ENVIRONMENTAL FACTORS AFFECTING THE PERFORMANCE OF SMALL BUSINESS

 ENVIRONMENTAL FACTORS AFFECTING THE PERFORMANCE OF SMALL BUSINESS ENTERPRISES IN THE PHARMACEUTICAL INDUSTRY IN GHANA.

Small scale businesses (SSBs) constitute large population of businesses worldwide and they play a significant role in the economy. Consequently, the performance of small-scale enterprises subsector is closely associated with the performance of the nation. SSBs play very important role towards fostering accelerated economic growth, development and stability within several economies. They play tremendous roles in employment generation, provision of goods and services, creating better standard of living, as well as contributing to the growth of Gross Domestic Product (GDP) of the nation, (OECD, 2010). Small firms create new jobs, open up opportunities for upward social mobility, foster economic flexibility, and contribute to competition and economic efficiency (Liao, Welsch, & Moutray, 2009). SSBs are the driving force for economic growth, job creation, and poverty reduction in developing countries. They have been the means through which accelerated economic growth and rapid industrialization have been achieved. Furthermore, SSBs has been recognized as a feeder service to large- scale industries (Fabayo, 2009).

There is no district accepted meaning of small and medium sized Enterprise. SMEs which stand for small and medium sized enterprise are owned, managed and established by entrepreneurs, according to Abor and Quartey (2010). Entrepreneur is a French word. In French language it means ‘entreprenerd’, meaning to undertake’. Some duties of the entrepreneur are managing, directing, controlling, assuming risk of business and organizing (Kuratko & Hodgetts, 1995). The term ‘entrepreneurs’ and ‘entrepreneurship’ are popular terms used in today`s modern parlance. Entrepreneurship is the process the entrepreneur goes through to undertake all the business risks to come out with invention which is of value to the society and receiving rewards for his invention, (Hisrich and peters, 2002 cited in stokes and Wilson, 2010). The European commission-initiated definitions for SMEs. The definitions of SMEs by European commission brought about a category of small business which was named ‘Micro Enterprises’.

There are so many definitions for SMEs defined by government agencies in Ghana. Ghana

Statistical Services described SMEs with more than ten (10) employees as medium and Large Sized Enterprise and SMEs with less than ten (10) employees as Small-Scale Enterprise. Once more, NBSSI portrayed firms as Micro and small enterprises as ventures utilizing 29 individuals or few workers. As per NBSSI, (2016) a firm is a micro enterprise when that firm employs between 1 – 5 representatives and have a fixed asset not exceeding 10,000 USD excluding land and building NBSSI further categories SMEs as enterprises employing between 6 – 29 people with a fixed asset not more than 10,000 USD, excluding land and capital.

Challenges such as government policies economic factors, financing, social amenities and among other are challenges faced by SMEs in Ghana. Globally, challenges such as experience, the age of the entrepreneur, business environment forces and lack of adequate capital are challenges faced by SMEs, (Rose et al, 2006).

In spite of the above challenges of the above challenges faced by SMEs, governmental organizations, for example, National Board for Small Scale Industries (NBSSI), the Intermediate Technology Transfer Unit (ITTU), have interceded to discover answer for the issues confronting SMEs Proprietors in Ghana and Hohoe Municipal Assembly. Therefore, the research under investigation tries to fine out the environmental factors affecting the performance of small business enterprises. 

Firm performance is often related to its environment, i.e. the business performance is based on the match between the business and its environment. The environment carries needs and expectations, i.e. market opportunities, which the firm tries to respond to with its resources and capabilities. The better the relationship between firm and its environment, the better the success, according to contingency theory, firm performance is the result of a proper alignment of firm design with the context it operates in, (Donaldson, 1995; Burns & Stalker, 1961). Similarly, there is no one best way to organize, and contextual factors should be taken into account (Pfeffer, 1982). In the configurational approach (Miller & Friesen, 1984) successful firms are considered to be aligned in a small number of typical patterns. However, as the business environment of many firms is changing all the time, there is a continuous need for adjustment of the fit between the firm and its environment. From the firm`s viewpoint, this process of adapting to changes in its environment is called strategic management (Schendel & Hofer, 1979).

Firm performance can be approached from many perspectives, i.e. from an internal (firm) or external (environment) perspective. Recently, the most popular theoretical approaches in research have been strategic management and population ecology (Tsai et al. 1991). They explain firm performance from opposite directions: the first from the firm-internal viewpoint, and the second from the firm-external point of view. Later studies of firm performance have discovered the benefits of an integrated approach, i.e. a dialectical approach (Amit, Glosten, & Muller, 2010; Vesalainen, 2012). Therefore; business performance is bounded with firm internal factors and with environmental factors and their fit.

