The Use of Performance Indicators for Small and Micro Enterprises (SMEs): A Brazilian regional experience
Arcenildo Valderes Da Silva Nunes
Eric Dorion
Elóide Teresa Pavoni
Adrieli Alves Pereira
Eliana Andréa Severo
Abstract
Micro and Small Enterprises represent approximately 98.4% of private enterprises in Brazil. Those small businesses are placed in a highly competitive environment and they need management practices to pursue greater competitiveness, resulting in a demand for performance indicators that can better assist entrepreneurs in small business management. The aim of the research is to verify if the Micro and Small Enterprises (MSEs) associated with the MICROEMPA association of Caxias do Sul, Brazil, use performance indicators and what are these specifically. The research is exploratory with a descriptive study. The sample was completed with 42 companies from a universe of 561 companies. The results show that the majority of companies use performance indicators to monitor the management of the business, but nevertheless, a small proportion of existing indicators are being by MSEs.
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Key-words: MSEs. Performance Indicators. Brazil.
1.INTRODUCTION
Business perspectives and relations between markets have suffered important changes in recent years, more specifically concerning the aspects of profitability and assets. Most of the South American countries are characterized by economies with heavy reliance on foreign capital and fierce competition, imposed by developed countries. In this context, companies seek other management models, grounded in knowledge mechanisms that provide information in order to minimize the negative effects of an economy that generates unexpected and increasing difficulties. Thus, a systematic evaluation of effective management performance becomes a tool of fundamental importance for organizational success, especially for micro and small businesses which constitute the main source of revenue for the South American population.
In this competitive environment, management models, theories on human resourcemanagement, process management, systems and organizational structures areconstantly being re-modeled. Overthepasttwocenturies, were formulatedvariousmodelsandtheoriesin thefield of administration, but more recently, there wasananalysis,reflectionand reformulationofideasin ordertoconform themtoan informationandknowledge based society(MINTZBERG et al., 1998).
Bondetal. (2001) claimthatorganizational performancedepends onthe integrationof all its activities; from the formulation of its strategies and through the actionsthat contribute to the achievement of the prescribed goals. Therefore, performance managementmaytransform behaviour, improve the organization’s activitiesandindicatewhere problems may arise and why.
Overtime, performancemeasurement systemshave beendevelopedtomonitorand maintaincontrolin the organizations, meaning that performance measurementisnecessaryfor organizational growthand continuous improvement.This leads totheimportancerelatedto the use of operation control indicators, whichidentify the criticalaspectsthat generate or impair business performance andwhichcontribute to the implementation ofmanagementimprovementsandchanges (BOND et al., 2001). In this context, entrepreneurs and business managers, whorequire a constant monitoring and evaluation of their organization, do need to use patronized indicators that guidestrategiesand business performance. Theseindicatorsneedto gobeyondfinancial datatoallowchange; and these indicators must provide knowledge support in a competitive perspective, to improve the business processesandtherefore to give a betterunderstanding and prevision of the future.
2.THE IMPORTANCE OF ENTREPRENEURSHIP
Entrepreneurshiphas become a recognized field of research which is directly associated to the growthofnationsand the development of their economies.It isalsoconsideredthemain sourceof formal employmentandinformation andthemajordriver ofgrowthandincome(FILION, 1998).Business ventureisone of thecausesof the prosperityof nations, being the consequence of opportunities, job creation and wealth. Theexistenceof entrepreneurs willingtotakerisksisoneof the pillarsofeconomic development.Entrepreneursareagents ofchange (SCHUMPETER, 1934).Ouvir
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2.1.Entrepreneurship in Brazil
From the researches conducted by the Global Entrepreneurship Monitor – GEM, since it was first published, Brazil has always occupied one of the best15 positionsin therankingofentrepreneurshipbyopportunityandbest positionsin the rankingof entrepreneurshipby necessity. Thesedatashow the increasingpresenceofentrepreneurship by necessity in Brazil, compared toothercountries.
