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Investigation of the Factors Influencing SME Failure as a Function of Its Prevention and Fast Recovery after Failure

  • Nenad Nikolić EMAIL logo , Ivan Jovanović , Đorđe Nikolić , Ivan Mihajlović and Peter Schulte
Published/Copyright: October 4, 2018

Abstract

This paper presents a conceptual framework for investigation of the factors influencing the failure of small and medium enterprises (SMEs) as well as the level of their recovery. Based on the review of literature, all the factors are classified either as individual characteristics of entrepreneurs or non-individual characteristics, that is, characteristics related to SMEs. Having in mind various factors identified by different researchers in their studies, the authors of this paper formed a basic hypothetical framework as well as a qualitative framework for evaluation of the most significant factors influencing SME failure and recovery. Accordingly, a preliminary questionnaire was designed in order to collect the attitudes of entrepreneurs regarding the impact of particular factors. The results of the survey were used for further quantitative analysis and as a base for the formation of a structural equation model for testing the proposed hypotheses.

Using the structural equation model to derive results, the authors have found that all the analysed factors except the factors related to private time activities of entrepreneurs/owners of SMEs have a statistically significant influence on SME success, with external non-individual factors having the greatest influence. Furthermore, the results indicate that the level of recovery, business life cycle stage and the sector of a failed SME impact on the ranking of the factors leading to SME failure. The study points to the necessity of improving the conditions under which SMEs operate, primarily by removing the obstacles that hinder growth and development of SMEs as well as by developing the appropriate system of support for entrepreneurs. In addition, having a clear vision of the factors of failure can help SMEs to become more resistant to the adverse effects of these factors and deal with them more effectively.

Acknowledgements

The authors feel indebted to the company Visual Decision Inc. Montreal, Canada, for software package Decision Lab 2000 provided to them free of charge. The authors also wish to thank Enisa Nikolić, a lecturer of English at the Technical faculty in Bor, the University of Belgrade for her assistance with the translation of this paper.

Appendix

A

Table 2:

The questions from the survey, classified into groups of factors.

GroupAbbreviationMean valueQuestion
Individual factors/private time activitiesI1I1Q14.3If I had more time for private activities I would spend it with my family.
I1I1Q23.8If I had more time for private activities I would spend it with my friends.
I1I1Q33.3If I had more time for private activities I would spend it on my hobby.
I1I1Q43.9If I had more time for private activities I would spend it going on vacation.
I1I1Q52.3If I had more time for private activities I would spend it on voluntary work.
I1I1Q62.7If I had more time for private activities I would spend it doing socially responsible work.
Individual factors/Personal characteristics of entrepreneur and owner of SMEI2I2Q13.9Self-confidence is the most important personal characteristic of an entrepreneur for SME success.
I2I2Q23.0The need of achievement is the most important personal characteristic of an entrepreneur for SME success.
I2I2Q33.6Risk taking is the most important personal characteristic of an entrepreneur for SME success.
I2I2Q44.0Creativity is the most important personal characteristic of an entrepreneur for SME success.
I2I2Q53.9Internal locus of control is the most important personal characteristic of an entrepreneur for SME success.
I2I2Q63.8Independence is the most important personal characteristic of an entrepreneur for SME success.
Individual factors/Motivation for SME start-upI3I3Q13.9My motivation for SME start-up was a desire to be independent.
I3I3Q24.1My motivation for SME start-up was of financial nature.
I3I3Q33.8My motivation for SME start-up was job satisfaction.
I3I3Q43.8My motivation for SME start-up was self-fulfilment.
I3I3Q53.1My motivation for SME start-up was based on good business connections.
External non-individual factors/PESTEL analysisE1aE1aQ13.3Political issues, as an external factor, can affect SME operation.
E1aE1aQ23.9Economic issues, as an external factor, can affect SME operation.
E1aE1aQ33.0Social issues, as an external factor, can affect SME operation.
E1bE1bQ12.9Technological issues, as an external factor, can affect SME operation.
E1bE1bQ22.3Environmental issues, as an external factor, can affect SME operation.
E1bE1bQ33.4Legislative issues, as an external factor, can affect SME operation.
External non-individual factors/Infrastructural issuesE2aE2aQ13.3Transportation system is an important infrastructural issue of the region in which my SME suffered from failure.
E2aE2aQ23.5The supply of electricity is an important infrastructural issue of the region in which my SME suffered from failure.
E2aE2aQ33.2Enough qualified work force is an important infrastructural issue of the region in which my SME suffered from failure.
E2bE2bQ13.0Possibility of increasing capacity is an important infrastructural issue of the region in which my SME suffered from failure.
E2bE2bQ23.5Existence of markets for products/services is an important infrastructural issue of region in which my SME suffered from failure.
E2bE2bQ32.6Availability of suppliers for the necessary production materials is an important infrastructural issue of the region in which my SME suffered from failure.
Internal non-individual factorsE3E3Q13.2Management of receivables/payables as an internal factor can affect SME operation.
E3E3Q22.7Delays in loan repayments as an internal factor can affect SME operation.
E3E3Q32.9Drop in motivation as an internal factor can affect SME operation.
E3E3Q43.1Difficulties in obtaining new technologies as an internal factor, can affect SME operation.
E3E3Q52.8Inability to find new potential shareholders/partners as an internal factor can affect SME operation.
E3E3Q62.0The level of unencumbered fixed assets as an internal factor can affect SME operation.
E3E3Q72.3The level of clearing/barter transaction as an internal factor can affect SME operation.