Strategic Groups theory

Strategic group theory stems from Hunt (2010). Strategic group was used as analytical tool for examining the intra-sartorial structure, (Santos Álvarez ,2014). Hunt defined the concept strategic groups to mean a collection of firms within the industry which have two sides by means of respect to cost structure, the degree of vertical or horizontal integration and the product differentiation, formal business, control systems and management rewards/punishments, Hunt, 2010, p.8 cited in (Leask & Parker 2016). Porter, 1979:215 cited in (Santos Álvarez 2014) described strategic group as a cluster of firms within a particular industry who share a similar strategy. The purpose of strategic group is to identify group (or clusters) of companies in and industry that pursue similar competitive strategies, (Cool & Schendel, 1987). Analysis of strategic group in business environment provides a basis for research into areas such as; intergroup interaction, process of strategic change, strategic stability, the dynamic of organizational behavior etc. The study of strategic group gives more directions and scope for explaining organizational behavior and performance, (Santos Álvarez 2004). The strategic group concept is helpful in no less than three ways; understanding rivalry, examination of strategic opportunities and investigation of versatility. Understanding competition is where managers focus on their direct competitors within their particular strategic group rather than the whole industry.

Market Segments theory

A market fragment is a gathering of clients who have relative needs that are not the same as customers’ needs in different parts of the market. The theory of market segment focuses attention on differences in customer needs, relative market share and how market can be recognized and serviced, (Johnson et al., (2008). There are processes of market segments. To begin with, the first way to segment market is to differentiate your customer on the basis of demographic variables (such as age, gender, evaluation and income), psychographic variables (such as opinions, interests, region and attitudes) and behaviors (such as media behavior purchase rate, brand loyalty and channel usage). For market segments to be functional, the segments groupings must include customers who are similar to one another and must be separated from customers in the other groups although the customers have reaction to your potential marketing offerings and approaches. Also, the market segments should be different in order to allow their sizes and accessibilities to be easily measured. Secondly, segments should be large enough to validate separate targeting efforts. Thirdly, the segments should be exclusively reachable through communication media and marketing strategies. Lastly, it should be fairly steady and not losing ground in size over time, (Lynn, 2011).

 Strategic Customers

The strategic customer is the person(s) to whom the strategy is primarily addressed because they have the most influence over which goods or services are purchased. For instance, most clients buy products through retail outlets, so the manufacturers must take care of two sorts of clients, the shop clients and the immediate clients. Although, both customers influence demand, one of the customers will be more influential than the others. These customers are called strategic customers, (Johnson et al., (2008).

The theoretical framework adapted for this study is (Johnson et al., (2008) theory on strategic position whereby business environment factors are considered as an accept of organization`s strategic position. (Johnson et al., (2008) identified key components of external and internal business environment which is made up of macro external factors, industry factors and competitors and markets.  

The concept of Small-Scale Business and its environment

Business is fundamental to the well-being of every society. Small scale enterprises exist in all economic environments. Most people have an idea of what is meant by small-scale business, but defining it poses a problem. How it is defined depends on who is defining it and the purpose for which it is defined. Thus, there is no universally accepted definition of small-scale business, because the classification of business into large, medium or small scale is relative. Bandar and Presley (2010) observe that the different socio-economic structures of each country are the reasons for non-uniformity in definition of SSB.

Small scale business, small scale industry and small-scale enterprise are used interchangeably. The criteria that have been used to define Small Scale Businesses include employment, capital investment, sales turnover, accessibility, output and in some cases, a blend of some or all of these criteria. In Ghana and worldwide, there seems to be no specific definition of small business. Different authors, scholars, and schools have different ideas as to the differences in capital outlay, number of employees, sales turnover, fixed capital investment, available plant and machinery, market share and the level of development, these features equally vary from one country to the others. 

Individual countries’ circumstances determine how micro, small, medium, and large-scale enterprises are being defined in that country, however, in Ghana, the current classification is based on the number of employees and assets (excluding land and buildings). In practice, the number of employees is the most common standard used in National SME policies worldwide. The criteria/ classification adopted in the recent enterprises survey in Ghana is micro enterprises less than 10 employees, small scale enterprises 10-49 employees, medium scale enterprises 50199 employees and large-scale enterprises 200 and above employees, (NBS/SMEDAN, 2012).

