Description
The study investigated the impact of level of experience and education on the profitability of the small grocery shops in the Mdatsane area in East London Metropole area in South Africa.
Impact of Level of Education and Experience on
Profitability of Small Grocery Shops in South
Africa
Norman Chiliya
School of Business and Economics, Monash University
P.Bag X60, Rooderport,1725, South Africa
Email: [email protected], Tel: (27) 11 950 4122, Fax: (27) 11 950 4022
Prof. Mornay Roberts-Lombard
Department of Marketing Management
University of Johannesburg
Johannesburg
Abstract
The study investigated the impact of level of experience and education on the profitability of the small grocery shops in
the Mdatsane area in East London Metropole area in South Africa. The primary objective is to identify whether
experience of the business owner affects the performance of the businesses. The secondary objectives were to
determine whether age of the owner/manager, level of education, and the age of the business are significant variables
that affect the financial performance of small business operations. Quantitative data was coded into SPSS for graphs and
descriptive statistics. One way ANOVA analyses were carried out. The findings indicate that previous work experiences,
education levels, age of the owner and the length of business operation have a significant impact on the profitability of
the business.
Keywords: Experience, Education and Profitability
INTRODUCTION
Cant and Lightelm (2003:2) indicate that surveys of small business failure maintain that entrepreneurs often
have good ideas and are competent but “they do not have a clue on how to run a business and have no
underlying appreciation of business fundamentals”. Professional experience has been cited as an important
factor affecting many aspects of entrepreneurial firms. Toohey (2009:13) argues that experience takes many
guises (for example, industry experience, start-up experience, etc.) and breadth of experience is shown to be
an important factor driving the performance of firms, with the number of previous jobs positively related to
new firm performance (Lumpkin and Marvel 2007). Wanigasekara and Surangi (2011:1) elaborates that
most of the researchers have found a strong link between business experience, education and business
success. Thapa (2007) also found a positive association between education and small business success.
The likelihood of failure was also found to be associated with the owner/manager’s work experience prior to
business launch and education. For example, businesses where the owners had 10 or more years of work
experience and/or 4 or more years of college/university education were less likely to fail (Boden and Nucci,
2000).
Chrisman, McMullan and Hal (2005) reported that the knowledge gained from previous experience is
essential for small firm success. For example, Ensley, Pearson and Sardeshmukh (2007) found, perhaps
unsurprisingly, that, to achieve high growth, a technology based start-up firm must possess both technical
and business knowledge. An interesting point was that the absence of this knowledge does not imply the firm
cannot be successful it just means that the firm should follow a more moderate growth strategy that would
enable the founder to learn the necessary skills and abilities required to increase future growth rates (Ensley
et al. 2007).
Khan and Butt (2002:1) found a negative relationship between the application of skills and abilities acquired
pre-start-up and the performance of the new firm. A possible explanation for this unexpected result was that
founders had incorrectly learned the skills and abilities or applied them too rigidly in the new business
environment (Khan and Butt, 2002:1). Khan and Butt (2002:1) qualifies the finding that experience is a
negative factor affecting firm performance and provides the following measures to combat the potentially
hazardous affects of pre-start-up skills: Positive relationships between new firm performance and the
application of skills acquired pre-start-up could be achieved when there is a broad range of flexibly applied
Norman Chiliya et al, Int.J.Buss.Mgt.Eco.Res., Vol 3(1),2012,462-470
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skills as opposed to a more limited set of skills or skills applied without due consideration of the new firm’s
environment (Khan and Butt, 2002:1).
Robinson and Sexton (1994:141) argue that literature is full of folklore focusing on high school drop- outs
that have made it big in the business world armed with education from the school of hard knocks. Robinson
et al (1994) argue further that through cunning means and hard work an entrepreneur can succeeded without
proper educational background. Robinson et al postulate that there is negative stereotyping of entrepreneurs
as being relatively uneducated. On the other hand Gompers, Kovner, Lerner and Scharfstein (2006) attribute
small business success of the above mentioned category of entrepreneurs to luck.
Cowling (2009:3) indicates that there has been an increase in entrepreneurship courses taught in schools,
further education colleges and universities and government support programmes to help entrepreneurs gain
the necessary skills and knowledge. Other interventions have assisted work placements in SMEs with a view
to removing the perceived stigma about working in small business sector. Still the question remains whether
entrepreneurship can be taught at all or whether it is an innate characteristic (Lee and Wong, 2006).
PROBLEM STATEMENT
Lumpkin and Marvel (2007) states that prior employment is the source of most start-up ideas, so before even
commencement of the small business start-up process, a potential entrepreneur with previous work
experience is in a better position than an entrepreneur with more limited experience. In contrast to this
positive relationships, Lumpkin and Marvel (2007) also discovered that for radical innovation, it may be
preferable to know less about the processes for developing the product and serving the market as this may
lead to a myopic point of view which in turn would limit the radicalism of any future innovations. Mixed results
obtained from the following studies (Lumpkin and Marvel, 2007; Rosa, 2009; Ucbasaran, Alsos and Wright,
2008) is evidence to the lack of conclusiveness within this research area. The current research empirically
tests whether experience, age of the owner, level of education and age of the business have a significant
impact on the profitability of small business in the South African context.
OBJECTIVES OF THE STUDY
The primary objective is to identify whether experience of the business owner affects the performance of the
businesses. The secondary objectives were to determine whether age of the owner/manager, level of
education, and the age of the business are significant variables that affect the financial performance of small
business operations. This study brings in a South African perspective to the growing body of knowledge on
experience and small business performance.
HYPOTHESES
H1a: Previous work experience of the owner has a significant impact on the profitability of the business
H1b: Previous work experience of the owner does not have a significant impact on the profitability of the
business.
