Measuring the Performance of MSEs

Defining and measuring an organisational performance remains a complex challenge due to the lack of consensus on the definition and measurement tools to be used. This has made MSE performance research to be a subject of concern for researchers for several decades. Fatoki (2011) defines performance as the results of activities of an organisation over a given period under consideration. Broadly, there are two approaches to measuring performance. Performance measurement can be done in an objective manner where parameters such as profitability, competitiveness, efficiency, and productivity are used (Raymond et al. 2011). On the other hand, firm performance could also be measured using a subjective approach where benchmarks such as the satisfaction of stakeholders, coherence and quality of human resources are engaged to measure the performance of the firm (Storey, 1994; Raymond et al. 2011). Most importantly, performance measurement should be

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multidimensional in nature consisting of financial indicators such as profitability growth, sales growth, market share, returns on equity, and non-financial indicators such as the overall satisfaction of owners, employment growth, customer satisfaction, employee satisfaction, customer loyalty, and brand awareness (Storey, 1994; Fatoki, 2011; Blackburn et al., 2013; Raven &, Le 2015).

Chong (2008) indicates that there are four main approaches namely the goal approach, the system resource approach, the stakeholder approach, and the competitive value approach that are suitable for measuring the performance of MSEs. Whilst the goal approach measures the ability of the MSE to attain its goals, the system resource approach assesses the ability of the MSE to obtain resources for the effective operation of the enterprise. Both the competitive value and the stakeholder approach measures the performance of the MSE by its ability to meet the needs and expectations of customers, suppliers, and competitors. In another study, Mudambi and Treichel (2005) indicate that there are eight performance measures for MSEs which includes efficiency, growth, profitability, size, liquidity, success or failure and leverage.

Specifically, the entrepreneurship literature indicates that MSE performance could be measured using indicators such as profitability, competitiveness, efficiency, and productivity (Raymond et al. 2011). Other financial indicators which are also used in the entrepreneurship literature includes profitability growth, sales growth, market share, and return on equity (Storey,1994; Fatoki, 2011). In another vein, Storey (1994) indicates employment, sales and profitability as indicators for measuring the performance of MSEs. However, the use of non-financial indicators such as the overall satisfaction of owners, employment growth, customer satisfaction, employee

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satisfaction, customer loyalty, and brand awareness has also been noted in the literature (Blackburn, Hart, and Wainwright, 2013). Based on the evidence in the literature and the conceptual model discussed in chapter 5, the following dimensions of the performance construct (P) were developed:

i. Employment Growth ii. Sales Growth

iii. Profitability Growth

These indicators of MSE performance were selected because the researcher wanted to measure performance using the objective approach prescribed by Storey (1994; Blackburn, Hart, and Wainwright, 2013) rather than the subjective measurement which might be limited in this research environment. Secondly, employment growth of MSEs is regarded as one of the most authentic measures to determine growth hence its authenticity to determine the performance of MSEs (Magableh et al. 2011).

Employment Growth

One of the key performance indicators which are usually used in assessing MSEs is their ability to generate employment (Storey, 1994; Fatoki, 2011). Among MSEs, the measurement of employment generated over a period has been one of the core measures of measuring MSE growth (Bögenhold & Fachinger, 2007; Magableh et al. 2011). Thus, it is thought that the ability of the MSE to meet an additional cost in terms of wages indicates financial growth. More importantly, employment generation measures the efficiency of an MC programme since this is the main objective of providing MC to microfinance clients (Otero, 1999). Therefore the ability of an MSE to generate a self-employment for the owner as well as generate both skilled and

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unskilled labour for others in a community indicates growth and represents the best way to measure performance (Magableh et al. 2011). Therefore this study has used employment growth as one of the indicators to measure the performance of MSEs. This indicator according to Blackburn, Hart, and Wainwright (2013) represents a more realistic approach to measuring the performance of MSEs since employment figures can be proven. The study therefore measured employment growth by capturing real employment data from MSEs for a period of five years (2011-2015). The five-year data is then aggregated to generate the growth rate which has been used in the regression analysis.

Sales Growth

The ability of an MSE to generate enough sales of its products and services signifies performance and growth (Storey,1994; Fatoki, 2011). Sales growth is seen as an avenue for cash flow into the business in order to meet both financial and non- financial goals of the MSE. In a related study by Paglia and Harjoto (2014), sales growth has been recognised as one of the main indicators of growth apart from employment. It is therefore suggested that MSEs are provided with all kinds of support such as access to credit, product development skills, marketing skills, and customer management skills which will increase their ability to sell their products (Fatoki, 2011). Also, Scott and Bruce's (1987) five-stage growth model for small businesses indicate that MSEs go through sales growth which is one of the indicators of growth and performance. Even though sales growth has been widely used in the entrepreneurship literature to measure MSE performance, it has been argued that in most cases, sales figures could not be relied on as a true measure of performance (Raposo et al., 2011). Notwithstanding this shortfall, sale growth has been used widely in measuring the performance of MSEs in the entrepreneurship

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literature and it has also been used in this study also to measure the performance of MSEs. The study measured sales growth by capturing real sales data from MSEs for a period of five years (2011-2015). The growth rate was calculated by taking the year-to-year changes and the five-year data was then aggregated to generate the growth rate which has been used in the regression analysis.

Profitability Growth

Profitability has been used as one of the measures for the growth of all profit- oriented organisations (Storey, 1994; Raymond et al. 2011; Blackburn, Hart, & Wainwright, 2013). In a related study, Roper (1999) indicated that a firm’s turnover and return on assets remain an indispensable growth indicator particular for MSEs where access to resources are limited. It is therefore emphasised that MSEs need to make strategic choices which could enhance their profitability position. Strategic choices such as sales growth, market positioning and effective asset utilisation could have a positive impact on MSE profitability (Roper, 1999). In order to increase profitability, Baker and Sinkula (2009) contend that MSEs need to adopt both market and entrepreneurial orientation which will make them competitive and ensures business continuity. With the above evidence, profitability has been used to measure the performance of MSEs. The study measured profitability growth by capturing profitability data from MSEs for a period of five years (2011-2015). The five-year data is then aggregated to generate the growth rate which has been used in the regression analysis.