of micro enterprises
growing from five or less employees to ten or more. It has long been debated that SMEs are
pivotal to employment creation and economic growth, particularly in countries such as South
Africa that has a high unemployment rate, estimated at up to 40% (Friedrich, 2004; Watson,
2004).

Upgrading the roles of the SME sector in the South African economy to improve economic
growth through increasing competitiveness, and by generating employ- ment and redistributing
income (Rogerson, 2004, 2006), has been the focus of new development policies since the
democratic transition (Berry et al., 2002; GCIS, 2002). In order to aid in the facilitation of the
SME environment, the South African government tabled the National Small Business Act of
1996 amended with Act 29 of 2004 to provide equal standing to SME enterprises (Rwigema and
Venter, 2004; Ntsika, 2001) in South Africa’s economy. The vital role the SME sector plays in
the South African economy in addressing sustainable development, was highlighted by the 2003
Human Development Report (UNDP, 2003) for South Africa (Rogerson, 2004).

In South Africa, it is estimated that 90% of all formal businesses are small, medium or micro
enterprises (Rwigema and Karungu, 1999). The SME sector is one of the largest contributors to
the South African economy. The SME is not only seen as an employment creator, but this sector
also acts as an absorbent of retrenched people coming from the private and public sector
(Ntsika, 2001).

Although the SME sector is responsible for 75% of new jobs, largely due to the emergence of
new micro enterprise formations, it compares poorly to Asian countries where SME employment
contribution is estimated at 80% (Friedrich, 2004; Watson and Godfrey, 1999). Even in countries
less developed than South Africa, their SME sector contributes a much higher proportion to the
GDP and employment (UNDP, 2003; OECD, 1997 1 cited by Watson and Godfrey, 1999). It is
 7

noted that the majority of South African SMEs are micro and survivalist enterprises which show
no signs of enterprise growth due to inadequate firm dynamics, resulting in SMEs conservative
contribution to employment compared to other countries. Even in dynamic South African SMEs,
it seems that a ‘jobless growth’ strategy (Kesper, 2000) is employed (SMIT and WATKINS,
2012).

The South African government has identified the SME sector as the means to achieve accelerated
economic growth. However, this objective was not achieved partly due to the high failure rate of
80% of enterprises (Watson, 2004; Van Niekerk, 2005) in the SME sector. As SMEs growth
depends to a larger extent on the macro economic growth, it can be said that the slack micro
economic growth of the past few years has inhibited entrepreneurial performance and therefore
SMEs to grow to their full potential (Watson, 2004; Berry et al., 2002). SME failure can further
be partly ascribed to the lack of management skills. South African SMEs do not aspire to
corporate governance best practices such as the non- compulsory implementation of King III
(King, 2009). Risk management, a component of King III, is therefore, also regarded as an
optional organisational activity, and not as a vital component to organisational success (SMIT
and WATKINS, 2012).

1.3. Factors that influence a small enterprise expansion and success

Studies have identified a number of factors that influence enterprise expansion and success. A
fundamental element (McGrath and King, 1996; Rogerson, 2001a) that has a positive impact on
an organisation’s growth is the depth of “human capital” or “brain power”. The importance of
human capital as a critical success factor was also confirmed in a study conducted on African
enterprises where it was determined that successful entrepreneurs more likely have education
and training beyond the primary school level (Rogerson, 2001a). The merit of this finding is
based on the argument that entrepreneurs with a greater level of education and training are more
able to adapt their business to the ever changing business environment. In a study conducted on
enterprise success factors in SMEs Gauteng, South Africa, it was concluded that a lack of
technical and managerial skills (Brink et al., 2003; Rogerson, 2008) impedes on business
development. Research conducted on SME failures in South Africa revealed that failure was
primarily caused by a lack of management skill and training. This finding is confirmed
(Rogerson, 2008) by 90% of a sample of 1000 entrepreneurs who believe that SME failure is due
 8

to a lack of managerial skills. However, taking the importance of training and skill into account,
it is cautioned by Rogerson (2008) that skills are not the only or even primary answer to the
challenges facing SME development (SMIT and WATKINS, 2012).