These GEM researches demonstrate that thelessknown any offer is, smaller isthenumber ofcompetitors, more recent are the technologiesandprocessesand higher is theexpectation to generatejobs; creating a greaterpotential of entrepreneurship which shall have a more positive impact on the market.
One of the researches realized before the 2008 world economical crisis reveals thatBrazil was already following theinternational dynamicsofhighcompetition, considering that the country was positioning itself slightlyhigherthan the others, reaching66.0%ofentrepreneursand72.5% of new ventures; and the portionof entrepreneurswhosay theydid nothavecompetitorswassignificantlylowerthaninthe othercountries, with 4.1% of thenew venturesand2.9% of theestablished enterprises (GEM, 2006).
The vast majorityofBrazilian entrepreneurschoosetostart aratherprosaic business, which is more or less ready to start and that wasalreadytestedinareas of high competition. On one hand, itpartly explainsthe low levelof product andmarket innovation,consideringthe totalityof theentrepreneurial population; on the other hand, this maygiveaclue about theobstacles facedby the entrepreneurstomaintaintheirbusinessesfor a longer period of time.
2.2.Entrepreneurship in the city of Caxias do Sul/RS
For thepurposeof data collection on business activities in the city ofCaxiasdo Sul/RS, the Social Information Annual Report (Relação Anual de Informações Sociais - RAIS) and theGeneral Registerof Employed andUnemployed Citizens (Cadastro Geral de Empregados e Desempregados - CAGED) were consulted as the research sources of data.
According to the datafromRAIS,the municipalityofCaxiasdo Sul/RShad28,310registeredbusinesses in 2004, generating123,281formal jobs. This year,thepopulationwasestimatedat396,000inhabitants, representingone businessfor every14inhabitants, far outpacingthenational averagewhich isaboutone formal businessforevery35inhabitants.
Thestate of Rio Grande do Sul (RS)has496municipalities, and in 2004, the city of Caxiasdo Sulaccountedfor 5.7% ofGDPof RS, only behind the cities ofPortoAlegreand Canoas, from the Capital’s metropolitan area. The income per capita in Caxias do Sulis ofR$ 20,485,being wellabovethe State andnational average, as presentedin Table1.
Table 1 – Gross Domestic Product, total and per capita in 2004 - Brazil, RS and Caxias do Sul
Brazil / Rio Grande do Sul / Caxias do SulGDP Total (R$ millions) / GDP Per capita (R$) / GDP Total (R$ millions) / GDP Per capita (R$) / GDP Total (R$ millions) / GDP Per capita (R$)
1.766.620 / 9.729 / 142.874 / 13.320 / 8.117 / 20.485
SOURCE: IBGE - Coordenação de Contas Nacionais. Elaborated by FEE - Núcleo de Contabilidade Social.
The municipalityofCaxiasdo Sulhasitsmain economic activity ametal-mechanic pole; howeverit has manyothereconomic activities, such as a productionof grapes, wine, furniture, and several otherservicesectorssuch as computer services. Dueto a high GDPpercapita, the city of Caxiasdo Sulis also distinguishedbyhavingaimportanttrade activity, attractingtothecityarange oflargedepartment storesofvarioustypes.
3.DECISION MAKING INDICATORS
Starting abusinessrequirescourage, energyand vision toseize anyopportunity. Theentrepreneurhas to develop these characteristics to be successful but, however, notalwaystheseskillsaresufficienttoensurethe businessmaturityandprofitability. According toLongeneckeretal. (1997, p.420) manysmall firmsaremarginalorunprofitable, "struggling tosurviveeachday ormonth, and atbest, yieldonlyaninsignificant amount of profit totheir owners. [...]They'run' their business, but isit exaggerated to saythattheseare'managed'? "
AresearchpublishedbySEBRAE-SP inBedê(2005), revealsthatamong themajor factorsaffectingthe mortalityof businesses are: the underdevelopedentrepreneurial profileamongmostpeople who startacompany, the lack ofbusiness planningbeforethe initiation of activities; corporatemismanagementduringthe firstyearofactivity, the failureofpublic policiesto supportsmallbusinesses, the lowgrowth rate of the Brazilian economyandthe personal problemsofthe business partners.
