SME Growth and Public Policy

Entrepreneurship research is characterised by the close collaboration between business, policy, and research. My own research would have been impossible without the help from organisations that foster networking. Two of these organisations, the  Institute for Small Business and Entrepreneurship, and the Enterprise Research Centre, organised a policy round-table event  at Coventry University Techology Park last week to discuss SME growth.

The “Start-Up or Scale-Up” event was to ask whether policies in the UK currently support the development of growth-oriented plans by entrepreneurs. Participants came from a range of universities, and support organisations such as Growth Hubs, LEPs, and Chambers of Commerce. Debate amongst the participants was lively.

Research by the ERC on the impact of high-growth firms and job creation in 2015 showed that, over a three year period, high growth firms represent less than 1% of established businesses, but create over 20% of job growth in all established businesses which grow. High-growth firms make a disproportionately huge impact on job creation. Hence the government interest in supporting high-growth firms. An influential report from NESTA (Brown, Mason, & Mawson, 2014) explores the misalignment between public policy and high-growth firms, particularly given the complex and under-researched nature of what growth involves.

Definitional problems around “high-growth” firms

The policy round table was opened by Professor Stephen Roper with a definitional problem: most policy-makers are using a very specific, even restrictive definition of what a “high growth firm”, or scale-up, actually is.

Start Up Scale Up

The Department for Business Energy and Industrial Strategy is using the OECD definition of a high-growth firm:

“All enterprises with average annualized growth greater than twenty percent per annum, over a three-year period, and with ten or more employees at the beginning of the observation period. Growth is thus measured by the number of employees and by turnover.”  (OECD & Eurostat, 2007)

The problem is that this definition excludes the vast majority of SMEs. 82% of SMEs in the UK have fewer than 10 employees (Department for Business Innovation and Skills, 2016). Of these, 76% had no employees. Start-ups generally have no employees, but have huge growth potential, and often require credit finance, leadership development, and support with exporting to achieve that growth.

A further difficulty is spotting firms at the right time, so that they can be offered help when they most need it. Firms spotted “ex ante” have often come out of a growth cycle and no longer require help. Professor Roper has developed a process whereby high growth firms are spotted through HMRC quarterly tax returns. When HMRC notice an unusual increase in pre-growth indicators, perhaps a change in employee numbers or turnover, they would inform the Growth Hub advisors in the firm’s geographical area. The advisors would then visit the firm to offer support for their growth.

Policy Suggestions for Growth

Professor Roper’s process addresses a key problem: only a small fraction of SMEs have heard of support organisations. Indeed, participants noted the fragmented nature of support for SME growth. In 2015, only 13% of SME employers in England had heard of Growth Hubs, the government-sponsored advisory and training service for SMEs. Growth Hubs are currently provided by the 39 LEPs in England. Wales, Scotland, and Northern Ireland have separate arrangements. Participants in the room noisily discussed the need for a joined-up policy on promoting business growth.

In addition to a lack of joined-up support for growth, a previous post argued that most SMEs are neither willing nor capable of growth. Participants then discussed whether government policy should stop subsidizing all SMEs and focus only on those with growth ambitions. This argument has been made by DEMOS , a non-partisan think-tank. A straw poll of the room showed that about 50% of us thought that government policy support should only go to firms with growth ambitions. The other 50% thought that all SMEs, irrespective of whether they have growth ambitions or not, should be supported.

I would also argue that we must support SMEs who appear to lack growth ambitions. We already know that the majority of entrepreneurs do not have higher education (Department for Business Innovation and Skills, 2016). Research shows that those with higher education can get better-paid jobs, and therefore don’t need to start a business. However, entrepreneurs that want to grow their business may be deterred by their lack of education, including knowledge about support organisations. A lack of growth ambition could therefore simply be a lack of confidence. All entrepreneurs should be given the confidence, skills, and knowledge to grow. Government and local policy should explain the benefits of growth to SMEs, and show them how to grow in a productive and sustainable way. Today’s event was a timely reminder of how much more needs to be done in this area.