There are also other kinds of factors that play a very important role in a small enterprise
management as support.

According to the basic categories of resources, the help/support that can be provided to SMEs is
divided into two main types: financial and non-financial support.

Financial support – money is the key resource of this type of SMEs support. More precisely, it
refers to the financial help of various institutions and organizations to start new business (start-up
loans) or to improve the business of existing SMEs (loans to finance current operations). In many
cases, money that is given to support SMEs is not a help itself, but a resource for the
achievement of specific objectives, so it must be spent on planned activities. (For example, the
support institutions provide funds to SMEs for: purchase equipment, employee trainings, export
activities and innovation of products/ services/ processes/ management). Financial resource, as a
form of support, is necessary for the development of new business ventures. Patzelt and
Shepherd (2009, p. 322) claim that entrepreneurs can achieve their strategic goals only if they
have sufficient funds and available sources of funds (RAKIĆEVIĆ et al, 2012).

Non-financial support refers to support that does not include money as a resource of support. It
is some kind of service: consulting, mentoring, training and seminars in various educational
fields (e.g. legal aspects of operations, business planning, marketing, finance, human resource
management, change management, innovation), intended for "managers" of SMEs (owners,
entrepreneurs and managers). The main objectives of non-financial support are knowledge and
competence improvement of the SMEs‟ owners, management and employees. The non-financial
form of support may also include: the transfer of technology, help with business networking
(entrance into clusters and other associations), contribution to the SMEs‟ reputation and
promotion, reduced administrative barriers and increase of tax incentives, but also a platform for
business development - such as business incubators and technology parks (RAKIĆEVIĆ et al,
2012).
 9

Non-financial support includes provision of resources and activities combination. The most
important are: a) Technology transfer is very important for the development of the enterprises in
many countries, so support measures for this process are created (such as: Technology Transfer
Agencies and Technology Transfer Offices); b) Entrepreneurial networking - an important form
of non-financial support, which refers to the formal and informal links of entrepreneurs and
SMEs with other individuals and organizations, through which they do economic transactions.
Those networks can provide access to important knowledge and improve the visibility and
reputation of a new business ventures. Support creators use them for placing numerous support
program this type of support (entrepreneurial networking) for numerous support program (e.g.
for formation of clusters); c) Knowledge - a very important resource for the development of
every company and one of the most important sources of competitive advantage (Spicer &
Sadler-Smith, 2006, p.133). According to the Knowledge based theory, it is a basic
asset/resource for any company. All other resources depend on it (Chirico, 2008, p. 434). There
are three very important types of knowledge: 1 - knowledge about management and development
of existing business or newly established company; 2 - knowledge about processes of products
and services development and production; 3 - knowledge about market, where the new company
will operate; d) Removal or reduction of administrative barriers allow entrepreneurs to focus on
daily operations and finding new business opportunities in their environment (because high
levels of bureaucracy and administrative barriers have a negative impact on new business
ventures development, according to Patzelt & Shepherd, 2009, p. 326); e) Tax incentives - they
can be an excellent form of support, so the governments of many European countries provide
large number of them (e.g. reduction of tax rates and respite in tax payment) (RAKIĆEVIĆ et al,
2012).

1.4. Small enterprise management problems

SME owner-managers are most conversant with their enterprises, but are frequently not able to
identify all the factors impacting on their enterprise activities and/or overrate the significance of
external factors, while underrating internal weaknesses (Kesper, 2000). According to Naicker
(2006), problems experienced by SMEs can be categorised as follows:

i. Economic based problems: SMEs success is tied in with the local economic conditions as the
SME sectors market growth is usually at the same rate as the macro economy as a whole,
 10

therefore, if there is an economic downturn, SMEs will usually also experience difficulty (Berry
et al., 2002). ii. Enterprise based problems: Internal factors such as human resource problems
encompassing poor staff planning, multi-functional management, high employee turnover
rate, inadequate trained employees, low productivity and difficulties in recruiting quality
staff (Rogerson, 2004; Beaver, 2002; Williamson, 2000; Lighthelm et al., 2002; Watt, 2007) are
impediments to SME success. It is argued that the role of labour, labour markets and skills levels
are the most important factors contributing to small enterprise growth (Berry et al., 2002).

