Marketing Challenges for Small Businesses

Marketing Challenges for Small Businesses
Present affiliation of Author
Dr. Atish Chattopadhyay, Professor of Marketing, SPJIMR, India, email: atishc@spjimr.org

Introduction

Small businesses are much easier to describe than to define and to this day there is no generally
agreed operational or numerical definition of what constitutes a small business. Countries, and in
many cases individual institutions within them, have developed classifications and definitions that
reflect their own particular requirements. These criteria tend to reflect the nature and composition
of the country’s economy on one hand, as also the context and need of the market under
consideration on the other. This is clearly reflected in Table 1.

Table 1: Definition of small-scale industries in different countries
COUNTRY CRITERIA OF DEFINITION
USA No official definition exists, but generally refers to < 100 employees
UK A manufacturing unit employing < 200 employees, having < 50,000 pounds
turnover in retail trade or < 200,000 pounds turnover in wholesale trade

A construction unit employing < 25 employees, and in transport unit having < 5
vehicles.

Japan A manufacturing unit employing < 300 employees, having < 100 million Yen
investment

A mining and wholesale unit employing < 100 employees, having < 30 million
Yen investment

A retail trade unit employing < 50 employees, having < 10 million Yen investment

Korea A manufacturing unit employing < 300 but > 5 employees, having < 500 million
Won investment

A construction unit employing < 50 but > 5 employees, having < 500 million Won
investment

Malaysia No ceiling on employment, investment limit 250,000 RM

Sri Lanka Mainly run by power, investment limit Rs 2 Lakh

Source: Hussain, S.V.(2003):“Small Scale Industries in the New Millennium”, Sarup & Sons, pp.4-5

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Small business sector is regarded as the fundamental ingredient in the establishment of a modern,
progressive and vibrant economy. According to Graham Beaver (2002) there are a number of
reasons why there is considerable interest in the creation and management of small businesses.

They are:
• Small firms help to diversify a nation’s economic base and provide it with the opportunity of
responding to a variety of market conditions.
• Small firms assist in employment creation
• It promotes an element of local control and accountability
• The over dependence on large enterprise supported by international finance can be unhealthy
and deprives regional economies of their dynamism and independence.
• It provides an opportunity to transcend social inequality and unemployment trap
• It is an expression of healthy and necessary competition against the excesses of large business,
monopolies and exploitation
• It helps in the development and dissemination of new forms of technology
• Small firms are the natural avenues for self-development and individual achievement, being the
natural expression of entrepreneurship.

However, small firms are not merely large firms in miniature. They have special characteristics
that may make them inherently riskier than large ones. Beaver and Jennings (1995) identified the
following vulnerabilities.

• Small businesses are frequently dominated and controlled by one person. He thus has an
overwhelming influence on all aspects of the firm’s direction, development and performance.
• They are heavily dependent on a small number of customers
• Due to their small market share they are unlikely to exert much influence in their concerned
sector
• They have problems in raising capital that significantly restrict their choice of strategies of
business development
• They fail to diversify under changing conditions

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The following section deals with the challenges faced by small firms in detail.

The Challenges

The small business sector by its very basic nature has to confront a large number of challenges.
According to Hewitt (2000), ‘small firms find it difficult to get access to the information and
finance they need. They are often unable to draw on the same range of expertise and experience as
large companies. They have fewer resources to get to grip with regulations and fewer opportunities
to influence government thinking.’

At the heart of most business start up lies the problem of lack of credibility for the founder in
dealing with the new business stakeholder community. While a track record may be one of the
major sources of reassurance in these circumstances lack of one may turn out to be a major
obstacle to overcome. The ‘credibility merry go round’ of Birley (1996) illustrates this point
particularly well. The concept (check exhibit 1) clearly shows the inter-related nature of the
resources, factors and stakeholders involved in the process and how the event is essentially a
dynamic one.

Exhibit 1. Credibility Merry Go Round

Money

Suppliers

Credibility Premises

Customers

Source: Birley, S. (1996): ‘The Start Up’, Small Business and Entrepreneurship, 2nd
Edn., McMillan, Ch 2.

How the individual responds to this difficult and unique challenge is also a good indicator of
entrepreneurial skill, determination and flair.

Lack of relevant knowledge and skill may be reckoned to be another challenge in the start up
process. Storey (1994) stresses on the need of providing management training to the small business

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owners that would enable them to formally learn the competencies and thus perform better than
untrained individuals.