H2 a: The age of the SME owner/manager has a significant impact on the profitability of the business.
H2 b: The age of the SME owner/manager does not have a significant impact on the profitability of the
business.
H3a: The level of education of the owner impacts on the financial performance of the business.
H3b: The level of education of the owner does not impact on the performance of the business.
H4a: The age of the firm has an impact on the performance of the firm.
H4b: The age of the firm does not have an impact on the performance of the firm.
LITERATURE REVIEW
The small business environment
South Africa lags behind other developing countries in promoting the growth and sustainability of small
businesses. On start-ups, the Global Entrepreneurship Monitor (GEM) 2008 figures show that eight in 100
adult South Africans own a business that is less than 3.5 years old - significantly behind other low to middle
income countries, where on average 13 out of 100 adults are building new businesses. The GEM (2008)
report also states that only 2.3 percent of South Africans own businesses that have been established for over
3.5 years, indicating a high failure rate among start-ups – with South Africa ranking 41st out of 43 countries
in the prevalence (survival) rate for established business owner-managers.
Sha (2006:1) expounds that is generally accepted that SMEs are becoming increasingly important in terms of
employment, wealth creation, and the development of innovation. However, there are considerable doubts
about the quality of management in this sector with policy-makers suggesting that there are particular
weaknesses in innovation, a lack of financial acumen, marketing, entrepreneurial flair, practical knowledge,
and human resource management. As a result, many firms do not reach their full potential and fail to grow.
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Demographic factors influencing small business performance
Mazzarol, Volery, Doss and Thein (1999) states that demographic factors such as age, gender, education
and work experience has a considerable impact on entrepreneurial intention and venture success.
Kristiansen, Furoholt and Wahid (2003) in their study found a significant relationship between age of an
entrepreneur and business success. Furoholt and Wahid (2003) indicated that older entrepreneurs were
more successful. On the contrary, Sinha (1996) indicated that younger entrepreneurs tend to be more
successful. Van Aardt, Van Aardt, Bezuidenhout and Mumba (2008:11) posits that age is no barrier to
entrepreneurship success. The average age of entrepreneurs starting a business is the mid-thirties and there
are numerous examples of entrepreneurs starting businesses in their sixties. The critical factors are the
relevant know –how, experience, and contacts that make it possible to recognize and pursue opportunities
(Van Aardt, Van Aardt,Bezuidenhout and Mumba,2008:11).
The characteristics of the enterprise such as the length of the time the business has been in operation and
size of the enterprise is of paramount importance to the survival and success of small business. In a study
conducted by Kristiansen, Furuholt and Wahid (2003) the outcome indicated that the length of time an
enterprise has been in operation was significantly related to the business success. However according to the
study by Indarti and Langenberg (2004) length of time was not significantly related to business success.
The profitability of a business as an indicator of business performance
Profitability is essential for continued business operations. Financial capabilities are critical in supporting
functional strategies and making required infrastructure investments. For example, a firm with adequate
funding can expand or invest, or can provide customer financing (Siropolis, 1997:385). Return on investment
(ROI) is a traditional approach of evaluating return relative to the expenditure required to obtain that return. It
is calculated as the discounted return (net of the discounted expenditure) expressed as a percentage of the
discounted expenditure (Correira et al., 2003:ch1, p.11). Correira et al. (2003), further, notes that the
objective of financial management is the maximisation of wealth and a structured analysis should aim
towards measuring how effectively this objective is achieved. Siropolis (1997:385) argues that the best
yardstick for estimating the financial return is called return on investment, and is computed by dividing net
profit by investment. The return on investment tells an entrepreneur how many cents he earns in a year for
every rand of investment in the same way that an interest rate tells savers how much they earn for each rand
of savings at the bank. This study uses return on equity (ROE) as the overall indicator of success. While
profit maximisation would not be a primary objective, a satisfactory return on shareholders or owners funds
would be required to maximise wealth.
METHODOLOGY
Research approach
The study was conducted using the quantitative paradigm, which is a form of conclusive research using large
samples and reasonable structure data collection procedures (Struwig and Stead 2007:4). The descriptive
research approach was used to describe the key elements of the research namely education, experience
and profitability. Descriptive analysis provides a very useful initial examination of the data, even if the
ultimate concern of the researcher is inferential in nature.
Population and sample
For the purpose of this study the population could be regarded as all small grocery shops in Mdatsane.
Spaza shops, hawkers and street vendors were not included in the list. A non-probability sampling
procedure was used and a convenient sample was drawn, purely on the basis of availability and
accessibility and being quick and economical. The final sample comprised 36 respondents. The only
requirements were that:
? Respondents must be owners/ managers of the grocery shop; and
? Respondents must be involved in the day to day running of the business.
Research instrument
The empirical research component of the study consisted of a self-administered questionnaire. The
questionnaire designed used several questioning techniques. The study employed five point Likert scaled
questions, multiple choice rating questions, dichotomous questions, open ended questions and single
answer questions respectively. The questions in the questionnaire covered biographical details of the
respondents as well as the key themes of the research such as experience and financial performance of the
grocery shops. The questionnaire was pre-tested amongst five of the respondents identified in the sample to
ensure reliability and validity.
Norman Chiliya et al, Int.J.Buss.Mgt.Eco.Res., Vol 3(1),2012,462-470
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Data gathering
The researcher visited small business shops owned by black individuals in Mdantsane and administered
questionnaires to the shop owners/managers. The researcher covered the area of study in 4 weeks.
Approximately 30 minutes were required to complete the questionnaire.