Managerial skills not only influence owners perceptions regarding their business, but various
literature sources (Watson, 2004) acknowledge that a lack of managerial skills and training is an
important cause of enterprise failure (Naicker, 2006) complimented by lack of experience and
lack of organisational culture acting as an impediment to the establishment of SMEs. The owner-
manager’s characteristics (O’Gorman, 2001) can also act as a barrier to growth in that the
personality, managerial skills and style including the entrepreneur’s and/or management’s
negative attitude towards change can negatively influence an enterprise (Leopoulos, 2006;
Naicker, 2006).

iii. Industry related problems: According to Naicker (2006) and Haung and Brown (1999),
market related factors that exerts the most negative influence on enterprise success are increase
competition, limited market size, low demand, inefficient marketing, poor competitor
understanding, poor location and market understanding and the inability to identify the target
market (Naicker, 2006; Watt, 2007). South African SMEs are hampered by a structural
problem, in that, South African SMEs, contrary to SMEs in other developing countries, do
not complement larger organisations with specialised products or services, but they compete with
larger enterprises in the same product markets (Rogerson, 2004), albeit for different consumer
segments. For SME owner-managers it is important to identify the most problematic areas in
managing their small enterprise. By identifying the problem areas, owner-managers can address
problems through education, training and information gathering activities (Huang and Brown,
1999).

It seems though that small enterprises usually face problems that can be overcome by using the
risk management that some authors propose:

1.5. Exploiting risk

 11

According to Plourd (2009), the importance of risk management is now escalated above issues
such as long-term and short-term financing constrains. Proclai- ming the existence of a risk
management strategy is insufficient, enterprises need to actively engage in risk management
practices to address the convergence of major risks as experienced in the current economic
climate where the credit crisis risk, fluctuating commodity prices, increased government debt,
rising unemployment and declining consumer spending are impacting individually and
combined, on enterprises.

The use of enterprise risk management (ERM) can be viewed as a business competency enabling
managers to optimise opportunities associated with risks (Hofmann, 2009). ERM should apply
basic risk management activities, embedding the risk champion’s knowledge of exposures,
across the entire scope of an enterprise’s risks such as strategic risks, operational risks, financial
risks and regulatory compliance risks (Engle, 2009), and should not be reduced to a process
based solely on risk formula’s (Bradford, 2009).

A structured risk management approach enables an enterprise to pursue its strategies

aggressively and efficiently as management can anticipate the risk exposure of each activity
engaged in, thus achieving more acceptable results at a reduced cost (Ntlhane, 1995).

Risk management for small business

Risk and risk management is a major concern for all companies, especially small and medium
sized enterprises which are particularly sensitive to business risk and competition (Alquier and
Lagasse, 2006). In SMEs, the risk management function usually resides with the owner’s
assessment of threats and opportunities pertaining to the enterprise (Watt, 2007). Although risk
management principles are common to all types of enterprises, the owner-manager’s risk
perception and his attitude towards risk management influences the adequacy of the enterprise’s
risk management actions deployed (Ntlhane, 1995).