Thehighmortality rate of new ventures in Brazilmaybethereasonwhyentrepreneurshipis ofincreasinginterestwithin thegovernment, the support institutionsandthe academic researchers themselves(Dornelas, 2001). In thatsense,there are severalprograms, supportedby the federal government, mainly through the SEBRAE and "S" Systems(Sebrae, SESI, SESC, Senac, Senai, Sennar, Senat, andSescoopSEST), ranging from the orientationon the openingofanewbusiness,tosubsidizedlow-cost consulting, in order to minimizethissituation (BOTELHO and SOUZA, 2001).
Therefore, it can beconcludedthattheestablishmentof measurement criteriaandconstant monitoringof the business environment,bothinternally andexternally, could befactors that increasethe businesssurvival rate and the competitiveness of micro and smallbusinesses (MSEs).
Neelyetal. (1996) define performance indicatorsasameansused to quantifytheefficiencyand the effectivenessofadecisiontakenby a company. Therefore, aperformance indicatorallows the organizations tounderstand whatthey aredoing andwhat the results of their actions are.
In general terms,a performanceindicatoris a tool used to measureandanalyzethe results of a company for a certain period of time. Theapplicationof this toolcanbe examinedfrom variousaspects, to meet the needsofdifferentareas of acompanyorany of its specific strategies.
Drucker(1992) argues thatcomputers storealarge volumeofdata,butdataare notinformation. Information hasrelevance andpurposeandacompanyneedsto decide what informationneedsto operateits business.Itis necessary to know how to enhance some information,clearly, objectivelyandat the right time, so that it can value the management decision making process. Knowing how to definewhatto measureandevaluatethedifferentactivities performed by acompanybecomesavery complextask. Establishwhatmeasuresshouldbetakendependson the complexityand the importanceoftheprocessthat should be analyzedin relationto the established goals, and alsoin function of the management.
The author mentions that for company which operate in the information area, it needs to bestructuredaroundgoalsthat clearly definethe expectationsand the objectivesof the organization.Nakamura and Mineta(2001) highlight thatthere isagrowing trendamongexecutives to reviewcorporate performance measure and to formulateindicators tomonitor implementation of thestrategy.
ChangandYoung(1995) justify the needtouseperformance measures, based on thecomplexityoftoday's business environment, on the demands forqualityandproductivity; and to establishreasons, focus, directionandcommon understanding, toprovideknowledge fordecisionsupport. Beuren(2000) believesthatdecision makersrequireadequate measuresto supportdecision making. KendallandKendall(1999), McgeeandPrusak(1994) and Harrington(1988) arguethatthe importance of information, andtherefore, indicatorsshould beemphasizedin anyorganization; andBeuren(2000, p.18) says that"throughamodeloforganization, the manager can better understandthe structureandits complex relationshipsandconsequently, the changesto bestudiedandimplementedinthe organization".
Drucker(1992) argues thatmostexperienced executiveslearnedthatthere is nomagic formulaformeasuring the performanceof a business.Comparingthemanagementwith thefunctionofacar,hesays:
Likeacarneedsacertainnumberofcontrol panel, and alsothatthetire pressure need to be checked frequently, acompany needsacertain numberof'panels' to havecontrol. Butthe number is small, fiveof these'scales' mayinform howthe company isgoingandwhetheritis movingin theright direction (DRUCKER, 1992, p. 173).
The small business worldhasrecognizedtheimportanceof business evaluationtomeasurethe performanceof companies. However,since the 80's, several authors have begun tocriticizethe traditional method, because of the performance measurement tools being restrictedtofinancial measures,notincludingnon-financial performance measuresandnotconsideringintangiblesin business management.