Data analysis
The researcher was able to use statistical techniques of inference to test the hypotheses. This was primarily
based on the software package MINITAB Release 14. MINITAB Statistical Software is a comprehensive
statistical tool for managing, analysing and displaying information. Among the features available are the
management and manipulation of data and files, producing graphs, analysing data, assessing quality design,
experiment and generate reports (Anon, 2011). Based on the distribution of the descriptive statistics for this
study, a normal distribution was used to perform the inferential analysis such as ‘ANOVA One Way’.
RESULTS
Table 1, below, describes the findings of the study in respect of the profile of the respondents.
Table 1 Profile of respondents
Status of respondent Frequency Percentage
Owner/Manager 17 47.2
Manager 19 52.8
Total 36 100
The study showed that there were almost an equal number of owners/managers running the small business
shops. This is in contrast to what Hart and Padayachee (2000:683) determined in their research of Indian
small business shops in Durban that 94% of the shops are managed by their owners.
Table 2 Gender of respondents
Gender of respondents Frequency Percentage
Male 25 69.4%
Female 11 30.6%
Total 36 100%
This study highlights that there is a significant number of males (69.4%) who operate in the small retail firm
area in South Africa. This could be caused by the unemployment rate in South Africa.
Table 3: Previous work experience of the respondents
Previous work experience Frequency Percentage
Yes 3
No 33
Total 36 100
The study at hand highlighted that most of the respondents did not have previous experience of running a
business. Only 3 of the respondents had previous experience of running a business. It can, therefore, be
concluded that the changing economic conditions in South Africa such as the reduction in formal
employment, low entry barriers and the growth of small, medium and micro enterprises could have attracted
the greater portion of the respondents to manage a grocery shop. A one ANOVA way analysis of Return on
Equity (ROE) against previous experience revealed that previous experience does has significant effect in
operating profitably (F 7.718, p 0.000).The hypothesis that states that H1 a: Previous work experience
of the SME owner/manager has a significant impact on the performance of the business is there
accepted.
Table 4 Age of respondents
Age of respondents Frequency Percentage
61 and above 3 8.3
51 to 60 5 13.
41 to 50 7 19.4
31 to 40 7 19.4
21 to 30 9 25
20 and below 5 13.9
Total 36 100
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The study, at hand, determined whether the age of the respondents, as the independent variable has an
effect on the profitability, of retail firms which is the dependent variable. The study determined that the age
category, 21 to 30, was the most prominent in owning or managing a retail firm followed by the age
categories 31 and 40. A one ANOVA way analysis of Return on Equity (ROE) against age revealed that age
does has significant effect in operating profitably (F 0.72, p 0.586).The hypothesis that states that H2 a:
Age of the SME owner/manager has a significant impact on the performance of the business is there
accepted. The study findings are almost similar to a study done in America by Muijanack, Vroonhof and
Zoetmer (2003:6) that determined that the optimum age for entrepreneurs was 25-35. This age group was
positively related to the probability of the business making better profits.
Figure 2 Education levels of respondents
3%
6%
8%
25%
19%
39%
Masters
Bachelors
Diploma
High school
Primaryschool
No formal education
Only 17% of the retailers have a post Matric qualification, namely a master’s degree (3%), a bachelor’s
degree (6%) or a diploma (8%). The study also showed that 25% of the respondents have attained high
school education. The study, further, reveals that 39% of the respondents have never been exposed to
formal education. Henceforth, the survey seems to reveal that inadequate education is a major reason small
grocery shops are unsuccessful.. The conclusion of the study at hand also supports the findings of Van der
Sluis, Van Praag and Vijverberg (2005:2) who determined that in least developing countries education is a
major drawback for the success of small firms.
The education levels of the entrepreneurs were correlated with net profit to find whether education has an
impact on the business performance. These residual scores were then correlated with other possible
determinants of net profit in the questionnaire, thereby establishing the marketing practices of the more
successful retailers. The correlation found that r =0, 3792 and p=0,003. In this case, the p value is significant
at a 95% confidence level which shows that education has an impact on the overall business performance as
measured by net profit.
Therefore the hypothesis that states that H3a: The level of education of the owner impacts on the
financial performance of the business is accepted
Table 5 Attendance of Workshops
Presentations Frequency Percentage
Seminars 10 28.00
Workshops 5 13.8
On the job training 2 5.55
Did not attend 19 52.7
Total 36 100
The attendance of workshops was poor with 52.7% of the respondents citing that they did not attend any
workshops. This finding is a cause for concern given the low education levels of the respondents. The
constraints that the respondents identified for their lack of participation in training included time and cost.
Owners, however, stipulated that time constraints was their major reason for non-participation workshops.
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With respect to time constraints, the SETAS can establish workplace learning. This implies trainers will train
shop workers/owners in their shops without having the trainees travelling to training venues elsewhere. This
will enable business owners to acquire the necessary experience to run and manage their businesses.
Table 6 Is training necessary for your organisation?
No of respondents Frequency Percentage
Yes 5 13.89
No 31 86.11
Total 36 100
The majority of the respondents (86,11%) did not regard management training as necessary. However, this
negatively influenced their businesses. Furthermore, managers viewed training programmes as a
punishment rather than an incentive or opportunity.
The average number of years which owners/managers have in running their business was found to be 4,25.
The findings suggest that the majority of small business shop owner/managers started to manage their small
business shops over the past five years. This can, be further, supported by the findings of Ligthelm and Cant
(2002:13) who determined that most small business shops have a short life span of fewer than five years.