Implied in SME, risk management is the core principle that entrepreneurial or management focus
should be focussed at recognising future uncertainty, deliberating risks, possible manifestations
and effects, and formu- lating plans to address these risks and reduce or eliminate its impact on
the enterprise (Ntlhane, 1995). One of the skills required of entrepreneurs is the ability to
identify and analyse risks to ensure that advantage is taken of calculated risks (Watson, 2004).
 12

According to Watt (2007), SME owner-managers should take regard of the following steps in
their risk management process:

i. Establishing the SMEs risk strategy

ii. ii. Determining the SMEs risk appetite
iii. iii. Identification and assessment of risk
iv. iv. Prioritising and managing risks

The fact that a risk is beyond the control of the owner- manager, does not absolve the owner-
manager from the need to anticipate the risk, and reducing the impact of the risk occurrence to
achieve organisational goals. Owner- managers should furthermore take cognisance of
managerial risks that arise as a result of the owner- managers own actions when planning and
executing business strategies (Berkeley et al., 1991). South African SMEs owner managers
should be educated in risk management principles, risk handling techniques available and risk
control programmes that can be used, but care should be taken in the application of risk
management principles, as although risk principles are common to all types of enterprises, the
application thereof differs substantially between small and larger enterprises. However, many
SMEs practice intuitive risk management when they assess the risk involved in decisions
(Ntlhane, 1995; Dupre, 2009).

Components of risk in small enterprises

Determining the components of total risk in SMEs is complex due to SMEs great heterogeneity
as well as difficulty in separating property from management (St- Pierre and Bahri, 2006).
Entrepreneurs have implied (St- Pierre and Bahri, 2006), inconsistent (LeCornu et al., 1996), and
in certain instances, unique (Naffziger et al., 1994) objectives that exerts both direct and indirect
influences on management practices, rendering comparisons between SMEs difficult.
Information derived by way of financial data analysis cannot yield all the dimensions of
enterprise performance, as emphasised by St-Pierre and Bahri (2006). Strategic information such
as quality, client satisfaction, and innovation reflects the enterprise’s competitiveness and
performance, but are not forthcoming in the income earned. Cumby and Conrod (2001)
emphasises that long term sustainable financial performance is attributable to non-financial
factors like client loyalty, employee satisfaction and internal processes. This view is
affirmed by Ittner and Larcker (1998) who states that the investment in intangible assets, that is,
 13

client satisfaction, is not accommodated in the accounting data. The same argument applies to
the risk of an enterprise that is difficult to understand if attention is solely directed at the
financial statements. Through the incorporation of non- financial data, the problems associated
with the manipulation of financial statements are reduced. By following a systematic approach
and by taking into account both financial and non-financial information related to the
organisation, an enhanced understanding of SME risks can be achieved (St-Pierre and Bahri,
2006).

Small enterprises inadequately manage their risk

Few SME owners and managers are risk aware and they focus their risk actions on “loss control”
programmes in areas of fire, safety, security, health, and quality assurance. These “loss control”
programmes are overseen either by the entrepreneur or other management along with their other
duties; therefore, increasing the chance of mismanagement as adequate time is not spent on the
risk function. As no structured risk identification is undertaken by SMEs, SMEs assume unaware
or unplanned risk exposure to their limited financial resources. Control measures implemented to
counter risk are ineffective as controls are reactive and non-automated (Ntlhane, 1995).

To limit the effect of risks on the enterprise, risks need to managed/controlled once it has been
identified. In SMEs, the control of risk exposure is construeded reactively, holding disastrous
consequences for the enterprise as losses are taken on while the enterprise is ill prepared to
finance the loss. In most SMEs, risks are left unmanaged till it realise, only then spurring on
action to address it (Ntlhane, 1995).

Through interviewing, Ntlhane (1995) confirms that SME owners and managers are not versed in
the availability and use of risk reduction techniques (that is, risk elimination/avoidance,
reduction, transfer or acceptance) to reduce the adverse effects of risks on the enterprise. It can
be gleaned from the interviewee results that entrepreneurs prefer avoiding risks, but they fail to
take into account that every risk action undertaken by them has an effect on the risk pattern.
Thereby, although a specific risk is avoided, the probability or impact of other risks may change
and new and potentially serious risks can be created. The study identified that entrepreneurial
actions are centred on avoiding risk, rather than devising risk control methods. This impedes on
the economic progress of a country as every business can be defined by its ability to take on
greater risks. Apart from risk avoidance, the study identified risk transfer as the alternative risk
 14

technique used by SMEs, whereby insurance brokers were contracted to undertake all risk
actions, that is, risk identification, risk assessment, risk control and risk financing. Risk retention
techniques whereby risks are financed by internal reserves such as current income are little
known and rarely applied in SMEs (Ntlhane, 1995).