There are a range of definitions of small enterprises by different scholars (Storey, 1994). These definitions have created a lot of problems for entrepreneurs. The principal advisory group to overcome this definition issue postured on little scale endeavors was panel of request on SMEs which is known as Bolton Committee (1971). The Bolton Committee confirmed the statistical and economic definition on SMEs. Three main criteria are used to evaluate the economic definition. Firstly, it should have small market share, secondly, it should be managed by owners in a modified way and lastly it should be self-regulating. One of the disadvantages connected with the Bolton Committee economic and statistical definition is that the economic definition which expresses that a small business is overseen by its owners or part owners is a changed way and not through the medium of a formal administration structure. As firm builds, entrepreneurs no more settle on vital choices, however, decline obligation toward a group of administrators.

For example, it is impossible for a firm with one hundred workers to be overseen in a personalized way, proposing that the economic and numerical definitions of Bolton Committee are afar reconciliation, (Weston & Copeland, 1998; cited in Abor & Quartey, 2010). The Bolton Committee`s definition was criticized by some scholars. Scholars said there was no single criteria definition for the word’s smallness, ownership, turnover, number of employees and assets. Second criticism was that the first three high limits of sales were grouped for dissimilar sectors and two dissimilar high limits of sales were grouped for number of employees. This situation makes the definition difficult to make cross country evaluation. The final criticism was that the definition considered the small-scale firm’s industry to be homogeneous. 

As a result of the above criticism for Bolton Committee statistical and economic definition for small scale enterprises, the European Commission (2004) proposed the term, Small and Medium

Enterprises (SMEs). The European Commission divided the sector into three components: European Commission said enterprise with up to 9 employees is termed „Micro enterprises‟, ten

(10) to ninety-nine (99) employees is referred to as Small Enterprises and firms with hundred

(100) to four hundred and ninety-nine (499) is termed „Medium Enterprise‟. In retrospect, European Commission definitions on SMEs are based on employment rather than diversity of criteria. Finally, EC`s definition is not homogeneous because it does not make clear distinction between small and medium enterprises.

In Ghana, Small & Medium Sized Enterprises have been distinct in so many ways; mostly the criterion used to define SMEs is the number of employees which leads to a lot of confusion, Abor & Quartey, (2010). The Ghana Statistical Service (GSS) considers enterprise with less than

10 employees as Small-Scale Enterprise and with more than 10 employees as Medium and

Large-Scale Enterprise. The National Board of Small-Scale Industries (NBSSI) in Ghana used fixed assets and number of employees in its definition criteria of Small-Scale Enterprise. It defines SMEs as enterprise which has 9 workers with plan and machinery (excluding land, building and vehicles) not exceeding 10 million cedis (US$ 9506, using 1994 exchange rate). On the other hand, the Ghana Enterprise Development Commission (GEDC) uses 10 million cedi’s upper limit definitions for plant and machines to define Small & Medium Sized Enterprises. However, these definitions received criticism. Firstly, valuation of fixed asset in Ghana is a big problem. Secondly, continuous depreciation of the cedis affect the exchange rate which make such definition out-moded (Kayanula & Quartey 2000). 

From the above reviewed literature about the definition of SMEs, definition of SMEs does not relate to a single universally accepted definition, but it can be in the context of statistical, geographical and economic.

Roles Performed by Small and Medium Scale Enterprises (SMEs)

The dynamic role played by SMEs in low income countries have been recognized, (Paul, 2012).

SMEs are significant wellspring of business and salary in developing nations. It is said that

SMEs employ 22% of dynamic populace in developing nations (Daniel and Fisseha, 1992; Paul, 2012 cited in (Kayanula and Quartey, 2000). SMEs enterprises perform a useful role of ensuring economic growth, income stability and employment. Since SMEs is labor intensive it is more likely to succeed in urban areas and rural areas. Also, when SMEs are settled in rural and urban areas, they can add to even allocation of economic activities in rural areas which will slow down rural urban migration, (Abor & Beipke, 2015)

In any case, some authors argued that job created by SMEs is statistical flaw and increment in business through SMEs is not generally connected with profitability. Nevertheless, the important role played by these enterprises cannot be overlooked, (Kayanula & Quartey ,2010).

In Ghana the sector accounts for over 80% of businesses, employs 15.5 of labor forces and accounts for 6% of GDP in 2000. Activities engaged in SMEs such as farming, electricians, auto mechanics, over the counter, retail and whole sale pharmaceutical business provide sources of employment and income to entrepreneurs in SMEs, (Abor & Beipke, 2005).