 

Further Reading

Brown, R., Mason, C., & Mawson, S. (2014). Increasing “The Vital 6 Percent”: Designing Effective Public Policy to Support High Growth Firms. London. Retrieved from http://www.nesta.org.uk/wp14-01

Department for Business Innovation and Skills. (2016). Longitudinal Small Business Survey Year 1: SME employers. Longitudinal Small Business Survey Year. Retrieved from https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/522364/bis-16-227-sme-employer-report.pdf

OECD, & Eurostat. (2007). Eurostat-OECD Manual on Business Demography Statistics. Retrieved from http://www.sourceoecd.org/industrytrade/9789264041875

 

 

 

Following Your Vision

This is the excerpt for your very first post.

This post describes the first workshop on vision and strategy: creating a vision is essential for developing a strategy.  The strategy then becomes a roadmap for enabling innovation and growth. The session was delivered by Professor Kurt Allman and Phil Johnson from Keele Management School.  Both academics are experienced in developing strategy with SMEs and drew on their personal experience to lend authenticity to  this inaugural workshop.

The workshop focussed on how to engage in innovation through a strategic lens. Despite importance of innovation for business growth, the majority of SMEs in the United Kingdom are not planning to innovate. This surprising result is evidenced by the Small Business Survey, 2015 which found that only 48% of SMEs were planning to introduce new products and services in the next 3 years.  While 48% is a small increase from 2014, where only 42% SMEs were planning to innovate, it is worrying that the majority of SMEs are not planning to innovate.  The use of structure and planning results in better innovation: failing to plan means planning to fail (Slater, Mohr, & Sengupta, 2014). Also worrying is that a recent research report from the ONS found that that smaller businesses in the UK are less likely to engage in structured planning (Office for National Statistics, 2017).

So, given that innovation has long been linked to firm growth (Schumpeter, 1934) and that structured planning helps innovation, what tools are available to help an SME owner to develop a structure for growth and innovation.

Kurt and Phil introduced a simple strategy model based on the influential work of Michael Porter (1980). This model aligns a business along the axes of competitive advantage (“cheap and cheerful” or “high quality”) and competitive scope (as broad a base of customers as possible or being highly selective about which customers to target).

Strategy Model

Adapted from Competitive Strategy: Techniques for Analysing Industries an Competitors The Free Press by Michael E. Porter, copyright 1980, 1998 by the Free Press.

A luxury brand, such as Porsche, would go for “Differentiation” by targeting their marketing to a relative few wealthy customers while also investing in a highly specialised product. A low-cost brand, such as Lidl, would market to as wide an audience as possible while investing in logistics and price control to produce a high number of low-cost goods.

The participants revealed that they, like many SMEs, are “stuck in the middle”. Many of our business owners have chosen a hybrid strategy which involves keeping  their options open. They do not want to deter potential customers by becoming too expensive. Our manufacturing business owners were also reluctant to invest heavily in expensive operational cost controls which would keep their prices down. Kurt and Phil warned that the danger is that an SME can be out-performed by companies who have decided on a single strategy.  And are pursuing it ruthlessly. The advice to SMEs for strategy selection was therefore: ensure you have  a strong understanding of the culture of your organisation, what your customers want, what your competitors are doing, and what legal and economic changes may be coming your way. In other words, choose to be “stuck in the middle” with your eyes wide open.

So how do you think SMEs should create a vision for growth? What tools could help SME owners map out their vision? Does it matter than an SME approaches innovation and growth without a clear strategic plan?

 

Further Reading

Office for National Statistics. (2017). Management practices and productivity among manufacturing businesses in Great Britain: Experimental estimates for 2015. Newport.

Porter, M. E. (1980). Competitive Strategy: Techniques for Analyzing Industries and Competitors. New York, NY: Simon and Schuster.

Schumpeter, J. A. (1934). The Theory of Economic Development: An Inquiry Into Profits, Capital, Credit, Interest, and the Business Cycle. Piscataway, New Jersey: Transaction Publishers.

Slater, S. F., Mohr, J. J., & Sengupta, S. (2014). Radical Product Innovation Capability: Literature Review, Synthesis, and Illustrative Research Propositions. Journal of Product Innovation Management, 31(3), 552–566.