Rationale for developing a strategic risk management strategy

Entrepreneurs operate in a macro, micro and market environment that is affected by numerous
internal and external influences which continuously change. These ‘change factors’ enable an
entrepreneur to identify opportunities and threats (Watson, 2004). It is therefore essential that an
entrepreneur has the capability to evaluate decisions to determine the enterprise’s future strategy
(Watson, 2004). Strategic risk management enables SME owner-managers to objectively
evaluate their actions. One of the difficulties encountered in risk management is that most risk
assessments are linked to a specific discipline which is not necessarily known by owner-
managers. Furthermore, owner-managers may be able to identify the obvious risk, but their depth
of risk knowledge may impede on their activities to identify indirect risks, or to take cognisance
of the inter-connecters of risks (Watt, 2007).

Watson (2004) emphasizes that owner-managers should develop a risk strategy to avoid,
reduce or respond to potential risks. It is therefore essential that owner-managers are equipped
with the necessary skills to compare risks and to identify appropriate risk strategies in adequately
addressing these risks. Depending on the specific circumstances, owner-managers should engage
in actions limiting the probability of risk occurrence, or if need be, to plan strategies that
maximise the probability of recovery (Watt, 2007).

By embedding a strategic risk management strategy in the SMEs processes, significant

advantages can be achieved, such as (Watt, 2007):

i. It ensures that the SMEs activities are aligned to its mission and objectives, and not
diverted by external influences.
ii. ii. It ensures that organisational activities comply with industry best practices and that
regulative compliance is achieved.
iii. iii. It may provide legal protection if difficulties occurs. iv. It may result in cost
savings by reducing insurance expenses.
 15

2. Evaluate the performance of a small enterprise

2.1. Definition of performance

Performance is a widely used concept in many areas. Usually, performance is a measure of how
well a mechanism/process achieves its purpose. In enterprise management, Moullin (2003)
defines an organization’s performance as “how well the organization is managed” and “the value
the organization delivers for customers and other stakeholders.” For the purposes of this
research, ‘performance’ is related to achieving stockholder/investor interests (WU, 2009).

Measuring performance is a multi-dimensional concept. Effectiveness and efficiency are the two
fundamental dimensions of performance; this is emphasized by Neely, Adams et al. (2002):
“Effectiveness refers to the extent to which stakeholder requirements are met, while efficiency is
a measure of how economically the firm’s resources are utilized when providing a given level of
stakeholder satisfaction”. To attain superior relative-performance, an organization must achieve
its expected objective with greater efficiency and effectiveness than its competitors (Neely
1998). To illustrate efficiency, effectiveness, and the value delivered, multi-measures should be
used. Though their forms vary widely, financial indicators are traditionally used; Neely (1998)
further expounded upon manufacturing performance measures, suggesting that five key-
dimensions should be assessed: quality, delivery speed, delivery reliability, price (cost), and
flexibility. By measuring all of these factors, performance is thus balanced and multi-
dimensional, better reflecting stockholder interest (WU, 2009).

In this study, performance is defined as the extent to achieving proposed objectives using
resource economically in the face of internal/external environment (stockholders, competitors,
society).

Due to the lack of academic resources focusing on performance evaluation of small enterprises
the work is going to talk about performance measurement of a small enterprise due to the fact
that evaluation and measurement being similar words.
 16

2.2. Performance measurement

Before 1980, financial data was used in enterprises as the main performance measure. After late
1980s, scholars were aware that financial data, alone, does not capture comprehensive
performance information and, hence, does not completely capture or predict future performance.
Thus, a balanced and multi-dimension concept was developed. This section briefly reviews this
concept (WU, 2009).

