Small Business Start-ups: Lessons from the Third-World
Starting a small business is for many an irresistible challenge. Creating and running your own business can be immensely rewarding in various ways: personal fulfilment, self-discovery, financial independence, a way to make your mark in life, and also to make a positive contribution to your local community or chosen business area. While these lessons, tips and guidance give simple help on how to start up a small business in the third world, the principles and techniques - including the increasing use and success of micro-finance (also referred to as micro-loans or micro-credit) apply to starting a small business anywhere in the world. This free article and guide to small business start ups in the developing world has been contributed by Lynette Dobbin of the Microloan Foundation, which is gratefully acknowledged.
Our modern lives and high-tech environments sometimes obscure the simpler values and lessons in life. These references points also help keep a humble perspective, and a straight and honourable path.
We often think of the Third World - that non-specific catch-all term for countries we deem to be less 'developed' than ourselves - as somewhere that relies heavily on us for support. We offer them - sometimes slightly patronisingly - our superior skills, top flight technology and sophisticated expertise. And there is no doubt, as anyone who has ever visited the poorer parts of Africa and India will attest, that they do indeed desperately need our help.
Yet if you told a bank manager working anywhere in the modern developed world that you knew of an organisation that consistently achieved 97% repayment of business start-up capital, his or her eyes would probably start to water with envy. For the truth is that for all our sophistication, technology and expertise, most business start-ups in the western world will fail within their first five years.
Many eminent institutions have developed their own reasoning as to why this should be. Dunn & Bradstreet for example believe that 90% of all small business failures can be put down to poor management, lack of planning, and under-capitalisation. Others highlight poor location, over-investment in fixed assets, and lack of experience.
It may therefore surprise you that in some respects, there are things we ourselves might learn from looking at the way in which people in a country like (in our example) Malawi set themselves up in business. For these people generating an income can prove to be literally the difference between life and death. And as this model shows, virtually all the skills needed to start a successful small business can be extrapolated from the experience of a small group of women in Malawi.
These examples come from the MicroLoan Foundation, a small UK registered charity, which has been helping people in the developing world set up small businesses since 1998. The charity provides the know-how, the start-up capital, and on-going support but the individual borrowers design and run the businesses for themselves. 97% of the loans are re-paid in full, a figure that most UK bank managers could only dream about. The 3% failure rate results from several factors, one of the commonest being that the borrower has died. With life expectancy of only 37 years, a high incidence of HIV/AIDS and malaria, it is a sad fact of life that some of the businesses will fail because of death.
The following illustrates the key success factors in running these successful small businesses.
Many businesses startups fail because of inadequate market research. Overcrowded sectors, insufficient customer awareness, wrong location - the list of potential pitfalls is almost endless. In Malawi, however, the situation is very simple.
There is not a great deal of choice available, because of course there would be no market for hi-tech wizardry in a village with no electricity, nor branded consumer goods for people who have never seen a television. So there is no temptation to come up with a revolutionary new concept, product or service and then try to find a market for it.
People need food, and people need clothes, and to a limited extent people need things like fishing lines and firewood. Agnes Mwaremware lives in a village located 5 km down a deeply rutted dirt track. To get to the main road villagers had to walk this distance and then travel to the nearest trading centre crammed into the back of a heavily overcrowded pick up truck. One or two of her neighbours had invested in the ultimate convenience, an exceedingly elderly bicycle, but found themselves at a loss when the chain broke, or the brakes failed, or (as often as not) the whole thing fell apart. Agnes spotted her niche and now runs a stall supplying bicycle spares to her community. This is not the sort of market research that would move mountains, but it is nevertheless based on sound analysis and common sense. It is not surprising therefore that her business is doing well.
How often do would-be entrepreneurs come up with a terrific idea only to have it fail because they cannot negotiate change of use for a premises, permission for alterations or construction, or they fail to observe the necessary rules of environmental health and local planning requirements? In Malawi, no-one would dream of setting up a business before first consulting the local chief or village head man. True, this may be a matter of common courtesy rather than a legal requirement, but understanding the permissions that a business needs to trade is an important piece of the start up framework.
The same principles, although more complex and extensive (health and safety, equal rights, to name just two examples) apply in the developed world.
Location and route to market
The choice of where to trade in Malawi is again governed by simple rules. It has to be somewhere that people can get to. It has to be somewhere that needs the product or service. And (importantly) it has to be somewhere from which the trader can easily obtain his or her raw materials or commodities. Often the simplest choice turns out to be best. Adija Msw for example borrowed £15 and started selling tomatoes on a makeshift table outside her mud hut. Her home is several kilometres from the nearest trading centre and in the middle of a well populated village settlement. She knew that she would have a ready market because her villagers often complained about having to walk into town to buy their supplies. Adija is Malawi's answer to the corner shop and the profits form her business support a family of 12 dependents. She now sells fish and firewood as well.
In the age of e-commerce and sophisticated distribution models, identifying a location and route to market is just as crucial for business start-ups in the developed world.
Small is beautiful!
