The Importance of Counseling in SME Survival
This article was written by Eduardo Fagre and Jhony Pulido.
Recent studies suggest that one of the most challenging problems for businesses in developing countries is the lack of “managerial capital,” which is basically the ability to make sound decisions in crucial areas such as strategic planning, choosing appropriate investments, defining a business plan, and adapting to unforeseen changes.
Helping companies develop this type of knowledge is a practice that has become increasingly popular, especially through training programs and consulting services. With respect to general business skills training programs, the evidence points to relatively modest impacts, although most assessments have faced challenges that hindered their results (for a multi-case review, see span>McKenzie & Woodruff, 2013). In contrast, the evidence on consulting services seems scarce, but shows promising effects (see Bruhn, Karlan, & Schoar; Mano, Iddrisu, Yoshino, & Sonobe, 2012; Karlan, Knight, & Udry, 2014;Bloom, Eifert, Mahajan, McKenzie, & Roberts, 2013).
But do these types of practices deliver good results in environments with economic instability? To address this concern, we conducted an experiment to assess whether tailored advice could improve the survival and management practices of a group of Venezuelan companies.
Venezuela has been facing a difficult economic situation, which makes doing business a daunting task. From a macroeconomic perspective, the International Monetary Fund estimated that the (hyper) inflation rate climbed to 65,000 and 19,900 percent in 2018 and 2019 respectively, with an 80-percent drop of its GDP between 2014 and 2019. Other problems include insecurity (the country has one of the highest homicide rates in the world), as well as chronic fuel shortages (in some states people must wait hours in line to fill up their cars), unplanned power outages (daily outages are common and have led to nationwide blackouts) , and poor internet connection speed (Venezuela ranks 173rd out of 174 countries in the Speedtest Global Index). In this context, the IDEAS Foundation set out to implement the Avanza program, which is a support model for small and medium-sized enterprises aimed at helping improve performance.
What did our experiment involve?
By the start date of the evaluation, as many as 190 SMEs were pre-selected, 95 of which were randomly assigned to the treatment group that would receive support from the Avanza program, while the other 95 remained as a control group. The goal of the experiment was to measure the impacts on the survival of companies, a difficult task given the context. Based on that, we tried to look for other relevant results, such as productivity and expansion practices, as well as factors to explain these impacts, such as management practices and business training.
The Avanza program was divided into several components:
- A diagnosis of companies in terms of management practices and performance gaps
- Free remote or on-site personalized advice for 6 to 8 months, led by experts from different areas
- Setting up to three goals and work plans to be reached within the timeframe of the program
- A series of workshops on key issues
Within one year of completing the intervention, the CAF team analyzed the impact on survival, having already measured short-term management skills. Some of the challenges that have arisen during this process relate to exhaustion, as well as difficulties in collecting information, as we could only survey 110 of the 190 companies. Other challenges relate to imperfect compliance, as although no control company received advice, 48 companies that were part of the treatment did not complete the program.
CAF measured management practices (in terms of finance, innovation, marketing, planning and human resources) right after the intervention, checking the survival of companies 21 months later.
What were the results?
The program had a positive economic and statistically significant effect on the survival of companies with more than 10 workers. The companies in the treatment group had a 21 percent higher survival rate than similar companies in the control group. Additionally, the survival rates of companies with 10 or fewer employees in the treatment and control groups were identical at 78 percent, suggesting that the program did not affect the survival of smaller companies.
Compared to smaller companies, larger businesses were more compliant, received more hours of advice, and showed greater commitment to the program. Additionally, they showed stronger management skills before the start of the program, and also had more operational experience.
Final Comments
In order to leverage this opportunity, companies must have the time and willingness, while taking care of their daily operations, which can be particularly difficult in environments such as Venezuela. It can even be more challenging for smaller businesses, as they often do not have enough human resources. In fact, 47 percent of smaller companies left the program at some point, compared to 27 percent of larger companies.
Noteworthy is that while the program appears to have effects on medium-sized and large companies, it was not possible to determine through which channel the program had these results. The exhaustion in the collection of information prevented us from confirming whether these effects occurred due to better managerial skills induced by the intervention. We believe that these programs could show better results by excluding smaller companies that lack motivation or sufficient capabilities. A potentially cost-effective way to do this is to align ex ante companies’ expectations with the reality of the program in terms of scope and obligations. This could be very useful if some companies were not aware that the program required such a strong commitment and a fair amount of dedication on their part. Another option is to add monetary costs to withdrawals from the process, such as an early termination fee or a registration or participation fee.