2.3. Definition of Performance Measurement

Although much research has been conducted on the issues of performance measurement the
definition of performance measurement is still debated. Neely (1998) defines Performance
Measurement as “the process of quantifying the efficiency and effectiveness of past actions
through acquisition, collation, sorting, analysis, interpretation and dissemination of appropriate
data”. Moullin (2003) thought that while Neely’s definition describes the process, “it does not
give much guidance to organisations about what it is essentially all about.” He suggests that
another definition may be more apt: “performance measurement is evaluating how well
organisations are managed and the value they deliver for customers and other stakeholders”
(Moullin 2003). Moullin (2003) argued that his definition clearly shows the purpose of
performance measurement and emphasizes the assessment both of the value an organisation
gives to its various stakeholders and the way the organisation is managed. Nanni et al. (1990)
defined performance measurement as “a means of monitoring and maintaining organisational
control which is the process of ensuring that an organization pursues strategies that lead to the
achievement of overall goals and objectives.” Amaratunga and Baldry (2002) provided a more
specific definition of performance measurement: “Measurement provides the basis for an
organisation to assess how well it is progressing towards its predetermined objectives, helps to
identify areas of strengths and weakness, and decides on future initiatives, with the goal of
improving organisational performance.” This definition illustrates the role and the process of
performance measurement clearly from different aspects (WU, 2009).

As identified from the above definitions, performance measurement is a structured system and a
process of gathering, monitoring, and assessing the information about an organization’s
activities, in order to achieve the proposed goals and objectives. In this study, the goals and
 17

objectives concern an organization’s strategic objectives, a business unit’s business goals and
objectives, and personal business commission.

2.4. Functions of Performance Measurement

Generally, the function of performance measurement can be categorized into the following four
aspects (Neely 1998):

(1) Checking position. Establishment of current status and monitoring of progress over time and
against benchmarks.

(2) Communicating position. Communicate with shareholders, customers, or employees by

releasing annual reports, etc.

(3) Confirm priorities. Performance data provide insights into what is important to a business,
thus exposing shortfalls that allow organisations to identify priorities.

(4) Compel progress. The measures can help organisations focus on specific issues and
encourage people to search for ways to improve performance. The measures communicate the
priorities and can form the basis for reward.

The above summary actually suggests a clear flow map for performance measurement, i.e. (1)→
(2)→ (3)→(4). Indeed, many SMEs apply PM for quality management. It is observed that the
above four points cover the roles of PM from the perspective of quality management (Oakland
2004):

• Tracking progress against organizational goals (represented in the above point (1));

• Identifying opportunities for improvement (represented in the above points (3), (4));

• Comparing performance against internal standards (represented in the above points (1), (2));

• Comparing performance against external standards (represented in the above points (1), (2)).

Therefore, the role of performance measures is to control processes and to enforce continuous
performance improvement by quality improvement teams. That is, measures should supply
 18

information about how well processes and people perform, the goal of which is to motivate better
future performance (WU, 2009).

An in-depth illustration of the above functions (3) and (4) of performance measurement is made
in (Godener & Soderquist 2004) , which summarized the use of performance into four groups,
based on Kerssens-Van & Bilderbeek’s (1999) study of 19 uses of performance on four different
organizational levels:

• Use of performance measurement results for personnel evaluation, promotion and incentives
(promotion prospects, salary, project participation, bonuses)

• Use of performance measurement results for resource allocation (project participation,

forming/dissolving teams, assignment of new projects and of resources)

• Use of performance measurement results for control/correction (control, correction,

reorganisation)

• Use of performance measurement results for learning/continuous improvement

Note the usage of performance measurement results for resource allocation is highlighted in
Godener & Soderquist (2004)’s summary. This is important for SMEs, whose development is
usually limited by resource (WU, 2009).

2.5. Performance measurement frameworks

Overview of Performance Measurement Frameworks

To overcome the shortcomings of traditional measurement systems, various holistic performance

measurement frameworks were developed after the late 1980s. The common, changed approach
in each of the theories echoes a multi-dimensional approach, which seeks to balance financial
and non-financial measures. Kennerley & Neely (2000) had summarized the characteristics of
performance measurement frameworks:

1. The measures used by an organization have to provide a ‘balanced’ picture of the business.

2. The framework of measures should provide a succinct overview of an organization’s

performance.