Fromthe 90’s, it is noticedtheintensedevelopmentof performance measurement tools and strategies, called the"RevolutionofMeasurement" (Neely etal., 1996). GhalayiniandNoble(1996) dividetheliteratureonperformance measurementintwophases.Thefirstphase,until the1980’s, has emphasis on financialperformance measuressuchasprofit,returnoninvestment andproductivity.In theearly1990’s, global competitionhas broughtmajorchangesand a new level of consumer demand, which forcedcompaniestodeploynew technologiesandmanagement philosophies, giving rise toa secondphaseof performance measurement.
Much ofthenewmanagement theoriesshow thattheperformance evaluationisa complexadministrativeprocess, which should takeintoconsiderationissuessuch ascustomer satisfaction, motivation, intellectual capital, the environmentandotherelements which refers to theorganization.
The greatchallenge ofcontemporarybusiness managementisto considervaluesinnon-financial performance evaluation.Banker, PotterandSrinivasan(2000) considerthatnonfinancialmeasuresarebetterindicatorsoffutureperformance than financial measuresandassistmanagersto focustheiractionsonlong-term prospects.
Kaplan(1983) argues that thesystem ofperformance measurementistoo muchbasedontraditionalfinancial measures.It containsonlyalimitedfinancial visionthatleadstoshort-term optimizationoftheevaluationof newinvestmentsand theintroductionofnewproducts.Moreover, there is a lack of performance measuresonquality,productivityand inventory. Chakravarthy(1986) mentionsthatthetraditional measures of performancesuch asproductivity,profitabilityand other financial measuresitselfdo notallow to clearly understand strategic performance.
Schmidtetal. (2002) emphasize that there isnorecipeforchoosingthe best indicators,which can befinancial or not financial. What reallymattersis to demonstrate the reality with moretransparency. Thisrequirementincreasestheresponsibility for whom defines the new indicators, but it gives roomtothe use ofcreativity, sincethere are nobusinessesalike, and thereforethe indicatorsusedsuccessfullyinacompany, are not necessarily the samein anotherorganization.For theauthor, to create performance indicatorsisto develop feedback instrumentsfor management.
According to Hronec(1994), the criteriatoestablish the performance measurescan besummarizedin threecategories: quality, timeand cost. KaplanandNorton(1992) mention thatperformance measures aredivided intofourperspectives:financial,customers,internal business processes,and learningandgrowth.
Thequestionaboutwhat arethebest performance measuresis the subjectofmuch debateamongeconomists, accountants, scientistsandadministrators. However,forbusiness managers,itdoes not matter. No actionchosenwill be perfect, butit isfundamentalthat such action beappropriateto thecompany's reality.Anymeasure adoptedwill bringamargin of error, soanaccurate reading you cannot be expected.The most important is that the measureschosendemonstratethetrend, proving that thecompanyisheading towardthe right direction (DRUCKER, 1992). Each manager has the duty to select betweenrangesofindicatorsthe onesthatbestfitthe realityof his businessto generate better business performance.
3.1.Key performance indicators
To define performance indicators tomeasureresultsisextremelyimportantforbusiness success, however, it isimportant toknow how to determinewhat to measure, whichindicatorsaremostrelevant andwhichgroundswill beused for thismeasurement. According toBrown(2000), thetermoutcomerefersto the effectsofthe activitiesgenerated by the organizationin meeting the requirementsofitsmanagement model. For thisresearch, wereusedindicatorsbased on financial statements, indicators usedby theNational Quality Award(Prêmio Nacional da Qualidade - PNQ), thegeneric indicatorsfrom theBalancedScore Card(BSC) and Competitiveness Indicators Award for MSEs.