Access to finance is another important influence on start up success and subsequent development.
There is no optimal capital structure that the small firms should try to achieve. However when the
firm value and competitive advantage is based on intangible assets such as its people, then due to
lack of opportunity to leverage upon tangible assets, debt finance should be used less. It is almost
impossible to overrate the importance of bank finance to small business. Burns and Dewhurst
(1989) in their text on small business finance clearly say, “At present some 60 % of the funds
needed by small businesses come from the bank. Small firms turn to their local branch manager,
not only for short term funds, but increasingly, for medium and long term funds. It is evident that
the relation the proprietor has with the local branch manager is of crucial importance.”

However commercial banks have been frequently criticized (Stanworth & Gray 1991) for failing to
provide adequate funds for newly formed enterprises. The banks usual response to such criticisms
is that this is a function of poorly constructed business proposals, rather than a lack of willingness
to lend funds. There are a number of difficulties that the small business may also face in starting a
business. While in the start up phase everything takes longer than planned, gaining market
credibility is also very difficult. Lack of accurate forecasts, demanding supplier relationships,
internal conflicts, and excessive credit payments may also hinder the progress of the firm.

It has been showed that firms that have succeeded in surviving 2 – 3 years and have gone through a
number of crucial phases attain a stable foundation from which they can continue to develop
(Mayer and Goldstein, 1961, Freeman et. al, 1983, Hall, 1995). However Daft (1995) cites the
work of Land and Jarman (1992) in the US that suggests that 84 % of the business that makes it
past the first year still fail within ten years. Consequently early development process is of prime
importance to any small business.

According to Kimberly and Miles (1980), early development process is one of the most important
periods in the life of a small firm and the thoughts and the driving forces implemented then can be
decisive for the continued growth and development of the firm. In fact in such introductory stage, a
firm may attain a position of strength by satisfying two criteria:

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a) Securing an input of resources
b) Developing an ability to manage and utilize such resources.

After this basic position of strength is achieved, a firm has a good deal of leeway in generating and
managing its resources.

Gibb and Scott (1986) introduced the concept ‘base for potential development’ as an expression of
such stabilization. According to them, a development base is said to be attained when the newly
developed firm has developed adequate resources, experiences, control, leadership and idea. With
this, the firm then has the possibility to develop and to manage future environmental changes and
thereby may be considered to attain stability.

Klofsten (1992) too reinforced this view. The fundamental thesis of his ‘Business Platform Model’
is that the firms are vulnerable in their early life and continually run the risk of disappearing from
the market. Their success is determined by how well this vulnerability is overcome. Klofsten
defined eight firm level cornerstones that determine a firm’s early development process. This has
been shown in Table 2.

Table 2: The 8 Cornerstones of Small Business Development in the Early Stage

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Cornerstones Minimum Levels to Attain
Formulation and The idea must be clarified so that the special springboard is
Clarification of the understandable and can be communicated internally and easily
Business Idea
Development to Finished Once the product is available it must gain acceptance by one or more
Product reference customers. The firm then has proven it is capable of
meeting needs and wants.
Definition of Market The firm must define a market that is large and profitable enough to
ensure survival
Development of an The organizational structure should facilitate functional co-
Operational Organization ordination. It should take advantage of firm’s inherent flexibility and
innovative ability and ensure internal co-ordination to maintain and
develop external relations.
Core Group Competence A business firm must have technology and commercial competence
to develop its products and markets. It is crucial to have access to
expertise for solving the firm’s real problem
Commitment of the Core A basic requirement for development is that at least one person is
Group and the Prime highly motivated and the other key factors are committed to the
Motivation of Each Actor business idea
Customer Relations A customer base must be qualitatively and quantitatively strong
enough to generate operating revenue
Other relations The firm may sometimes need additional capital, management
know-how or other oil in its machinery to complement the
customer’s relationship
Source: Klofsten M. & P.Davidsson: ‘The Business Platform: Developing an Instrument to Gauge
and to Assist the Development of Young Firms’, Journal of Small Business Management,
41(1), pp 4-5.