3. The performance measures should be multi-dimensional.

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4. The performance measurement matrix (PMM) provides comprehensive mapping. It is possible

to map all possible measures of an organization’s performance onto the framework and identify
where there is omission or a need for greater focus.

5. The performance measures should be integrated across the organization’s functions and
through its hierarchy.

6. The performance measurement system can provide data for monitoring past performance and
planning future performance. It implies the measures should measure both results and the drivers
of them.

2.5.1. The Balanced Scorecard

The Balanced Scorecard (BSC) (Kaplan and Norton 1996) is perhaps the most well-known
performance measurement framework. Many people even believe it is the most important and
widely used management theory of the 20th century. BSC suggests managers to view
organization’s performance from four perspectives (see Figure 2-1):

(a) How do customers see us? - Customer perspective

(b) What must we excel at? - Internal perspective

(c) Can we continue to improve and create value? - Innovation & learning perspective

(d) How do we look to shareholders? - Financial perspectiveBSC incorporates financial and non-
financial measures in one measurement system. The objectives and measures of BSC are derived
from an organization’s vision and strategy. The Balanced Scorecard provides executives with a
comprehensive framework that translates a company’s vision and strategy into a coherent set of
performance measures (WU, 2009).

According to Kaplan & Norton (1996) “the balanced scorecard not only allows the monitoring of
present performance, but also tries to capture information about how well the organization is
positioned to perform in the future”. Furthermore, the Balanced Scorecard has evolved to
become a core management tool, in that it helps CEOs “not only to clarify and communicate
strategy, but also to manage strategy.” In practice, companies use the BSC approach to
accomplish four critical management processes:
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1. Clarify and translate vision and strategy

2. Communicate and link strategic objectives and measures

3. Plan, set targets, and align strategic initiatives

4. Enhance strategic feedback and learning.

The four perspectives in the BSC model are regarded as a chain of cause-and-effect. For
example, financial performance depends on a customer’s loyalty, which is influenced by an
enterprise’s internal/business processes. Similarly, internal business processes are dependent on
employee’s skills (leaning and growth). A good Balanced Scorecard should have an appropriate
mix of outcomes (lagging indicators) and performance drivers (leading indicators) of the
business unit’s strategy (Kaplan & Norton 1996)

Kaplan & Norton (2001) pushed the BSC to a new level: the ‘strategy map’. ‘The strategy map
describes the process for transforming intangible assets into tangible customer and financial
outcomes. It provides executives with a framework for describing and managing strategy in a
knowledge economy (WU, 2009).

Though the Balanced Scorecard is widely lauded, numerous authors have identified
shortcomings:

• The Balanced Scorecard neglects the most fundamental question – the competitor perspective
(Neely, Gregory et al. 1995)

• The approach used by the Balanced Scorecard is not consistent with a complete performance
measurement system; rather, it merely provides senior managers with a tool to monitor
performance against strategic and operational objectives (Brignall 1991; Brignall, Fitzgerald et
al. 1991; Gomes, Yasin et al. 2004)

• The BSC is more like a strategic management tool than a true, complete PM system (Kaplan
and Norton 1996)

• The BSC does not address the stockholders (end user, employee, suppliers, regulators, pressure
groups and local communities). The BSC does not take a broad enough view of the stakeholders
who interact with an organization (Neely and Adams 2001).
 21

• “The scorecard has floundered as a device for measuring and rewarding performance.” (Meyer
2002)

• The BSC is just taken as a boilerplate. It is hard to work in many enterprises (Ittner and Larcker
2003).

• It does not reflect different dimensions of performance addressed by the SMART pyramid or
Results and Determinants Model. Neither the customer nor internal perspective are defined in
terms of performance-dimensions that regard success, such as the generic strategic-objectives of
quality, cost, delivery (speed and reliability), and flexibility (Neely 2002).