Challenges of SMEs in Contributing to National Economies

Despite the contributions of SMEs to the national economy, they still battle with problems which affect economic growth and development. According to Schmitz 1982, Liedholm & Mend, 1987, Liedholm, 1990; Steel & Webseter, 1990 cited in (Kayanula & Quartey 2010). In Ghana SMEs face a lot of constraints, among those are; input, finance, political, legal, economic, competitive forces, managerial and others. In Ghana, Small Scale Entrepreneurs in whole sale and retail pharmaceutical industry face regulatory constraints. These regulatory constraints are in the form of regulatory sanctions Ghana Pharmaceutical Council imposed on industries which failed to renew pharmacy license, engaged in unprofessional practices, improper records keeping of procurement, continuous absence of pharmacists from business premises and others (Melorose et al. 2015). Other legal constraints like permitting and administrative prerequisites, high cost of settling legal cases and over the top deferrals in court continuing influence SMEs operation.

In general, external business environment is a major driver that impact on all business including SMEs. According to Ibrahim, 2008 cited in (Dzisi et al. 2013) said SMEs in developing countries are vulnerable to external business environment effects. He said, the challenges the SMEs face can be attributed to macro environmental factors, competitive forces and strategic group competition. 

Business and its Environment

The firm interacts with its environment. There are in fact different levels of environment, each encompassing several components. Thus, the environment of the firm consists of several environments. Environment as a general term refers here to all those arenas the firm is operating in and is attached to (Kauranen, 2011). Moreover, environments and their components affect firm performance in many ways, directly or indirectly.

Hence, the firm operates in many environments simultaneously collaborating with other actors in the market and at the same time competing for scarce resources with others.

For instance, from the firm`s point of view, one of the most critical markets is the customer market, where the firm sells the products which have gone through the process of combining the production factors. On the other side of the supply chain, in the supplier market, the firm buys factors of production. In the financial market, the firm acquires necessary financing for the business. Several environmental dimensions have been presented in the literature for describing the qualities of organizational environments. For instance, Dess and Beard (2010) distinguish between dimensions such as munificence, dynamism, and complexity. Munificence refers to the environmental capacity as the extent to which the environment can support sustained growth. In general, a munificent environment is regarded as more favorable for business success than a scarce environment. Dynamism is related to the turbulence, i.e. the dimension of stability vs. instability. It has been found that small firms that face an environment with increasing dynamism tend to grow faster than others (Wiklund, 1998). Environmental complexity indicates that there are several different segments of the market with varied characteristics and needs that are being served by the firm. Thus, the firm sees a heterogeneous environment as complex.

A distinction can also be made between hostile and benign environments (Covin & Slevin,1989). Hostile environments are characterized by precarious industry settings, intense competition, harsh, overwhelming business climates, and the relative lack of exploitable opportunities. On the other hand, benign environments provide a safe setting for business operations due to their overall level of munificence and richness in investment and marketing opportunities. Perhaps the most elaborate typology of environmental dimensions is the one presented by Luckovich (1974), who identified 64 types of environments based upon the following dimensions: complex/noncomplex, routine/non-routine, organized/unorganized, direct/indirect, low-change/high-change, and stable/unstable.

However, it seems that the environmental dimensions commonly used are uncertainty, dynamism, homogeneity, munificence, and complexity (Miller, 1987c). It is important to notice that the environment may play a bigger role for small firms than for larger firms because of small firms‟ higher vulnerability to environmental influences. Paradoxically, environment is a threat for the firm, but also an opportunity in providing resources the firm needs”. 

According to Kefalas, (1981) business environments of an enterprise are events which directly or indirectly affect the operations of enterprise and they are uncontrollable. He said the business environment can be grouped into task environment which is well defined and example is customers, suppliers, bankers etc. and the general external business environment which is ill defined and can be conceptualized as PESTEL.

Factors like socio-economic, geographical location, legal regulation, demographic conditions and other factors create business environment (Litavniece & Znotiņa 2015). Vedla A. (2000), cited in (Litarniece and Zenotina, 2015) said business environment is objective and subjective. He argued that it is objective because the external business environment is claimed as a set of surrounding circumstances. It is subjective because external business environment forces are independent from the will of individuals. He therefore, defined the business environment as "" an arrangement of goal and subjective elements affecting the business circumstance within a predefined day and age, (Vedla, 2010 as cited in Litarniece and Zenotina, 2015).