This implies that retail shops, in this study, are likely to cease operations before the fifth year. The GEM
Report (2008) figures show that eight in 100 adult South Africans own a business that is less than 3.5 years
old - significantly behind other low to middle income countries, where on average 13 out of 100 adults are
starting new businesses. GEM also reports that only 2.3 percent of South Africans own businesses that have
been established for over 3.5 years, indicating a high failure rate among start-ups
The mean number of years which small firms in Mdatsane operate is 5.19 years. This suggests that most of
the shops operating in Mdatsane have been in business for a number of years, and should have established
customer bases and relationships with other stakeholders such as banks and suppliers. The survey
established that there is a positive relationship between the number of years that the business has been in
operation and the return on equity (F 2.49, p=0.033). The following hypothesis which states that H4a:
The age of the firm has an impact on the performance of the firm is accepted. The study at hand
contradicts the Ebony Consulting Group (2006), which established that there was no relationship between
the number of years by which a small firm is in operation and its profitability.
The motivation and experience of owners/ managers for assuming control of their shops play an important
role in determining the success of their business. The alternatives that the respondents gave are indicated in
table 7.
Table 7 Motivation to run a small business shop
Motive Frequency Percentage
To become own boss 20 55
Through a lack of choice (family business) 2 5.6
Through redundancy (job loss) 8 22.2
As a sideline (An additional source of income) activity 6 17.0
Total 36 100
The primary reason provided by respondents for operating a small business shop was the opportunity to
become one’s own boss (55%). The above observation was also determined in America in that the start up
of 51% of small retail firms was also influenced by the same reason (United States Small Business
Administration (USSBA), 2011). However, redundancy was also identified as an important reason South
Africans operated small business shops. This shows that some of the respondents were forced into the retail
business as a result of unemployment in South Africa.
The empirical results therefore suggest that:
H1a: Previous work experience of the owner has a significant impact on the profitability of the business
H2 a: The age of the SME owner/manager has a significant impact on the profitability of the business.
H3a: The level of education of the owner impacts on the financial performance of the business.
H4a: The age of the firm has an impact on the performance of the firm.
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CONCLUSIONS
The responses on the key themes that affect profitability covered in research such as previous work
experience, age of the SME owner/manager, level of education of the owner and the age of the firm are
elaborated.
Conclusions on previous work experience
The study at hand highlighted that most of the respondents did not have previous experience of running a
business. Only 3 of the respondents had previous experience of running a business. Although Toohey
(2009) indicates that the existing literature on the influence of founder experience on the performance of new
ventures has found mixed results. This study found a positive link between experience and performance of
grocery shops. This implies that potential grocery shop owners can benefit from prior experience. This
experience can be gained by establishing shops/projects at Universities/ Techikons (Techincal colleges)
where students can have hands on experience managing the business. Potential shop owners can also
serve as apprentices in large supermarkets before managing their own business.
Conclusions on the age of the SME owner/manager
The study, at hand, determined whether the age of the respondents, as the independent variable has an
effect on the profitability, of retail firms which is the dependent variable. The study determined that the age
category, 21 to 30, was the most prominent in owning or managing a retail firm followed by the age
categories 31 and 40. It becomes apparent that the age group 21 to 30, which is the majority (25%) in the
study, do not attend or participate in workshops and, also, do not regard training as necessary. This is a
cause for concern, since the above age category is regarded as the active age in the economy of a country.
The shop owners/managers in the study, however do not exhibit such activeness. Incorporating
entrepreneurial courses in the primary and high school curriculum may also improve the entrepreneurial
mindset of grocery shop/SME owners and managers.
Conclusions on the level of education of the respondents
Grocery shops could also make use of skills available in the graduate labour market. Graduates are
underrepresented in the grocery sector. This could be the result of the low wages paid by the sector. Also
managers/owners could often be wary to employ graduates because they are perceived as unlikely to remain
committed over the long term due to ambitious career plans. However, recruiting more unemployed
graduates or employing graduates on a part time basis will result in the greater flow of talent, energy and
innovation in the sector.
Furthermore, many grocery shops lack time, resources, technology or expertise to research and develop
new business ideas and innovations. Higher Education Institutions (HEI) can potentially provide access to
expertise, technology and resources that could be of assistance to grocery shops. Working in partnership
with research departments can lead to new commercial developments that a grocery shop could not have
achieved on its own. Student projects and placements can offer grocery shops access to a wide range of
knowledge, expertise and resources. For many start-up businesses, some form of mentoring is needed in
varying degrees to grow business skills. One to one mentoring is effective but expensive and unless
economies of scale can be achieved, providing these support services to small enterprises is difficult to
sustain
Conclusions on the age of the firm
The average number of years which owners/managers have in running their business was found to be 4,25.
The findings suggest that the majority of grocery shop owner/managers started to manage their grocery
shops over the past five years. This can, be further, supported by the findings of the GEM report (2008)
which determined that most 2.3 percent of South Africans own businesses that have been established for
over 3.5 years have a short life span of fewer than five years. This implies that retail shops, in this study, are
likely to cease operations before the fifth year. The mortality rate of SMEs in South Africa has been a cause
for concern. The different interventions by government and private agencies are not reaping the desired
fruits. Furthermore the government is not taking the efforts of SMEs seriously since there is no dedicated
Small Business Administration Department that collects data on SMEs in South Africa. Without a dedicated
database of SMEs in South Africa it is difficult to track the mortality rates of SMEs. Furthermore it is
impossible to tailor products that suit a certain sectors for example the grocery sector since no information is
available about the operations of grocery SMEs in South Africa. This calls for the government to merge
agencies such National Youth Development, Small Enterprise Development, The Business Place and
different municipal Local Economic Development (LED) programmes. The merging of the different agencies
will enable better utilization of resources and manpower to assist SMEs.