• Kaplan and Norton promote the application of strategy maps (as noted above); they only
weakly develop this, however, since they fail to break them down into their vital components –
the potential for success and the potential for failure (WU, 2009).

Organizations have many opportunities, but they also face several threats; their measurement
systems need to be able to capture both so that executives can manage the business with a clear
view of both scenarios (Neely 2002).

2.6. Small Enterprise performance measurement

2.6.1. Challenges and Features of Performance Measurement in SMEs

Measuring SME performance is complex and challenging work (Brush and Vanderwerf 1992;
Murphy, Trailer et al. 1996; Sapienza and Grimm 1997; Amason, Shrader et al. 2006). The
challenges are usually distinct from those of large organizations and, because most existing
performance measurement systems were designed for the latter, few tools are available for
SMEs. The main challenges to measuring performance in SMEs are as follows:

First, collecting performance information from privately held SMEs is often difficult due to a
lack of historical information and accessibility. The information is often imperfect and the
accuracy is hard to be checked even if the information can be obtained. For example, traditional
financial measures of performance are often unavailable (Brush and Vanderwerf 1992, Chandler
and Hanks 1993; Wang and Ang 2004).
 22

Second, financial data is difficult to interpret (Barnes, Coulton et al. 1998). This is because
SMEs usually have small starting base, enormous and erratic growth rate and uneven record-
keeping (Sapienza and Grimm 1997).

Third, many measures, such as future profits and survival, require a longitudinal sample-design.
It is inappropriate to use such measures on an SME, however, due to the group’s typically short
operation-history (Brush and Vanderwerf 1992, Chandler and Hanks 1993; Wang and Ang
2004).

Fourth, financial data is often influenced by industry-related factors (Wang and Ang 2004). The
performance measures for ICT SMEs present a different connotation from that for traditional
industries (WU, 2009).

Fifth, there exists possible source bias, e.g. owner/founder might manipulate the related
information in propaganda (Brush and Vanderwerf 1992).

Sixth, SMEs’ future and potential performance is more important than lagged-performance. This
requires that performance measurement systems not only measure lagged performance, but also
capture future performance (Kaplan and Norton 1992).

Seventh, Most SMEs focus on day-to-day operations. There may not be enough resources to
execute comprehensive PM measurement (Stephens 2000).

Finally, the decision-making processes in SMEs are always not formalized and their strategies
are often poorly planned, which influences the standard PM system employed in SMEs
(Garengo, Biazzo et al. 2005).

3. Additional questions answers

1. There is no one definitive profile to be a successful entrepreneur. Successful
entrepreneurs come in various ages, income levels, gender, and race. They differ in
education and experience. But research indicates that most successful entrepreneurs share
certain personal attributes, including: creativity, dedication, determination, flexibility,
leadership, passion, self-confidence, and “smarts.”
 23

2. Most entrepreneurs are risk takers by nature. They sometimes face losing everything they
invested into a start-up business. When choosing this career path, they leave security as a
wage earner behind as well as extra time to spend with their family, all in order to create
something new. In more cases than not, entrepreneurs face a point when unfortunate
events occur as a result of failed attempts at risky endeavours. Further risks include
building a brand with no credibility.
3. Some economists consider entrepreneurship as a factor of production because it can
increase the productive efficiency of a firm. Many of the definitions place entrepreneur in
same critical category as consistently identified factors of production.

Conclusion

This group work had two main topics: management of a small enterprise activities, and evaluate
the performance of a small enterprise.

According to the work there is no strict definition of small enterprises. Different countries have
different definition of small enterprises. The typical definition is based on categorization by the
maximum number of staff and annual turnover.

It also highlighted the fact that to evaluate the performance of a particular small enterprise there
are many steps to follow and such steps do not have to be the same as large enterprises
evaluation steps because small enterprises usually are not very well organized, do not have many
resources, employees and the financial resources.
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RAKIĆEVIĆ, Zoran et al. Improvement of SMES environmental support planning based on new
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