A new venture can be seen either as an entirely new identity by customers or as an established
corporate identity venturing into a new market with a new product. The ability of a corporate
identity to provide an umbrella for new product development and new venturing has long been
recognized (Belch and Belch, 1987, Keller and Aaker, 1994) and may be reckoned to be a source
of competitive advantage. Though competitive advantage may be concerned with developing a
value creating strategy (Porter, 1985) by uniquely combining bundles of valuable firm resources
and skills to yield positional advantage, yet for a new firm convincing the customers of their
superior value proposition may not be an easy task i.e. even if they have the requisite skills and
resources.

According to Suchman (1995), uncertainty that individuals possess regarding a new venture may
be mitigated if customers know and trust the individuals running a venture. Shepherd and

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Zacharakis (2003) too reiterates this point. According to them, a corporate venture into an
unrelated industry, while still considered a new venture, can be viewed as more familiar to
customers than a venture in which the customers are completely ignorant of the organization
launching the venture. A known and well-reputed management team has greater legitimacy than an
unknown management team.

Stichcombe (1965) argues that a newly found small business suffers from “the liability of
newness”. Being unable to provide clear evidence of its ability to compete against more
established firms, an information gap or “information asymmetry” prevents stakeholders from
judging the full capabilities of a firm (Dixon, 1991). Consequently, these businesses lack
recognized institutional legitimacy and have problems in attracting money, customers and
competent personnel (Zimmerman, 1997).

In the absence of history of success, small business management can endeavor to strengthen the
market status by establishing a positive corporate reputation in the shortest time possible. This
reputation defines a company’s identity – as seen by important stakeholders – in the market
competitiveness of its products, the efficient management of its resources and its potential for
future success. A good reputation is perceived by others as an indicator of the firm’s overall
effectiveness. It attracts investors, decreases costs, ensures better terms from suppliers, encourages
customers to buy and assists in the recruitment of skilled manpower (Dollinger et al., 1997).

However Goldberg et al. (2003) complain that despite its attractiveness, few small businesses
follow a reputation building strategy. Few managers make a pragmatic and premeditated decision
to invest in building a corporate reputation as one of the primary objectives during early stages of
business development. This thus is another major challenge confronting small businesses.

Multiple and often conflicting objectives pursued by the Government may also fail to cater to all
the needs, wants and deficiencies of the small firm sector. Storey (1994, pp.315) clearly
recommends that ‘the government in its dealing with the small firms, needs to do less and better,
rather than more and worse. The very clear message that comes across discussions with small
firms, is in creating a suitable macroeconomic framework within which firms can prosper.’

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This has been endorsed by other writers (Deakins, 1999) that confirm that small firms seek an
environment with low inflation, low interest rates, steady economic growth and a high level of
aggregate demand. This macro-economic framework appears to be the acid test by which small
firms judge the economic effectiveness of the government.

Having the appropriate organization structure and the necessary resources are other challenges
faced by the small firms. From a contingent theory perspective (Drazin and Van de Ven, 1985)

EXHIBIT 2: The Small Firm Management Process

ENTREPRENEURIAL SKILLS OWNERSHIP SKILLS
(adaptive and organic) (predictive and mechanistic)

Strategic Management Thinking
Innovation Objective setting
Risk-taking Policy Formulation
Tactical Planning Strategic planning
Common Core Skills Required

Decision-making
Problem solving
Information processing
Management Skills and Abilities
Negotiating Organising
Trouble shooting Coordinating
Interpersonal communications Monitoring
Issues of organizational formalities

Source: Beaver, G. & Jennings, P.L. (1995): ‘Picking Winners-The Art of Identifying Successful Small Firms’,
Rethinking Strategic Management – Ways to Improve Competitive Performance, Chichester: Wiley,
Ch. 4
One could argue that there is no uniformly best organization structure for all firms in all
circumstances. Instead, one has to find the appropriate fit among and within contextual factors
(environment, technology etc), design factors (strategy and institutional models) and structural
factors (complexity, centralization, and formalization).

Management in the smaller firm is essentially an adaptive process, concerned with adjusting a
limited amount of resources in order to gain the maximum short-term advantage. In the small firm

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efforts are concentrated not on predicting but controlling the operating environment, adapting as
quickly as possible to the changing demands of the environment and devising suitable tactics for
mitigating the consequences of any change that occur. The key skills and abilities required for
small firm management process is shown in exhibit 2.

While it may be argued that the identified attributes in exhibit 2 are generic to all management
situations, the complexity of the small business operating environment demands a unique blending
of these qualities to succeed in exploiting competitive advantage to achieve and sustain superior
performance.