The indicatorsbasedon financial statementsarewidelydisseminated andusedby largecompanies, and theaccounting departments have longusedtheseindicatorstoassist in business management. The indicatorsusedby PNQinvolveawide range ofindicators, internationally recognized,andbeingusedfora goodpartofBrazilian companies. Thegeneric indicatorsof theBSC, asatoolusedworldwideforawide range of companies, isbeingwidelydisseminatedandrecognizedasamoderntool of business management, which includesindicatorsof allcompany levels, such as the ones of the Competitiveness Indicators Award for SMEs, which isthe focusof this research.
There isawidediversityofliterature onindicators. Theeconomic and financial indicatorshavedevotedtheiruseover theyears, especially inlargecompanies. In that case, thelitterature has becomeredundant.
Through the review of theliterature, wereselectedasetofindicators for the implementationof the researchon MSEs. The selection criterion is based on thefrequencythateach one appears in the bibliography, considering that the research focuses on MSEs.
The indicatorschosenarelistedinTable1.
Group / IndicadorFinancial / Sales growth
Sales profit (Net margin)
Return n invested capital
Profit by product
Profit per customer
Cash flow
Liquidity ratio
Turnover or inventory turnover
Purchase payment medium period
Sales payment medium period
Indebtedness Level
Immobilization of own resources
Market - Clients / Market Share
Customer retention (number of customers with multiple purchases)
Customer acquisition (new customers)
Customer Satisfaction
Customer complaints
Customer returns Index
Number of exclusive clients
Process / New products acceptance Rate
Lack of products Index
Number of orders delivered as promised
Quantity of unplanned production failures
Product Quality
Human resource / Employee satisfaction
Employee retention
Employee productivity
Percentage of hours employed in training
Frequency of job
Frequency of job accidents
Others / Percentage of products / services received from suppliers within the required specifications
Percentage met environmental requirements (environmental law)
Amount invested in social programs
Table 1 - Performance indicators on MSEs
Source: Authors’ elaboration
Largecorporationsusesophisticated toolsbasedoninformation technology,often throughlarge investments,fortheconstant monitoringof itsindicators. However,this cannot constitutealimiting factorfortheMSEstoimplementbusiness developmentwith theuseofindicators. The selection and the number ofindicators that should beusedit is up toeachcompanyto decide, accordingto theirlevelof competitiveness andstrategiesdefined.
4.DEFINITION OF MSEs
There is noconsensusregardingacleardefinitionofwhat aremicroorsmall enterprises (MSEs). BattleandDelay(1990) warn thatthedefinition and the implementationofconceptsonMSEsisanissue that still generatesmajordiscussions,notonly inBrazil butinthe world. Considering that there is nouniversally accepted definition, eachcountry,andsometimes each regions within acountry,use their ownspecific criteria,according to their characteristicsand with thepurposeof the classification.There is avarietyofcriteriato rankthecompanies by itssizebecausethere are manyvariablesthatcan beadopted.
Longenecker et al. (1997, p.27) mention that:
To specifyanysize standardfordefiningbusinessisnecessarilysomewhatarbitrarybecausepeople adoptdifferent standards fordifferent purposes[...].Acompanycanbedescribed as"small" comparedto any larger companies, or 'large' comparedtoany smaller company.
Amicro-enterpriseor smallbusinessis typicallyrun by a business ownerandhisfamily,havingasmallnumberofemployeesand whodevelopactivitiesthatfulfill the localitywhere they areinstalled in products. Leone(1999) says that smallbusinessesareidentifiedas beingmorecentralized organizations,with a simple organizational structure, requiring asmaller amountofadministrative functions.
Thenumber ofemployeesisthe criterion adopted bytwosourcesofclassificationusedinBrazil;the Social Information Annual Report (Relação Anual de Informações Sociais - RAIS) of the Ministryof LabourandSEBRAE. In addition tothecriteriaadoptedby the StatuteofMicroandSmallEnterprise, SEBRAE(2007) classifiesthesizeof thecompaniesaccordingtoTable2.