According to Orginni & Adesanya, 2013, business organization does not operate in vacuum but it operates in business environment where there is production and distribution of goods and services. They argued that the business environment is the summation of all outside and interior conditions and influences that influence the presence, development and advancement of business. In Adebayo et al, 2005 as stated in (Oginni & Adesanya 2013) business environment can be divided into internal and external. He said internal business environment is the environment where organization has control over and can be dictated by circumstances such as policy, personnel, capital etc. They also, said external business consist of factors which are outside the control of organization such as technology, politics, government legislations etc. From the above reviewed literature on the definition of business environment, it can be deduced that the definition of business environment does not lend itself to a single universal accepted definition but it could be in the context of task or general business environment, internal or external business environment. This study adopted classification of business environment by (Johnson et al., (2010) which classifies business environment into macro-business environment, industry business environment, competitors and market environment. 

Macro Business Environmental Factors

These are broad business environment factors that have bigger or less impact on almost all firms,

(Johnson et al., (2008). According to Itani, O`Connel, Mason, 2014 cited in (Litavniece & Znotiņa 2015) macro business environment where a firm finds itself in can influence the performance of that firm and the rate of influence depends on what share of the firm`s depending on the overall economy. PESTEL framework which consists of political, economic, sociocultural, technological, environmental and legal is used to analyse the macro environment. For the purpose of this study, because of time constraints on the side of the researcher, he selected political, economic, technological and legal factors to examine the effect environment factors on the execution of Small & Medium Sized Enterprises in pharmaceutical industry in Hohoe Municipality.

Political Environmental Factors

Political environment is any national or international political factors that can affect the performance of SMEs positively or negatively (Wanjiru et al. 2013). It includes government subventions for national carriers, security controls, boundaries on migration, etc, (Johnson et al., (2008). Political imperatives are spot on SMEs through duty modified, the lowest pay permitted by law enactment, contamination approaches and different activities went for securing workers, clients, the overall population and nature. Nevertheless, some political actions are planned to give benefits and protect SMEs. Such laws include patent laws, government subventions and product research incentives but in Ghana, political forces such as legislation, increase in taxation, environmental protection, foreign trade agreement, stability of political system and others affect small entrepreneurs.

Economic Environmental Factors

Economic factors include the general economic climate, trade rates, inflation rate, labour unemployment rate, interest rates, the rate of economic development, per capita domestic product and trade deficit or surplus, Gamble, 2014 cited in (Litavniece & Znotiņa, 2015). Economic factors help SMEs to make strategic decision. It is important for entrepreneurs of Small & Medium Sized Enterprises in pharmaceutical industry to comprehend monetary elements and indicators and to utilize the information to help marketing decision-making and planning process. For instance, if there is a variation in interest rates, then it is likely that SMEs may be involved in considering increases in cost. According to Related & Rights, 2007 stated that high trade barriers in Ghana leads to high local production cost of pharmaceutical products which affect the local drugs not to be competitive with the imported drugs.

Technological Environmental Factors

Technological forces refer to the rate of scientific change and fastest growth of technology that have potential wide-ranging effects on society Gamble, (2014) cited in (Litavniece & Znotiņa 2015). In Ghana, Small Scale Entrepreneurs find it difficult to gaining access to new technologies which limits innovation and SMEs competitiveness, (Kayanula & Quartey 2000). Technological factors have rendered some SMEs not competitive and not able to meet the needs of customers. However, entrepreneurs in Small and Medium Scale pharmaceutical industry need to recognize the need for technological change, and the need to go with the flow, to have competitive advantage. Decisions to improve change or implement new technological processes must be made in order to meet customer wants and needs.

Information Technology has been identified as a major player in innovation and competitiveness of SMEs but according to European Union (EU), a full potential of IT will be harnessed if labour force is equipped with right skills and having access to high-tech infrastructure. However, in the case of Ghana, some SMEs lack physical telecommunication infrastructure and high-speed internet to compete globally, (Dzisi et al. 2013).

 Legal Environmental Factors

Legal environment forces include, labour law, antitrust laws, regulations, occupational health & safety policies and other laws of a country or pertaining to particular business environment that industry within the business environment must with those rules. In Ghana, the cumbersome procedures and commencing businesses were issues affecting local entrepreneurs in pharmaceutical whole sale and retail industry. According to Aryeetey et al (1994) cited in (Kayanula & Quartey 2000), this legal constraint accounted for less than 1% of their sample. In Ghana, regulations adopted by the local government in controlling of pharmaceutical retail industry include, screening of premises, monitoring or registration of renewal applications, collating and managing inventories of all documents for registration and renewals etc.

In Ghana the political environment  is fast affecting the development our country.