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LIMITATION
The study only focused on grocery shops in the East London Metro area in South Africa. Small business in
the other sectors of the economy and which are outside the targeted geographical area were left out due to
time and financial constraints.
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doc_825294130.pdf
The study investigated the impact of level of experience and education on the profitability of the small grocery shops in the Mdatsane area in East London Metropole area in South Africa.
Impact of Level of Education and Experience on
Profitability of Small Grocery Shops in South
Africa
Norman Chiliya
School of Business and Economics, Monash University
P.Bag X60, Rooderport,1725, South Africa
Email: [email protected], Tel: (27) 11 950 4122, Fax: (27) 11 950 4022
Prof. Mornay Roberts-Lombard
Department of Marketing Management
University of Johannesburg
Johannesburg
Abstract
The study investigated the impact of level of experience and education on the profitability of the small grocery shops in
the Mdatsane area in East London Metropole area in South Africa. The primary objective is to identify whether
experience of the business owner affects the performance of the businesses. The secondary objectives were to
determine whether age of the owner/manager, level of education, and the age of the business are significant variables
that affect the financial performance of small business operations. Quantitative data was coded into SPSS for graphs and
descriptive statistics. One way ANOVA analyses were carried out. The findings indicate that previous work experiences,
education levels, age of the owner and the length of business operation have a significant impact on the profitability of
the business.
Keywords: Experience, Education and Profitability
INTRODUCTION
Cant and Lightelm (2003:2) indicate that surveys of small business failure maintain that entrepreneurs often
have good ideas and are competent but “they do not have a clue on how to run a business and have no
underlying appreciation of business fundamentals”. Professional experience has been cited as an important
factor affecting many aspects of entrepreneurial firms. Toohey (2009:13) argues that experience takes many
guises (for example, industry experience, start-up experience, etc.) and breadth of experience is shown to be
an important factor driving the performance of firms, with the number of previous jobs positively related to
new firm performance (Lumpkin and Marvel 2007). Wanigasekara and Surangi (2011:1) elaborates that
most of the researchers have found a strong link between business experience, education and business
success. Thapa (2007) also found a positive association between education and small business success.
The likelihood of failure was also found to be associated with the owner/manager’s work experience prior to
business launch and education. For example, businesses where the owners had 10 or more years of work
experience and/or 4 or more years of college/university education were less likely to fail (Boden and Nucci,
2000).
Chrisman, McMullan and Hal (2005) reported that the knowledge gained from previous experience is
essential for small firm success. For example, Ensley, Pearson and Sardeshmukh (2007) found, perhaps
unsurprisingly, that, to achieve high growth, a technology based start-up firm must possess both technical
and business knowledge. An interesting point was that the absence of this knowledge does not imply the firm
cannot be successful it just means that the firm should follow a more moderate growth strategy that would
enable the founder to learn the necessary skills and abilities required to increase future growth rates (Ensley
et al. 2007).
Khan and Butt (2002:1) found a negative relationship between the application of skills and abilities acquired
pre-start-up and the performance of the new firm. A possible explanation for this unexpected result was that
founders had incorrectly learned the skills and abilities or applied them too rigidly in the new business
environment (Khan and Butt, 2002:1). Khan and Butt (2002:1) qualifies the finding that experience is a
negative factor affecting firm performance and provides the following measures to combat the potentially
hazardous affects of pre-start-up skills: Positive relationships between new firm performance and the
application of skills acquired pre-start-up could be achieved when there is a broad range of flexibly applied
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skills as opposed to a more limited set of skills or skills applied without due consideration of the new firm’s
environment (Khan and Butt, 2002:1).
Robinson and Sexton (1994:141) argue that literature is full of folklore focusing on high school drop- outs
that have made it big in the business world armed with education from the school of hard knocks. Robinson
et al (1994) argue further that through cunning means and hard work an entrepreneur can succeeded without
proper educational background. Robinson et al postulate that there is negative stereotyping of entrepreneurs
as being relatively uneducated. On the other hand Gompers, Kovner, Lerner and Scharfstein (2006) attribute
small business success of the above mentioned category of entrepreneurs to luck.
Cowling (2009:3) indicates that there has been an increase in entrepreneurship courses taught in schools,
further education colleges and universities and government support programmes to help entrepreneurs gain
the necessary skills and knowledge. Other interventions have assisted work placements in SMEs with a view
to removing the perceived stigma about working in small business sector. Still the question remains whether
entrepreneurship can be taught at all or whether it is an innate characteristic (Lee and Wong, 2006).
PROBLEM STATEMENT
Lumpkin and Marvel (2007) states that prior employment is the source of most start-up ideas, so before even
commencement of the small business start-up process, a potential entrepreneur with previous work
experience is in a better position than an entrepreneur with more limited experience. In contrast to this
positive relationships, Lumpkin and Marvel (2007) also discovered that for radical innovation, it may be
preferable to know less about the processes for developing the product and serving the market as this may
lead to a myopic point of view which in turn would limit the radicalism of any future innovations. Mixed results
obtained from the following studies (Lumpkin and Marvel, 2007; Rosa, 2009; Ucbasaran, Alsos and Wright,
2008) is evidence to the lack of conclusiveness within this research area. The current research empirically
tests whether experience, age of the owner, level of education and age of the business have a significant
impact on the profitability of small business in the South African context.
OBJECTIVES OF THE STUDY
The primary objective is to identify whether experience of the business owner affects the performance of the
businesses. The secondary objectives were to determine whether age of the owner/manager, level of
education, and the age of the business are significant variables that affect the financial performance of small
business operations. This study brings in a South African perspective to the growing body of knowledge on
experience and small business performance.
HYPOTHESES
H1a: Previous work experience of the owner has a significant impact on the profitability of the business
H1b: Previous work experience of the owner does not have a significant impact on the profitability of the
business.
