Where is New Zealand Inc going wrong?

Small to medium enterprises could be dying cruel deaths unnecessarily, writes Andrea Fox.

The death rate of small to medium businesses in New Zealand is a national tragedy, reckons Peter Sun of Waikato University.

Especially when there are ambulances like the Waikato Management School at the top of the cliff, says the associate dean, enterprise, of the centre for corporate and executive education.

As grim proof of the toll on New Zealand Inc, Sun offers up a research thesis by a Master of Business Administration student of his, Ian Stewart.

The first paragraphs of Stewart's project How to turn a little company into a big company recap what most of us already know: small to medium enterprises (SMEs) - those employing 19 or fewer staff - account for 97.2 per cent of all businesses in New Zealand; SMEs account for nearly 42 per cent of the economy's total output and employ 30.5 per cent of the workforce.

But pretty smartly he turns to the "extremely high" failure rates of SMEs.

Among SMEs born between 2001 and 2009, of those employing zero people - mum and dad operations - 69 per cent failed; of those employing 1-5 people, 51 per cent failed; and of those employing 6-9 and 10-19, 45 per cent had failed by 2009.

He reports that in 2009 there were also more deaths than births of businesses, according to 2010 statistics from the former Economic Development Ministry. Stewart ponders whether the high levels of business failure are due to a saturation point at which only so many can exist in an economy at any one time - "only so much money . . . so much pie to go around".

He suggests the only way a business can survive and grow is to be better than average, "to operate its business superiorly to other businesses, and continue to do this sustainably".

With this in mind, the objective of his research project was to identify what is best practice to operate a business and what are the fundamental requirements to continue to do business and grow sustainably long term.

He explores the prospect that the main challenge facing an SME as it grows is the lack of skills of the entrepreneur or business founder.

Sun reckons given the concentration of SMEs in the Waikato the mortality rates among businesses are probably higher than Stewart found.

What is of concern to Sun is that too few Waikato business owners are taking advantage of the business learning mecca on their doorstep. Well, he would say that, wouldn't he?

But Sun believes that given lifting New Zealand's productivity is a mantra these days, higher SME participation in post-graduate diplomas and MBA programmes is not aspirational - it's vital for the economy.

He says business owners who undertake business management studies not only surprise themselves with the life changing self-development that results, but their view of how to run their business also changes profoundly.

Productivity at the participant's business often soars, because instead of toiling daily "in" the business, their hands deep in the gear box, the business owner has learned to work "on" the business, strategising for growth.

"For me, executive education is the answer to lots of death threats for SMEs," Sun says.

So what's stopping them?

Not lack of a previous university education. The programme accepts entrants without degrees who have a minimum of five years managerial experience.

According to Sun and colleague Andrew Buchanan-Smart, director of corporate and external relations at the management school, the problem is plain old human nature.

Sun: "These types who run SMEs have had a very good idea, they execute the idea and get very, very involved in operations. Money is always tight.

"But [when it comes to] letting go, letting professional people help manage their company, they just can't take that step. When the business grows they just do more.

"They can't separate the operations of the business from the need to be more strategic. They find it difficult to make that switch and they just don't recognise the need for it."

When they start executive education that need tends to hit them like a truck.

"What is leadership and what is management - they see the difference," Sun says.

Buchanan-Smart believes many entrepreneurs mistakenly believe that getting out of the gear box is somehow surrendering.

"I think they feel they have failed, or let themselves down, or are exposing their faults and weaknesses and are therefore being judged. Sometimes they are so focused on working in the business they can't look up and see the opportunities . . . they think it's better to have 100 per cent of something than 50 per cent of something two or three times the size."

What's on offer? The first step is a post-graduate diploma, part one of an MBA. Participants need a minimum B-plus pass to enter part two.

Sun says one of the main benefits of the programme is it gives participants a "very functional perspective".

"If you do accounting, you do accounting, if you do finance, you do finance. But this takes you through all the competencies, and more importantly, how these competencies fit together.

"That's what is important for an SME owner or a senior executive. They may not be qualified enough to generate a balance sheet, but they should be able to understand the balance sheet and look at it from an economic perspective, a strategic perspective, a marketing perspective.

"For an SME to grow from being small to being more strategic, they need to understand these inter-relationships. That is the value this programme provides."

Buchanan-Smart can tell many stories of skilled tradespeople or craftspeople whose businesses have thrived after their owners and managers graduated from the programme. "There must be hundreds more out there in small or medium sized businesses who have got stuck.

"We need Waikato businesses to grow - for productivity and to create jobs.

"It's not about us clipping the ticket. If we want to grow the Waikato we have to educate the businesses. There is no funny handshake or funny formula. There is just so much out there not being done because of lack of knowledge."

Given the economic winter, surely lack of time and spare funds for education are more likely reasons for SMEs to stay away from the university, one of only three in Australasia with triple business school accreditation from the US, Europe and the Association of MBAs.

Both men agree business school isn't cheap.

A post-grad diploma, achieved over two years of part-time study, costs $14,000, an MBA $25,000.

Buchanan-Smart: "If you increase your business income by $50,000, $14,000 is nothing. It's all relative and on international terms the cost of our MBA is exceptionally competitive. It's an investment that pays."

"Too busy" also doesn't wash as an excuse with these two.

A post-grad diploma can be studied on Monday evenings at the university over two years. An MBA involves study every other weekend, on a Friday afternoon and all day Saturday for a year. Alternatively, an MBA can be completed in two years by doing the alternate weekend study from the start.

The MBA fee includes the cost of an international study tour in the second year.

"The hardest thing about an MBA isn't the learning, it's managing your time while going through the process," says Buchanan-Smart.

"You're covering a lot of different areas of management and you have assignments and assessments. You would expect to do a day's work and then maybe 10 to 15 hours a week study. People run their businesses and study at the same time."

Sun says the post-grad diploma involves 240 hours of contact time with lecturers and programme peers.

"You learn day-to-day skills that you can use immediately in your business.

"Imagine how much you would pay for an outside consultant for 240 hours. This way you are with like-minded people who throw out ideas, and lecturers who have ideas you can apply to your business."

Buchanan-Smart reckons a participant learns as much from others in the class as from the facilitators.

A valuable lesson is realisation of the value of involving outsiders such as an advisory board or an independent director, the pair say.

Sun says programme graduates go on to grow their businesses in two ways. They open their minds to outside guidance, which brings a new and different perspective, and they pull out of operations, appoint a chief executive or general manager and a separate governance board.

"That is a catalyst for rapid growth. It's the value of an outside perspective."

Waikato Times