Company size / Industry / Comercial and ServicesMicro / Up to 19 employed persons / Up to 9 employed persons
Small / From 20 to 99 employed persons / From 10 to 49 employed persons
Medium / From 100 to 499 employed persons / From 50 to 99 employed persons
Large / Over 499 employed persons / Over 99 employed persons
Table 2 - Classificationofcompaniesby thecriteriaof personsemployed
Source: SEBRAE ,2007
InBrazil, thestatistics which constitutes the source of data are fromthe Brazilian InstituteofGeographyand Statistics(IBGE)onMSEs,usingtheabove criteria presented in Table 2. In all their surveys, IBGE classifies the firms according to the number of total employed persons. It also refers to the the Complementary Law (LC), number 123 of 14/12/2006, with the statute of establishing the new National Micro and Small Businesses law, which is based on a quantitative criterion of billing or using the term "gross income".
It can be concluded there are two criteria for the classification of MSEs in Brazil. The criterionofbillingvalueismost often usedfor tax purposes, while the criterionof numberof personsemployed isusedbyentities of the"S" system and for the calculation ofmost statisticson company sizeinthe country. In this research were used data from SEBRAE.
5.METHOD
Startingfrom theempiricalassumptionthatMSEsusefeworeven make nouseof performance indicatorsfor their resultsevaluation, thisresearch was realizedintwosteps. Thefirst part wasexploratory, from the review of literature and, the secondstepwasa surveythrough the useof a questionnaire,selecting, by means ofstatistical procedures,asample ofthe MICROEMPA (Micro and Small Businesses Association) population (Clarke & Cook, 1983).
The study is characterized as exploratory. In the first stage, it was carried out a research on the concepts of entrepreneurship and on the concepts and criteria for the classification ofMSEs. Inthe secondstage of the researchwascarried outthe study on business performance indicators, through areview of theaccounting and financialindicators from the Brazilian literature, from thegeneric indicators of BSC and from the indicatorsusedin theNational Quality Award (Prêmio Nacional da Qualidade - PNQ).
Thesurvey was realized with a directed questionnaire.The choiceof thiscollectiondata instrumenthaspresentedvariousadvantages: the answers toclosed questionsare easytocode,theintervieweedoes notneedto write, and closed questionsfacilitatethecompletionof the questionnaire (RICHARDSON, 1999). Thesurveywas conductedintwophases,thefirst of asampleoftencompaniesbelongingto thepopulationstudied, aiming totestthequestionnaire. The second phase included the necessary adjustments and the application to all theselected companiesin the sample.
Thestudied populationconsistsinallcompaniesassociatedwithMICROEMPA, whichpossess5or more persons working(and staffmembers) in the segmentsof industry, commerceandservices. The surveyofcompaniesshowedthere are 561member companies in MICROEMPAthatmeetthecriterionof atleast fiveworking persons. The establishment of thiscriterionseeks to preventthesurvey ofcompaniesthat have onlymembersprovidingdirect servicestoonecompany.
Through thelistofMSEs that constitute the population,asample of 83companies was chosenrandomly, becauseeach MSEhasthe same chanceofbeingselected(Clarke & Cook, 1983, Cooper and Schindler, 1998). The companiessurveyedwere chosenbysystematic sampling(Clarke Cook, 1983), sincethey wereregisteredin thecomputer systemMICROEMPA, and wereselectedby theirpositionin the listing.ReaandParker(2000, p. 143) classifiedthis sampleas"systematic random sample".
A total of249questionnaires were sent, observingthe same selection criteriafor allcompanies. ThequestionnairesweremailedthroughthepouchMICROEMPA, along withaletter ofresponse. Subsequently, telephone contacts were made with the companies and contact was maintained by e-mail. Finally, werevisited32companies to seek their participation in the survey. However,it was notpossibletoget83responses,sinceonly42firms answeredthequestionnaire, which created a limitationof the research.Consideringthat42companiesansweredthe questionnaire, thereliability coefficientdecreasedto90% and theerror rateincreased to12%, a fact thatultimatelydonotallowinferencesto the entirepopulation.