H2 a: The age of the SME owner/manager has a significant impact on the profitability of the business.
H2 b: The age of the SME owner/manager does not have a significant impact on the profitability of the
business.
H3a: The level of education of the owner impacts on the financial performance of the business.
H3b: The level of education of the owner does not impact on the performance of the business.
H4a: The age of the firm has an impact on the performance of the firm.
H4b: The age of the firm does not have an impact on the performance of the firm.
LITERATURE REVIEW
The small business environment
South Africa lags behind other developing countries in promoting the growth and sustainability of small
businesses. On start-ups, the Global Entrepreneurship Monitor (GEM) 2008 figures show that eight in 100
adult South Africans own a business that is less than 3.5 years old - significantly behind other low to middle
income countries, where on average 13 out of 100 adults are building new businesses. The GEM (2008)
report also states that only 2.3 percent of South Africans own businesses that have been established for over
3.5 years, indicating a high failure rate among start-ups – with South Africa ranking 41st out of 43 countries
in the prevalence (survival) rate for established business owner-managers.
Sha (2006:1) expounds that is generally accepted that SMEs are becoming increasingly important in terms of
employment, wealth creation, and the development of innovation. However, there are considerable doubts
about the quality of management in this sector with policy-makers suggesting that there are particular
weaknesses in innovation, a lack of financial acumen, marketing, entrepreneurial flair, practical knowledge,
and human resource management. As a result, many firms do not reach their full potential and fail to grow.
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Demographic factors influencing small business performance
Mazzarol, Volery, Doss and Thein (1999) states that demographic factors such as age, gender, education
and work experience has a considerable impact on entrepreneurial intention and venture success.
Kristiansen, Furoholt and Wahid (2003) in their study found a significant relationship between age of an
entrepreneur and business success. Furoholt and Wahid (2003) indicated that older entrepreneurs were
more successful. On the contrary, Sinha (1996) indicated that younger entrepreneurs tend to be more
successful. Van Aardt, Van Aardt, Bezuidenhout and Mumba (2008:11) posits that age is no barrier to
entrepreneurship success. The average age of entrepreneurs starting a business is the mid-thirties and there
are numerous examples of entrepreneurs starting businesses in their sixties. The critical factors are the
relevant know –how, experience, and contacts that make it possible to recognize and pursue opportunities
(Van Aardt, Van Aardt,Bezuidenhout and Mumba,2008:11).
The characteristics of the enterprise such as the length of the time the business has been in operation and
size of the enterprise is of paramount importance to the survival and success of small business. In a study
conducted by Kristiansen, Furuholt and Wahid (2003) the outcome indicated that the length of time an
enterprise has been in operation was significantly related to the business success. However according to the
study by Indarti and Langenberg (2004) length of time was not significantly related to business success.
The profitability of a business as an indicator of business performance
Profitability is essential for continued business operations. Financial capabilities are critical in supporting
functional strategies and making required infrastructure investments. For example, a firm with adequate
funding can expand or invest, or can provide customer financing (Siropolis, 1997:385). Return on investment
(ROI) is a traditional approach of evaluating return relative to the expenditure required to obtain that return. It
is calculated as the discounted return (net of the discounted expenditure) expressed as a percentage of the
discounted expenditure (Correira et al., 2003:ch1, p.11). Correira et al. (2003), further, notes that the
objective of financial management is the maximisation of wealth and a structured analysis should aim
towards measuring how effectively this objective is achieved. Siropolis (1997:385) argues that the best
yardstick for estimating the financial return is called return on investment, and is computed by dividing net
profit by investment. The return on investment tells an entrepreneur how many cents he earns in a year for
every rand of investment in the same way that an interest rate tells savers how much they earn for each rand
of savings at the bank. This study uses return on equity (ROE) as the overall indicator of success. While
profit maximisation would not be a primary objective, a satisfactory return on shareholders or owners funds
would be required to maximise wealth.
METHODOLOGY
Research approach
The study was conducted using the quantitative paradigm, which is a form of conclusive research using large
samples and reasonable structure data collection procedures (Struwig and Stead 2007:4). The descriptive
research approach was used to describe the key elements of the research namely education, experience
and profitability. Descriptive analysis provides a very useful initial examination of the data, even if the
ultimate concern of the researcher is inferential in nature.
Population and sample
For the purpose of this study the population could be regarded as all small grocery shops in Mdatsane.
Spaza shops, hawkers and street vendors were not included in the list. A non-probability sampling
procedure was used and a convenient sample was drawn, purely on the basis of availability and
accessibility and being quick and economical. The final sample comprised 36 respondents. The only
requirements were that:
? Respondents must be owners/ managers of the grocery shop; and
? Respondents must be involved in the day to day running of the business.
Research instrument
The empirical research component of the study consisted of a self-administered questionnaire. The
questionnaire designed used several questioning techniques. The study employed five point Likert scaled
questions, multiple choice rating questions, dichotomous questions, open ended questions and single
answer questions respectively. The questions in the questionnaire covered biographical details of the
respondents as well as the key themes of the research such as experience and financial performance of the
grocery shops. The questionnaire was pre-tested amongst five of the respondents identified in the sample to
ensure reliability and validity.
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Data gathering
The researcher visited small business shops owned by black individuals in Mdantsane and administered
questionnaires to the shop owners/managers. The researcher covered the area of study in 4 weeks.
Approximately 30 minutes were required to complete the questionnaire.
