This paper examines the key management and operational challenges that cause small and medium enterprises (SMEs) to fail, particularly within their first two to three years of operation. Drawing on a range of academic and practitioner sources, the paper identifies the absence of adequate managerial skills as the primary driver of SME failure, while also analyzing contributing factors such as weak financial management, poor market understanding, burdensome government regulations, inadequate strategic planning, and the personal characteristics of business owners. The discussion also considers the role of outside assistance and marketing effectiveness. Evidence from South Africa and broader international research is used to contextualize the high rates of small business failure documented across many countries.
The paper demonstrates effective synthesis of multiple sources around a single analytical theme. Rather than summarizing each source in isolation, it groups findings by topic — financial management, strategy, personal characteristics — and uses citations from several authors to reinforce each point. This multi-source synthesis is a core academic writing skill at the undergraduate level.
The paper opens with a general framing of SME management challenges and failure statistics, then moves into a categorized discussion of failure causes: regulatory burden, market structure, firm age and size, owner characteristics, outside expertise, marketing, financial management, and strategy. A brief conclusion synthesizes the key findings and restates the central argument about managerial skill deficiency.
This paper discusses the management and operational issues faced by Small and Medium Enterprises (SMEs). When considering the management and running of a small firm, it is important to keep in mind that the operations, management activities, and day-to-day processes are all very different from those of large firms. In small firms, the main focus is on maintaining, managing, and carrying out short-term operational activities. The management activities of small firms are mainly concerned with pressures from the external environment and how to predict and control the operational environment in the best possible manner (Sha, 2010).
Prior research and statistics have observed that the majority of SMEs face failure within two years of initiation (LeBrasseur, Zanibbi, and Zinger, 2003). According to Storey (2000; also see Burns, 2001), about 50% of firms stop trading within the first three years of initiation. Storey also suggested that the chances of failure are considerably higher for smaller firms than for larger ones (Storey in Burns, 2001). According to Rwigema and Venter (2004: 68), the ratio of failure of small businesses far exceeds their rate of success in many countries. A survey conducted in South Africa found that approximately 70 to 80% of small businesses fail completely within three years of start-up (Rwigema and Venter, 2004). Lack of management skills is consistently cited as the main reason for the failure of most ventures (Kuratko and Welsch, 2004; Rwigema and Venter, 2004; Longenecker, Moore, and Petty, 2003; Megginson, Byrd, and Megginson, 2003; Storey in Burns, 2001; Sha, 2010).
Moutray (2008) supports this by asserting that "small businesses are eager for a business tax and regulatory environment that allows them to prosper without being overly burdensome, and they worry about maintaining and attracting a quality workforce. The fact that smaller businesses are less able to provide and retain the generous benefits of their larger counterparts makes the competition for talent that much harder" (Moutray, 2008).
Many studies have observed that small firms can prove very beneficial for the economy as well as for large firms. However, the significant problems faced by these small firms can and do hinder their performance. There is also a need to understand the word "failure" and the context in which it is appropriate to use it. Just because a firm has stopped operating does not necessarily mean it has failed; it is possible that it shifted to another business, or, in the case of a family business, the family may have decided to shut it down (Megginson et al., 2003). According to Jovanovic's model, the probability of failure of a small business would be considerably lower if management is functioning properly. It is largely the lack of management education that results in the failure of small businesses, as it leads to failures across various stages of development, and after a certain period the whole firm ultimately fails (Hall, 1995).
Some of the most common reasons for the failure of businesses have been cited in research by Argenti (in Hall, 1995):
There is one-man rule; usually the owner is the one who manages the business, which makes their attitude more dominating than leading toward employees. The top management is not sufficiently powerful with regard to their management skills. The financial structure is not robust. The board has very little involvement in the decision-making process and generally goes along with whatever the owner says. There is a lack of management depth because the owner is the only one managing and dominating the employees, often acting as they please without accountability (Sha, 2010).
Businesses that suffer from these problems are most likely to take on projects that are inappropriate for the firm, make poor use of financial information, and respond to change in an ineffective manner. According to Argenti (in Hall, 1995) and Megginson et al. (2003), it is not always possible to pinpoint the exact reason for a business failure. However, in most cases the lack of capital is the primary reason. Without proper finances, businesses are unable to recruit and retain capable staff, produce products effectively, reach their target audience, or perform their activities efficiently (Megginson et al., 2003).
The second most common reason for business failure is the lack of managerial skills. Management is a very broad term. The absence of proper managerial skills — including dealing with employees and problematic situations and carrying out effective planning — are major factors contributing to business failure. According to Jennings and Beaver (in Sha, 2010), the ultimate cause of either poor performance or outright failure is a lack of proper management.
Soni (2005) also compiled a list of reasons for failure, writing that "in a recent interview with John Emmins, the Honorary Chairman of The Federation of Small Businesses (FSB) in the UK, the main challenges facing small businesses today were cited as: firstly, the 'death of distance', whereby with advances in technology such as the worldwide web, small businesses can operate on a global scale but need to be professional and efficient; secondly, greater competition from larger firms and the public sector; thirdly, having to contend with laws as they apply to employees and customers. It also appeared that regulatory and legal issues are important challenges facing small businesses — the analogy being that the legal issues for small businesses can be like climbing a mountain in sandals and shorts. Small business practitioners may often not understand the law and as a result may end up paying penalties and fines" (Soni, 2005).
In the past, certain rules and regulations applied only to large organizations. The scenario has since changed completely, and both large and small organizations must follow the same regulations. For small firms, this often becomes very difficult, as certain regulations are so complex that these firms struggle to keep up with them (SACOB, 1999).
According to Hall (1995), market structure is ignored by many business owners. The main reason for this ignorance is the lack of education among owner-managers, who also tend to display a resistant attitude toward acknowledging that they need experienced people to manage the business. This resistance and dominating attitude leads to poor allocation of resources and improper work distribution, which affects operational activities and ultimately harms the business.
The market segments in which small firms compete usually feature intense price-based competition. When new firms enter the market, the pressure on existing firms increases considerably. Hall (1995) makes the important point that small firms face high barriers to entry, as they lack the benefit of economies of scale.
According to Hall (1995), the Jovanovic model has demonstrated in detail that firm failure and firm age have an inverse relationship — the older a firm grows, the lower the probability of failure. When firms enter a market and realize their product is not performing as hoped, they often continue operating in the expectation that conditions will change, or until they have exhausted their capital (Hall, 1995). Over time, these firms do make space for themselves in the market as they learn from experience how to handle various problems and scenarios (Hall, 1995).
The environmental and operational factors discussed above are mainly responsible for the failure of Small and Medium Enterprises, or pose the most difficult challenges to them during the first two years of operation. It can be concluded that the absence of managerial skills is one of the major reasons for business failure among SMEs. The nature of SME failures and their implications for the functional areas of management have also been discussed. Other factors — including age and size, marketing, government regulations, and outside assistance — also play a significant role in determining the success or failure of small businesses.
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