Consequently a critical aspect of strategic implementation of small firms is, among other things, to
recognize that firms can, in different industries, pursue different competitive strategies and the
administrative mechanisms used by small business managers to follow a competitive strategy may
differ (Hanks and Chandler, 1994). At least two different administrative mechanisms are available
for the small business manager to develop and pursue a competitive strategy. One refers to
managerial skill needed to implement and follow the strategy developed (Govindrajan, 1988). The
other refers to the design of organization structure i.e. how job tasks are divided grouped and
coordinated (Dodge & Robbins, 1992).

From a strategic research perspective, one could argue that the small business manager must have
the knowledge about the firm (internal conditions like resources, control systems, operations etc.)
and the industry in which it operates (external conditions like competitors, suppliers, customers
etc) and must have the managerial skills to develop a competitive strategy (Luo, 1999). Otherwise,
how could the small business manager know for which resources to strive and how to structure
them?

Based on this knowledge it is also argued that when the small business manager has this
knowledge about external and internal conditions can he develop a competitive strategy and a
structure that fits together (Check Exhibit 3).

Lastly another major challenge before small business managers is their apparent apathy towards
risks, change, aggregation, and innovation. Gasse (1982) believed that the major differences

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between managers and entrepreneurs were three psychological constructs: achievement
motivation, risk taking propensity and innovations. Cavin and Slevin (1988) too subscribes to the
same view. They suggest that intention to grow and innovation orientation are characteristics of
entrepreneurial behavior. However this was lacking in the small business managers.

Exhibit 3: Fit among competitive strategy, administrative mechanism and performance

Administrative
Mechanisms
COMPETITIVE
MANAGERIAL STRATEGY
SKILLS

FIT
SUPERIOR
ORGANIZATION PERFORMANCE
STRUCTURE

Source: Barth H.: “Fit among Competitive Strategy, Administrative Mechanism and Performance:
A Comparative Study of Small Firms in Mature and New Industry”, Journal of Small
Business Management, 2003, Vol.41, No.2, pp.136.

Stewart et al. (1998) found that small business owners were more comparable to managers whose
main concern is to secure an income to meet their immediate needs than to entrepreneurs who are
higher in achievement motivation, risk taking propensity and preference for innovation. Hodgetts
and Kuratko (2001) while describing small businesses mentioned that small businesses are
businesses that are independently owned and operated, are not dominant in their field and usually
do not engage in many new and innovative practices. This risk aversion nature of small businesses
results in its losing out on a number of opportunities.

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Marketing Challenges

For those firms whose main aim is growth, there are a number of challenges that have to be faced.
In 1994 Churchill proposed a six-stage model for company growth. Each stage of the model is
characterized by what Churchill describes as “an index of increasing size, complexity and or
dispersion”.

The model allows owners to assess the type of challenges facing them at current and future stages:

1. Conception / existence
2. Survival
3. Profitability and stabilization
4. Profitability and growth
5. Take - off
6. Maturity

The model outlines expansion of customer base and increase in turnover as one of the key
challenges faced in the conception / existence stage.

Churchill’s (1994) six-stage model clearly outlines expansion of customer base and increase in
turnover as one of the key challenge faced by small firms in its conception / existence stage.
Zeithaml and Bitner (1996) too states that client contacts are not enough. There actually must be
consumers buying continuously. Consequently, the customers hold the key to the success or failure
of any small business.

Now the aspect that makes new ventures into the small businesses so risky is the uncertainty
regarding the rate at which the customers will adopt the new (Lambkin and Grey, 1989). In other
words, their doubt is to what extent and how quickly will customers switch from a product with
which they are familiar to an unknown one? This uncertainty stems from the lack of knowledge
regarding both the performance and the benefits of the new product (Bentler, 1990), Rogers, 1983,
Slater, 1993). Customers may not even know that the product can meet their needs or be able to

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appreciate its true benefits (Athaide et al., 1996). Presence of well-established competitors with
known value proposition and established brand image does not help their cause.

An entrepreneur needs to consider the following points with respect to marketing while
planning a business.

• The customer of the new venture.
• Customer’s decision making process about buying the product or service.
• The degree to which the product or service compels purchase for the customer.
• The pricing of the product or service.
• The strategy to reach the identified customer segment.
• Cost (in time and resources) to acquire a customer.
• Cost to produce and deliver the product or service
• Cost to support a customer.
• Ease of retaining a customer.