Data analysis
The researcher was able to use statistical techniques of inference to test the hypotheses. This was primarily
based on the software package MINITAB Release 14. MINITAB Statistical Software is a comprehensive
statistical tool for managing, analysing and displaying information. Among the features available are the
management and manipulation of data and files, producing graphs, analysing data, assessing quality design,
experiment and generate reports (Anon, 2011). Based on the distribution of the descriptive statistics for this
study, a normal distribution was used to perform the inferential analysis such as ‘ANOVA One Way’.
RESULTS
Table 1, below, describes the findings of the study in respect of the profile of the respondents.
Table 1 Profile of respondents
Status of respondent Frequency Percentage
Owner/Manager 17 47.2
Manager 19 52.8
Total 36 100
The study showed that there were almost an equal number of owners/managers running the small business
shops. This is in contrast to what Hart and Padayachee (2000:683) determined in their research of Indian
small business shops in Durban that 94% of the shops are managed by their owners.
Table 2 Gender of respondents
Gender of respondents Frequency Percentage
Male 25 69.4%
Female 11 30.6%
Total 36 100%
This study highlights that there is a significant number of males (69.4%) who operate in the small retail firm
area in South Africa. This could be caused by the unemployment rate in South Africa.
Table 3: Previous work experience of the respondents
Previous work experience Frequency Percentage
Yes 3
No 33
Total 36 100
The study at hand highlighted that most of the respondents did not have previous experience of running a
business. Only 3 of the respondents had previous experience of running a business. It can, therefore, be
concluded that the changing economic conditions in South Africa such as the reduction in formal
employment, low entry barriers and the growth of small, medium and micro enterprises could have attracted
the greater portion of the respondents to manage a grocery shop. A one ANOVA way analysis of Return on
Equity (ROE) against previous experience revealed that previous experience does has significant effect in
operating profitably (F 7.718, p 0.000).The hypothesis that states that H1 a: Previous work experience
of the SME owner/manager has a significant impact on the performance of the business is there
accepted.
Table 4 Age of respondents
Age of respondents Frequency Percentage
61 and above 3 8.3
51 to 60 5 13.
41 to 50 7 19.4
31 to 40 7 19.4
21 to 30 9 25
20 and below 5 13.9
Total 36 100
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The study, at hand, determined whether the age of the respondents, as the independent variable has an
effect on the profitability, of retail firms which is the dependent variable. The study determined that the age
category, 21 to 30, was the most prominent in owning or managing a retail firm followed by the age
categories 31 and 40. A one ANOVA way analysis of Return on Equity (ROE) against age revealed that age
does has significant effect in operating profitably (F 0.72, p 0.586).The hypothesis that states that H2 a:
Age of the SME owner/manager has a significant impact on the performance of the business is there
accepted. The study findings are almost similar to a study done in America by Muijanack, Vroonhof and
Zoetmer (2003:6) that determined that the optimum age for entrepreneurs was 25-35. This age group was
positively related to the probability of the business making better profits.
Figure 2 Education levels of respondents
3%
6%
8%
25%
19%
39%
Masters
Bachelors
Diploma
High school
Primaryschool
No formal education
Only 17% of the retailers have a post Matric qualification, namely a master’s degree (3%), a bachelor’s
degree (6%) or a diploma (8%). The study also showed that 25% of the respondents have attained high
school education. The study, further, reveals that 39% of the respondents have never been exposed to
formal education. Henceforth, the survey seems to reveal that inadequate education is a major reason small
grocery shops are unsuccessful.. The conclusion of the study at hand also supports the findings of Van der
Sluis, Van Praag and Vijverberg (2005:2) who determined that in least developing countries education is a
major drawback for the success of small firms.
The education levels of the entrepreneurs were correlated with net profit to find whether education has an
impact on the business performance. These residual scores were then correlated with other possible
determinants of net profit in the questionnaire, thereby establishing the marketing practices of the more
successful retailers. The correlation found that r =0, 3792 and p=0,003. In this case, the p value is significant
at a 95% confidence level which shows that education has an impact on the overall business performance as
measured by net profit.
Therefore the hypothesis that states that H3a: The level of education of the owner impacts on the
financial performance of the business is accepted
Table 5 Attendance of Workshops
Presentations Frequency Percentage
Seminars 10 28.00
Workshops 5 13.8
On the job training 2 5.55
Did not attend 19 52.7
Total 36 100
The attendance of workshops was poor with 52.7% of the respondents citing that they did not attend any
workshops. This finding is a cause for concern given the low education levels of the respondents. The
constraints that the respondents identified for their lack of participation in training included time and cost.
Owners, however, stipulated that time constraints was their major reason for non-participation workshops.
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With respect to time constraints, the SETAS can establish workplace learning. This implies trainers will train
shop workers/owners in their shops without having the trainees travelling to training venues elsewhere. This
will enable business owners to acquire the necessary experience to run and manage their businesses.
Table 6 Is training necessary for your organisation?
No of respondents Frequency Percentage
Yes 5 13.89
No 31 86.11
Total 36 100
The majority of the respondents (86,11%) did not regard management training as necessary. However, this
negatively influenced their businesses. Furthermore, managers viewed training programmes as a
punishment rather than an incentive or opportunity.
The average number of years which owners/managers have in running their business was found to be 4,25.
The findings suggest that the majority of small business shop owner/managers started to manage their small
business shops over the past five years. This can, be further, supported by the findings of Ligthelm and Cant
(2002:13) who determined that most small business shops have a short life span of fewer than five years.
