Does size really matter? The ups and downs of owning a microbusiness in the UAE25 July 2018 Category : Mainland Company
The dream of business growth is often seen as a desirable progression as part of an entrepreneur’s long-term business plan. But some business owners prefer to keep their business small because they see far greater benefits in running very small ventures. Often classified as microbusinesses, these micro firms, according to Dubai SME, part of the Department of Economic Development (DED) of Dubai, are ventures with fewer than nine employees and a turnover of less than AED 9m in the trading sector, or fewer than 20 and a turnover of less than AED 10m in the services sector. But despite the apparent benefits of micro firms, keeping your business small can be a major barrier to growing your profits.
So, is there any good reason not to grow your business if you can acknowledge and mitigate the disadvantages of growth? Here we identify and discuss a few of the key points.
1. Overheads: It might seem an obvious point, but the fewer employees you have, the lower your wage bill and the lower the cost of business premises or office space. In short, your monthly outgoings are reduced and you can hold on to more of the profit. In addition, a leaner organisation means you can operate the business more efficiently, and with the flat management structure characteristic of microbusinesses, decisions can be made quickly, giving your venture the flexibility to adapt quickly to market forces, a luxury most larger companies lack. And here in the UAE, it would seem many owners recognise those advantages: whether they’re on their way to higher growth or choosing to remain small, Dubai SME estimates that microbusinesses account for over 70% of Dubai’s overall business count.
In the UAE, we have the added bonus that the government has been bending over backwards to help small businesses, help not available to larger corporations. Dubai SME acknowledges that SMEs represent 95% of all companies, accounting for 40% of Dubai’s GDP, ‘and play an integral role in fostering innovation and entrepreneurship.’ Under the Dubai Plan 2021 they aim to increase that to 45% within the next three years. And whilst Dubai SME offers support to entrepreneurs in all phases of their development, further aid is provided by agencies such as Dubai Future Accelerator, which helps cutting-edge entrepreneurs, in partnership with Dubai’s government, to use the city as a ‘testbed for creating solutions to the global challenges of tomorrow’. And initiatives like these have translated into tangible benefits for SME owners large or small, with the UAE ranking 21st out of 190 in The World Bank’s 2018 Doing Business report, representing a jump of five places from its previous ranking.
But this assistance exists to help entrepreneurs establish new businesses, not to restrict their future growth. And the reality is that a small staff and lower overheads aren’t always advantageous: staying small may give you those efficiencies in your management structure, but if you never grow, not only will you be limited in the size and scope of the business you can take on, you may also be limiting yourself to one of the many free zones without ever being able to access to UAE onshore market, which, depending on your sector, can be a major barrier to profit growth.
But this assistance exists to help entrepreneurs establish new businesses, not to restrict their future growth.
In addition, you’ll also never be able to take advantage of the economies of scale enjoyed by larger businesses and your venture will suffer higher costs. And this affects your purchasing power, too: larger organisations can keep unit costs down by negotiating lower prices for large volumes, thus giving them those economies of scale elusive to so many microbusinesses. And with virtually every cost your venture takes on, from healthcare to telecoms, the larger the company, the greater the scope for negotiating costs downwards. In short, whether you’re providing a service or a product, your unit cost is always likely to be higher as a microbusiness.
2. The ups and downs of hiring talent: The draw of being closer to the customer or client is attractive to many employees, and staff who enjoy being part of a small team can often be rewarded with close communication and collaboration with the business owner, as well as the satisfaction of being able to input ideas and deliver new services or products to market much faster as a result of fewer decision makers. This gives the business owner a distinct advantage over larger competitors, and allows you to be more nimble in correcting any service or production issues. Furthermore, keeping your business small means you can be quick to adapt according to feedback and quick to handle any negative PR more effectively.
But there’s a drawback: even though many small businesses offer non-financial perks as well as the opportunity to stay close to the creative and decision-making process, the inescapable truth is that, in most cases, larger companies can afford to pay employees more and are therefore more likely to attract the best talent. And the key takeaway here? You’ll only ever compete in the market for top talent if you’re constantly striving for growth.
3. Markets & finance: Microbusinesses, in order to thrive, often position themselves in niche markets where they are unlikely, at least for a while, to be troubled by larger competitors. It goes without saying that a microbusiness operating in an established mass market presents difficulties with more intense competition. But niche markets can offer what economists refer to as a ‘price inelastic demand’, meaning that demand from customers or clients will not change, regardless of whether the price falls or rises. That means that microbusinesses operating in niche markets can charge a higher mark-up, which in turn allows them to be more profitable, despite lower volumes.
But is that sustainable? The downside here is that you may only be successful in your niche market for a short time. When larger organisations come along they can compete on price because their size allows them to take advantage of economies of scale. And if you decide you want to scale up your business to keep pace with your competitors, you’ll need finance to grow.
And that presents another problem for a microbusiness owner. It’s a well known fact here in the UAE that small businesses, especially ones with little or no track record in the market, can struggle to secure financing. According to a report from the International Monetary Fund (IMF), one third of all SMEs in the Middle East and North Africa (MENA) region report difficulty in accessing finance. Whilst larger and established SMEs can use their track record and growth to help secure further finance, for small businesses, bank finance, where available, can be expensive. And if you can secure investment from angel investors or venture capitalists, business owners will often have to surrender much more equity in their venture than they might otherwise have liked. In short, the bigger and more established you are, the less the risk you represent to potential lenders.
4. The personal touch vs. name recognition: Bringing with it a heightened appreciation of the value of each customer, the personal touch can give a microbusiness a competitive advantage over bigger rivals. For a start, they’ll know that your company’s staff will have detailed individual knowledge of each and every client and are likely to see a client through every stage of their engagement with your venture. Why? Because when staff members in a microbusiness are closer to the customer, they have more of a stake in that transaction and assume higher levels of responsibility, and the upshot of that is that they’re much more likely to show higher levels of engagement.
And that personal connection to the client or customer can really pay dividends: as the Federation of Small Business notes, ‘the consistency inherent in SME staffing can save clients a great deal of valuable time in the long run as there is no need to repeatedly spell out their requirements every time they contact the firm.’ And what does that consistency bring? Primarily, it translates into repeat business. After all, customers you’ve formed a close connection with are more likely to trust your fledgling brand and more likely to choose your venture again, keeping potential competitors at bay. Indeed, as David Stokes and Nicholas Wilson note in their book Small Business Management and Entrepreneurship, ‘allegiances to an existing small business are sometimes sufficiently great, and the local market sufficiently small, to make market entry impossible except by purchasing the business’.
But there’s a downside here, too: the bigger your business, the more money and time you can spend on brand building and marketing. And when you as a business owner spend the majority of your time at the coal face of your business, liaising with and selling to customers, you’ll have little time to develop your brand. The key takeaway here? You don’t have to sacrifice the loyalty of existing customers in order to appeal to a wider market, nor should you.
But there’s a downside here, too: the bigger your business, the more money and time you can spend on brand building and marketing.
Small fry or big fish
Whichever camp you fall into, as many entrepreneurs who have been through the growth phase will attest, it always pays to remember how you did things as a microbusiness, and why they were important. The advantages of staying small therefore don’t have to be eclipsed by growing your business and your profits, and with the right advice and careful planning, you might just be able to achieve the best of both worlds.
Virtuzone Mainland is dedicated to helping clients open a company on the UAE mainland, providing advice and assistance with every aspect of the company formation. To set up a consultation, please call us on +971 4 457 8200, send an email to firstname.lastname@example.org or click here.