B

Table 3:

Ranking of the factors affecting SME failure based on groups of factors.

Fully recovered SMEsSMEs that have not recoveredAll respondents
Group nameFactor groupMean value of factor rankFactorMean value of factor rankFactorMean value of factor rankFactor
Individual factors/Personal characteristics of entrepreneurs and owners of SMEI24.7I2Q13.8I2Q14.0I2Q4
4.7I2Q53.8I2Q43.9I2Q1
4.7I2Q63.7I2Q33.9I2Q5
4.6I2Q43.6I2Q53.8I2Q6
3.5I2Q33.5I2Q63.6I2Q3
3.4I2Q22.7I2Q23.0I2Q2
Individual factors/

Motivation for SME start-up
I34.8I3Q24.0I3Q24.1I3Q2
4.7I3Q13.6I3Q33.9I3Q1
4.4I3Q43.6I3Q43.8I3Q3
4.3I3Q33.5I3Q13.8I3Q4
4.2I3Q52.7I3Q53.1I3Q5
Non-individual external factors/PESTEL analysisE14.4E1aQ23.6E1aQ23.9E1aQ2
3.6E1aQ13.6E1bQ33.4E1bQ3
3.6E1aQ33.0E1bQ13.3E1aQ1
3. 2E1bQ13.0E1aQ13.0E1aQ3
3.0E1bQ32.8E1aQ32.9E1bQ1
2.1E1bQ22.4E1bQ22.3E1bQ2
Non-individual external factors/Infrastructural issuesE23.6E2bQ13.8E2aQ23.5E2aQ2
2.9E2aQ23.5E2bQ13.5E2bQ2
2.9E2bQ33.4E2bQ33.3E2aQ1
2.8E2aQ13.3E2aQ13.2E2aQ3
2.6E2aQ32.6E2aQ33.0E2bQ1
2.1E2bQ22.5E2bQ22.6E2bQ3
Non-individual internal factors/factors of business environmentE34.3E3Q12.9E3Q13.2E3Q1
3.8E3Q32.8E3Q43.1E3Q4
3.2E3Q42.8E3Q32.9E3Q3
2.8E3Q22.7E3Q22.8E3Q5
2.7E3Q52.5E3Q52.7E3Q2
2.2E3Q72.2E3Q72.3E3Q7
2.0E3Q62.0E3Q62.0E3Q6

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Published Online: 2018-10-04

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