Small is beautiful: why SMEs are back in fashion
By focusing on innovation, sustainability and their markets, small businesses could play a pivotal role in helping UK plc recover, writes Robert Jeffery
With the City pages awash once more with takeover bids, it is easy to assume the age of big business is back – if, indeed, it ever went away. But such sagas as Kraft-Cadbury may prove just an entertaining sideshow. The real economic story could be that, as economist EF Schumacher nearly put it, small is beautiful again. In the messy aftermath of the credit crunch, his meisterwerk’s subtitle – A Study of Economics as if People Mattered – seems more relevant than ever.
John Cusack and Jack Black in a scene from High Fidelity (Movie Store Collection)
With some global names suddenly looking shockingly vulnerable, small businesses matter. They account for 51% of UK GDP and employ 13.5m people (59% of the private sector workforce) , 60% of them expect to grow in the next 2-3 years, and they are responsible for 65% of new patents and technical innovations. Still, they are feeling the squeeze: 2,000 local shops close every year and 42% of small towns and villages in England now have no shop at all, leading many Britons to conclude the small business has had its day. Large groups dominate retail, but SMEs are fighting back, and in other sectors they are enjoying significant success.
“Small businesses are the largest sector of the economy,” says Kevin Hoctor, head of policy at the British Chambers of Commerce (BCC), which is helping firms across the country through a series of Business Growth Clubs held in conjunction with the Design Council. “Some of them are struggling, but they will lead us out of recession. There is a lot of potential for the sector to grow.”
Lightweight champions
Though the tightening of bank credit and other cash flow issues have hit them hard, SMEs are still naturally strong, says Josh Ryan Collins of the New Economics Foundation (NEF) . They are lean and react quickly to change, and they often have a higher threshold for financial discomfort: “Larger businesses tend to be less resilient to economic shocks. In a recession, they close down parts that are less profitable. But if you own a small shop, that’s your life – it’s a much bigger thing to close it.”
The latest business statistics support this view. In August 2009, credit-checking agency Experian reported that firms with five or fewer employees were the hardiest of all UK businesses, with an insolvency rate of 0.05% (almost half the national figure). The CBI’s latest quarterly SME Trends report, published in September, indicated that while conditions remained tough, more smaller businesses were experiencing increased access to credit and were expecting a return to growth.
Few would disagree that SMEs need help. The BCC believes increasing access to finance is essential, along with reducing the regulatory burden of EU employment legislation and ensuring business-critical infrastructure, such as the road network, doesn’t suffer as pressure on the public purse grows. For NEF, a focus on coherent communities, with local businesses’ needs incorporated in planning law, is a long-term must – the Sustainable Communities Act 2007 mandated this, but implementation has been slow.
Despite the challenges, there is cautious optimism. Jonathan Ball, a design associate in the Design Council’s Designing Demand programme, says many clients realise that investing during a recession can be a smart way to launch or build market share. He cites smoothie maker Innocent as an example of a company that started off small during a restrained financial climate (the late 1990s) yet achieved turnover of £100m in under a decade.
Small businesses are the largest part of the economy. Some of them are struggling, but they can lead us out of recession Kevin Hoctor, British Chambers of Commerce
Smaller businesses could be doing better if they were more aware of design. Ball believes they should examine customer service, brand proposition and design and innovation processes to define a cutting edge. He asks companies to name their greatest ambitions, then start communicating them to staff, partners, suppliers and customers and pinpointing ways to make them a reality.
“Many businesses are faced with complex short-term issues,” he says. “But for those who are up for an extra 5% sweat, the rewards can be far greater. The key is changing your processes to think like a big business but move like a small one. Any small business can have aspirations to be the biggest brand in their space. They need to organise the way they tell their story and build the right culture.”
Morgan Stanley senior executive and former chief economist Stephen S Roach has predicted “a new era of localisation... the self-interest of individual nation states is in the ascendant, whereas the collective push for cross-border integration is on the wane.” The trend for preferring local produce – and producers – was in full swing before the recession. It could be central to many SMEs’ rebound strategies, as they look to capitalise on consumer goodwill towards more modest, community-spirited enterprise.
The rise of the locavores
Research by retail analysts IGD has shown that every £10 spent on a local business generates £24 for the local economy. The number of shoppers who try to buy local food – the sector that has driven localisation thanks to publicity over ‘locavores’ and the burgeoning popularity of farmers’ markets – has risen from 15% to 27% in the past three years, according to IGD. Paul Flatters, managing partner at future trends analysts Trajectory Partnerships, says it could become even more important: “Local can reach a long way as a motivating factor for consumers, and it hasn’t reached anywhere near its potential yet.”