This implies that retail shops, in this study, are likely to cease operations before the fifth year. The GEM
Report (2008) figures show that eight in 100 adult South Africans own a business that is less than 3.5 years
old - significantly behind other low to middle income countries, where on average 13 out of 100 adults are
starting new businesses. GEM also reports that only 2.3 percent of South Africans own businesses that have
been established for over 3.5 years, indicating a high failure rate among start-ups
The mean number of years which small firms in Mdatsane operate is 5.19 years. This suggests that most of
the shops operating in Mdatsane have been in business for a number of years, and should have established
customer bases and relationships with other stakeholders such as banks and suppliers. The survey
established that there is a positive relationship between the number of years that the business has been in
operation and the return on equity (F 2.49, p=0.033). The following hypothesis which states that H4a:
The age of the firm has an impact on the performance of the firm is accepted. The study at hand
contradicts the Ebony Consulting Group (2006), which established that there was no relationship between
the number of years by which a small firm is in operation and its profitability.
The motivation and experience of owners/ managers for assuming control of their shops play an important
role in determining the success of their business. The alternatives that the respondents gave are indicated in
table 7.
Table 7 Motivation to run a small business shop
Motive Frequency Percentage
To become own boss 20 55
Through a lack of choice (family business) 2 5.6
Through redundancy (job loss) 8 22.2
As a sideline (An additional source of income) activity 6 17.0
Total 36 100
The primary reason provided by respondents for operating a small business shop was the opportunity to
become one’s own boss (55%). The above observation was also determined in America in that the start up
of 51% of small retail firms was also influenced by the same reason (United States Small Business
Administration (USSBA), 2011). However, redundancy was also identified as an important reason South
Africans operated small business shops. This shows that some of the respondents were forced into the retail
business as a result of unemployment in South Africa.
The empirical results therefore suggest that:
H1a: Previous work experience of the owner has a significant impact on the profitability of the business
H2 a: The age of the SME owner/manager has a significant impact on the profitability of the business.
H3a: The level of education of the owner impacts on the financial performance of the business.
H4a: The age of the firm has an impact on the performance of the firm.
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CONCLUSIONS
The responses on the key themes that affect profitability covered in research such as previous work
experience, age of the SME owner/manager, level of education of the owner and the age of the firm are
elaborated.
Conclusions on previous work experience
The study at hand highlighted that most of the respondents did not have previous experience of running a
business. Only 3 of the respondents had previous experience of running a business. Although Toohey
(2009) indicates that the existing literature on the influence of founder experience on the performance of new
ventures has found mixed results. This study found a positive link between experience and performance of
grocery shops. This implies that potential grocery shop owners can benefit from prior experience. This
experience can be gained by establishing shops/projects at Universities/ Techikons (Techincal colleges)
where students can have hands on experience managing the business. Potential shop owners can also
serve as apprentices in large supermarkets before managing their own business.
Conclusions on the age of the SME owner/manager
The study, at hand, determined whether the age of the respondents, as the independent variable has an
effect on the profitability, of retail firms which is the dependent variable. The study determined that the age
category, 21 to 30, was the most prominent in owning or managing a retail firm followed by the age
categories 31 and 40. It becomes apparent that the age group 21 to 30, which is the majority (25%) in the
study, do not attend or participate in workshops and, also, do not regard training as necessary. This is a
cause for concern, since the above age category is regarded as the active age in the economy of a country.
The shop owners/managers in the study, however do not exhibit such activeness. Incorporating
entrepreneurial courses in the primary and high school curriculum may also improve the entrepreneurial
mindset of grocery shop/SME owners and managers.
Conclusions on the level of education of the respondents
Grocery shops could also make use of skills available in the graduate labour market. Graduates are
underrepresented in the grocery sector. This could be the result of the low wages paid by the sector. Also
managers/owners could often be wary to employ graduates because they are perceived as unlikely to remain
committed over the long term due to ambitious career plans. However, recruiting more unemployed
graduates or employing graduates on a part time basis will result in the greater flow of talent, energy and
innovation in the sector.
Furthermore, many grocery shops lack time, resources, technology or expertise to research and develop
new business ideas and innovations. Higher Education Institutions (HEI) can potentially provide access to
expertise, technology and resources that could be of assistance to grocery shops. Working in partnership
with research departments can lead to new commercial developments that a grocery shop could not have
achieved on its own. Student projects and placements can offer grocery shops access to a wide range of
knowledge, expertise and resources. For many start-up businesses, some form of mentoring is needed in
varying degrees to grow business skills. One to one mentoring is effective but expensive and unless
economies of scale can be achieved, providing these support services to small enterprises is difficult to
sustain
Conclusions on the age of the firm
The average number of years which owners/managers have in running their business was found to be 4,25.
The findings suggest that the majority of grocery shop owner/managers started to manage their grocery
shops over the past five years. This can, be further, supported by the findings of the GEM report (2008)
which determined that most 2.3 percent of South Africans own businesses that have been established for
over 3.5 years have a short life span of fewer than five years. This implies that retail shops, in this study, are
likely to cease operations before the fifth year. The mortality rate of SMEs in South Africa has been a cause
for concern. The different interventions by government and private agencies are not reaping the desired
fruits. Furthermore the government is not taking the efforts of SMEs seriously since there is no dedicated
Small Business Administration Department that collects data on SMEs in South Africa. Without a dedicated
database of SMEs in South Africa it is difficult to track the mortality rates of SMEs. Furthermore it is
impossible to tailor products that suit a certain sectors for example the grocery sector since no information is
available about the operations of grocery SMEs in South Africa. This calls for the government to merge
agencies such National Youth Development, Small Enterprise Development, The Business Place and
different municipal Local Economic Development (LED) programmes. The merging of the different agencies
will enable better utilization of resources and manpower to assist SMEs.
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LIMITATION
The study only focused on grocery shops in the East London Metro area in South Africa. Small business in
the other sectors of the economy and which are outside the targeted geographical area were left out due to
time and financial constraints.
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