How entrepreneurial small firms can achieve and sustain market growth is summarized in various
models proposed by (Coopers and Lybrand, 1994), and German versus UK firms (Brickau, 1994).
The entry point in the model is to identify a market niche.

Most small business starters do not make it past the entrepreneurial stage. Daft (1995) cites the
work of Land and Jarman (1992) in the US that suggests 84% of business that make it past the first
year still fail within five years. However failure is difficult to measure with any degree of
accuracy.

Murphy (1996) suggests two definition of failure: “A business can be said to have failed when it is
disposed of or sold or liquidated with losses to avoid further losses”; failure is defined as “the
condition of the firm when it is unable to meet its financial obligations to its creditors in full. It is
deemed to be legally bankrupt and is usually forced into insolvency liquidation”.

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Birley and Niktari (1995) asked 486 bankers and accountants to give the reasons for client failure.
Eighty seven individual reasons were listed as contributing to the failure of an owner - managed
firm. These were reduced to two dozen themes listed below.
1. Capital structure 13. Quality
2. Management team 14. Adverse publicity
3. The economy 15. Ill Health
4. Customer diversity 16. Partnership problems
5. Financial management 17. Obsolescence
6. Owner attitudes 18. Reliance on grants
7. Rising costs 19. Family succession
8. Lack of planning 20. Legislation
9. Pricing 21. Cost of money
10. Suppliers 22. Personal problems
11. Marketing 23. Fire, Flood
12. Growth 24. Industrial injury

The study points out that marketing and factors which are related to marketing like customer
diversity, pricing and adverse publicity are the reasons for failure. The reasons for failure in the
small firm have attracted much attention. Hall (1995) gave three explanations - one of them is
related to the structure of markets and segments of markets they compete in. Hall also surveyed the
owners of small business and their perceptions of primary cause of failure. His study pointed out
those external issues like lack of demand, reliance on a few customers, competitor behavior and
poor forecasting are the key contributors in failure. Peppard and Rowland (1995) identified a set of
objectives a firm should set itself in order to remain competitive. Delivery, pricing, relationship
management were identified as the key objectives of the firm. Peppard and Rowland identified
that all firms are built upon three broad pillars- people, technology and processes. When designing
processes to meet customer’s requirements and the customers within it, four critical elements need
to be considered-- customer requirements, pattern of demand, constraints, and efficiency targets.

These elements set the deliverables for a product or service delivery process, known as the service
task (Armistead, 1990). A clear understanding is critical if processes are to be redesigned to meet
the needs of the customers. For this many organizations focus on the customer care aspect. As Jack
Welch of General Electric remarked “The three most important things you need to measure in a

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business are customer satisfaction, employee satisfaction and cash flows”, pointing the importance
of marketing for any successful organization.

Strategic marketing is a market-driven process of strategy development, taking into account a
constantly changing business environment and the need to achieve high levels of customer
satisfaction. It essentially focuses on organizational performances rather than the traditional
concern about increasing sales and builds competitive advantage by combining the customer-
influencing strategies of the business into an integrated array of market-focused actions. Marketing
strategy is defined as the analysis, strategy development, and the implementation activities in
selecting target market strategies for the product-markets of interests to the organizations, setting
marketing objectives and developing, implementing and managing the marketing programs,
positioning strategies designed to meet the needs of customer in each target market.

A typical marketing strategy (Kotler, 1999) consists of:

• Analyzing market and competition
• Segmenting market
• Market targeting and positioning strategies
• Relationship strategies
• Product/ Customer strategies
• Distribution strategy
• Pricing strategy
• Advertising, service and sales promotion strategies
• Research and development strategies
• Marketing research strategies

The marketing concept is a consciously articulated philosophy of business that says, in essence,
“The customer is king”. Implicit in the marketing concept is the need to ensure the long-term
continuity of predictable quality, sales and service, and in turn viability of the enterprise.

The marketing concept is interwoven with an explicit assumption that every organization has a
responsibility to its constituent stakeholders. A stakeholder is “any individual or group who can

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affect or is affected by the actions, decisions, policies, practices or goals of the organization”.
These include owners, customers, employees, suppliers as well as private investors and lenders.
Also communities are stakeholders interested in profitable business that sustain tax revenues and
employment. What is needed is a strategic approach to marketing so that sale reinforces a
composite set of objectives, including customer satisfaction, profitability and long term continuity
of the enterprise.

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