The effects often start small. In Slaithwaite, five miles outside Huddersfield, a local co-operative took over a grocer’s shop closed by the credit crunch and has rebranded it as Green Valley Grocer, with an emphasis on West Yorkshire farm food. With local people investing and sharing profits from the business, it has captured the imagination of shoppers. So far, says co-op board member Graham Mitchell, the business is out-performing its predecessor and stimulating the local economy. “Since we started opening late on Thursdays to catch the commuters, other shops have done the same. It’s had a positive effect on businesses as it brings people to the area who then use the shops. It’s having a local multiplier effect. Money spent in the shop stays in the local economy.”
For Hoctor, this illustrates how businesses can create local hubs: “People think companies talk to each other about their problems, but they don’t. A lot more can be done to get them to act together locally.” The BCC’s Business Growth Clubs – informal, hands-on business workshops that connect likeminded people and where experts advise on successful strategies for growth – should help address this very problem.
But being local doesn’t always mean narrowing your horizons. Helen Alexander, president of the CBI, believes technology will increasingly make niche markets globally accessible. “That would have been quite difficult in the past,” she says, “because they would have needed much more scale. I think we’re going to see smaller businesses having more international reach.” Thomas Friedman’s bestseller The World Is Flat proposed that geography might soon, as far as business was concerned, become history, a shift that prompted the British Government to focus on making SMEs more innovative and competitive in the globalised marketplace.
An idyllic view of local retail in a scene from You've Got Mail (Movie Store Collection)
Some SMEs are already proving Alexander and Friedman right. One success story of the BCC’s Export Marketing Research Scheme is Isle of Wight-based Pooltronix, which has pioneered a system of disinfecting swimming pools by using electrolysis to turn salt into chlorine. It has found lucrative opportunities in Hungary (where almost every town has a spa) and France. Southsea Deckchairs, a small Portsmouth company that used the Designing Demand programme, began exporting to Europe after identifying a market: the company brought in product designers to help its chairs meet EU guidelines without compromising quality.
Ball sees no reason SMEs shouldn’t look beyond national boundaries: “Small businesses have been viewing the threat of globalisation as an opportunity. Being small is not as big a barrier to exporting as some think. If you have your brand and processes in place, it’s easier to make that step.” Just over half of SMEs expected demand from abroad to increase in 2009, according to UK Trade & Investment.
BCC research suggests most businesses who export do so because of a specific approach from a potential customer or partner rather than a strategic decision. To Hoctor, this points to a “conservative attitude”, particularly among SMEs, who may be daunted by the scale and complexity of the global market: “Britain used to be a big exporter and small businesses can help get us back to that. Most of the barriers they feel are in the way of exporting are perceived rather than real ones.”
The SME sector has suffered its fair share of hardship during the recession, but there is good reason to believe it can lead the UK back to growth. Small businesses may not all be beautiful but they do have competitive advantages: there is no external imperative which forces them to become the biggest in the world, or make acquisitions to placate investors, and they can take a realistic view of risk without worrying about the short-term effect on their share price.
The rapid changes to the business landscape present a paradox: while focusing on local could be lucrative, SMEs will find themselves under greater pressure from imports in the short term. Creativity and innovation will be more important than ever. Are British small businesses up to the challenge?
Why local works
Saving the world needn’t be left to government: it can happen one town at a time. The key, say the experts, is redressing the imbalance of production and consumption. Colin Hines, author of Localisation: a global manifesto, says: “Most of the economic activity that reduces a country’s energy use, carbon emissions and use of raw materials comes from economic diversity. In essence, that means producing as much as you can nationally, or as a group of nations.”
The UK scores particularly badly here. Just 60% of our food is produced domestically. The amount of food on our roads is 23% greater than 20 years ago and it is travelling 65% further. In clothing manufacture, car production and scientific appliances, you find a similar tale of declining domestic production and rising imports. The anomalies can be baffling: the UK exports the same amount of milk as it imports, for example.
Hines argues for “green protectionism”, an EU mandate which would force countries to rediversify their economies by setting quotas on the number and types of imports. “The UK is hideously over-populated for food provision, and we ought to be the first country to make the case for localisation, out of self-interest.”
Article first published in Design Council Magazine, Issue 7, Winter 2009
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