As the example from Adija's business shows, it is not always either necessary or desirable to over-invest in fixed assets at the start of a business undertaking. Adija has had to expand her operation to accommodate the firewood but she has taken the simplest route again - she stacks it neatly on the ground.
'Quality' is often defined (quite rightly) as 'fitness for purpose'. The lessons from Third World business start-ups are valuable ones for the developed world too - find common-sense solutions to business start-up and growth challenges. Unnecessary overheads will result in higher prices for your customers, so keep solutions simple and practical.
Business know-how and financial discipline
To become a company director in the UK requires completion of a certain amount of paperwork but needs no evidence of understanding or experience in business itself. People can and do set up in business without being able to read a balance sheet or prepare and cost a business plan. Elementary business know-how is one of the cornerstones of the MicroLoan Foundation's philosophy and success. Would-be borrowers are required to demonstrate that they can manage money by saving up a small sum themselves - 10-15% of the loan they seek - before receiving their money. They then receive business training over a six week period in which they are taught to run meetings, elect their own chair, secretary and treasurer, keep records, bank money, manage their cash-flow, budget for their business and ensure that they make a profit. They don't have calculators and some cannot read and write so all their sums are done by means of good old fashioned mental arithmetic.
The inescapable and harsh financial realities of the Third World create a level of accountability for small business start ups that is far less forgiving than typically found in the modern corporate world. In relative terms we have it very easy indeed.
Mentoring support - get a second opinion
MicroLoan's business start up borrowers meet every two weeks with their Loan Officer to review how their businesses are progressing, and to make repayments against their loan. Many of the borrowers find this timescale extremely tight, but the discipline is vital. Businesses stay on track and well-managed when realistic expectations are agreed, monitored and followed up. The Loan Officer's input is crucial because if a business is struggling then this can be identified at any early stage and corrective action can be taken. This is obviously a level of input that cannot be expected from normal large commercial lending organisations, so to have an informal and experienced mentor is an invaluable source of both moral and practical support.
Getting a good second opinion when setting expectations, and monitoring performance, is helpful for everyone in business, everywhere. No-one in business knows all there is to know about themselves - we need the advice and opinions of others to help us fill in the gaps and to understand the full picture. (See the Johari Window model .)
Teamwork and networking
Interestingly, MicroLoan lends to business start up groups of between eight and fifteen women, and the group is collectively responsible for the repayment of each individual loan. This means that individuals wishing to participate in the scheme firstly have to network amongst their own communities in order to recruit the requisite number of beneficiaries. It also means that the group members have to agree amongst themselves what businesses they wish to pursue. This fosters a spirit of co-operative endeavour, in which one member may well have an idea that can be taken up by another, and the group as a whole puts together a balanced portfolio of ideas.
It also means that if one member of a group gets into trouble, the others are both willing and prepared to help her out. This is particularly important where, for example, one member of a group becomes ill. Although in the case where a group member dies before her loan is repaid the loan is written off, where someone is suffering from an illness from which she is likely to recover other members of the group take personal responsibility for carrying her through the period of her ill-health.
As well as providing an inspirational lesson in team-working, the team approach to Malawi business start ups demonstrates the value of effectiveness of working in a team towards a collective aim, even though each individual team member has her own particular activity and focus.
This is rather like the collective sense of teamwork and mutual support that individual departments should aspire to in modern corporations and organizations. Individual different responsibilities brought together with a collective vision and commitment. It's powerful stuff.
By distilling the components of successful start ups from these third world examples down to their lowest common denominators we can learn some simple and valuable lessons that transfer easily to the modern western world. The scale may be different, the technology may be more advanced, but the principles are the same.
The Microloan Foundation is an wonderful and worthy vehicle for doing good in a part of the world that needs all the help it can get.
Whether you are reading this because you are starting your own small business, helping someone else to start their own small business, or because you have another interest in developing people and organisations, take a few moments to look at what the Microloan Foundation does, and maybe make a donation. Helping others can be seriously good for your own well-being.
To find out more about the MicroLoan Foundation and its work in Malawi visit its website on www.microloanfoundation.org.uk .
The MicroLoan Foundation is a UK registered charity no 1104287.
The contribution of this inspirational article is gratefully acknowledged.
- BALANCED SCORECARD, THEORY, TEMPLATE, EXAMPLES
- BUSINESS AND MANAGEMENT DICTIONARY
- BUSINESS PLANNING AND MARKETING STRATEGY, PROCESS AND TEMPLATES
- CONTRACTS AND LEGAL TERMS GLOSSARY
- FINANCIAL BUSINESS TERMS AND RATIOS EXPLAINED
- MARKETING GUIDE, FROM START-UP TO ADVERTISING
- PEST MARKET ANALYSIS - FREE TEMPLATE
- PORTER'S FIVE FORCES OF COMPETITIVE POSITION
- SOSTAC® - PR SMITH'S BUSINESS MARKETING PLANNING SYSTEM
- SWOT ANALYSIS - THEORY, HISTORY, TEMPLATES AND EXAMPLES
- FREE DIAGRAMS, TOOLS, TESTS, AND WORKING FILES
© main content Lynette Dobbin 2004, edit, contextual content Alan Chapman 2004-2013