SMALL BUSINESSES AND GROWTH Business and its Environment

Small Businesses SMEs (Small and Medium-sized Enterprises) have a critical role in driving economic growth, but it is a small proportion of SMEs who are responsible for much of the impact. Every year around 250,000 private sector firms are started in the UK. Around 90% of new firms are small with fewer than 5 employees A decade later 70-80% of those new firms will have closed (BIS, 2013, p. 10).

Benefits of Small Businesses to the Economy Many jobs are created by small businesses. Small businesses are often more dynamic and entrepreneurial than larger firms, creating new products and providing more choice for consumers. Small firms create competition for established firms. Small firms often supply specialist goods and services that larger firms will not.

The Five Stages of Small Business Growth (Churchill & Lewis, 1983) ExistenceSurvivalSuccessTake-off Resource Maturity Ossification

Stage 1: Existence Main problems are obtaining customers and delivering the product or service. Organisation is simple – owner is involved in most tasks and directly supervises any subordinates. Systems and formal planning are minimal if they exist at all. Company strategy is simply to remain alive.

Stage 2: Survival Business has enough customers and satisfies them sufficiently to keep them. Systems development is minimal. Formal planning is, at best, forecasting cash flow. Major goal is still survival, and the owner is still synonymous with the business.

Stage 3: Success The decision facing owners at this stage is whether to  exploit the company’s accomplishments and expand or  keep the company stable and profitable, providing a base for alternative owner activities Business has grown large enough to, in many cases, require managers to take over certain duties performed by the owner. Among the important tasks are to make sure the basic business stays profitable and to hire/develop managers to meet the needs of the growing business.

Stage 4: Take-off Problems are how to grow rapidly and how to finance that growth. This is a pivotal period in a company’s life. If the owner rises to the challenges of a growing company, both financially and managerially, it can become a big business. If not, it can usually be sold at a profit provided the owner recognises his or her limitations soon enough.

Stage 5: Resource Maturity The firm must expand the management force fast enough to eliminate the inefficiencies that growth can produce and professionalise by use of such tools as strategic planning and management by objectives.

Stage 6: Ossification It may enter a sixth stage – ossification. Ossification is characterised by a lack of innovative decision making and the avoidance of risks. Ossification seems most common in large corporations whose market share, buying power, and financial resources keep them viable until there is a major change in the environment. Unfortunately for these businesses, it is usually their rapidly growing competitors that notice the environmental change first.

Rationale for Government Intervention “SMEs drive economic growth by stimulating innovation, acting as a competitive spur to existing businesses and making a disproportionately large contribution to job creation.” (BIS, 2013, p. 67) The UK Government supports SMEs in a variety of ways.

Government Grants Small businesses grants are available for a number of reasons. These include:  Grants to support the arts and cultural activities  Grants to support research and development  Grants to help firms complete IT projects  Up to £5,000 towards employee training costs

Start-up Loans This government-funded initiative provides loans, mentoring and support for start-ups with potentially viable propositions but who are unable to attract investment from retail banks. The scheme provides free business planning and an average loan size of around £6,000.

Export Financing UK Export Finance helps UK exporters by ‘underwriting’ bank loans offered to overseas buyers of UK products and services. This means it takes on the risk of the loan from the bank, so that the bank is more likely to offer it.

References Churchill, N. C. and V. L. Lewis (1983, May/June) The Five Stages of Small Business Growth Harvard Business Review Department for Business, Innovation and Skills (2013, December) SMEs: The Key Enablers of Business Success and the Economic Rationale for Government Intervention Retrieved from ds/attachment_data/file/266304/bis smes-key- enablers-of-business-success.pdf ds/attachment_data/file/266304/bis smes-key- enablers-of-business-success.pdf The Economist (2011, June 30) What’s so great about small businesses? Retrieved from 6/entrepreneurship-0#SrTYlVC7Y0J8upMD /entrepreneurship-0#SrTYlVC7Y0J8upMD.99