"Which strategies should SMEs adopt for growth?"
UNIVERSITY OF LUTON
LUTON BUSINESS SCHOOL
MSc ENTREPRENEURSHIP AND BUSINESS MANAGEMENT
ENTREPRENEURIAL ENVIRONMENT
SECOND COURSEWORK
"WHICH STRATEGIES SHOULD SMEs ADOPT FOR GROWTH?"
MODULE CO-ORDINATOR: PROFESSOR JOHN PHEBY
It is a fact that, recently, there has been written more about small business growth than in any other aspect of small businesses as far as the development and management is concerned. A main reason for this is the rising importance of small firms to the economic development and the generation of places for employment. Whilst growth may be judged by some as an indicator of business success, it can also introduce several problems to managers often focusing on the need to relate expansion to either the available resources or those which can be efficiently used.
Reviewing the literature it can be easily noticed the fact that business growth is mostly defined in terms of employment. Statistics upon this measure of growth have also showed that just a minority of the fast growing businesses has significantly contributed to employment generation. In other words the contribution to employment generation was very disproportionate. Although the generation of employment is a respected and appropriate criterion for growth we can see that managers or owners of small firms are more considered about the development of profits, sales and other net assets.
Because of there is a vast variety of different factors that can influence the growth of the business there has not been any certain theory of it yet developed so as to give a simple and clear way of dealing with the need for growth. so, the only way to analyze and approach the growth strategies for SMEs is by concentrating on the aspects that seem to characterize fast growing businesses. The most important among them are the three main stated by Storey. David Storey (1990) supported that the characteristics of the entrepreneur, the characteristics of the business and the management strategies are the main influences on growth in addition with the influence from external factors.
It is very important to take under consideration that business growth is most of the times subjective and depends on the entrepreneur's choice of ambitions for the business. The characteristics of the entrepreneur The 'boss' itself can be the major constriction on the orientation of a small firms extent of growth. it is sometimes suggested that the entrepreneurs do not explicit strategies and they often have implicit visions. It is suggested that the small business behaves as an extension of the entrepreneur and the strategy is 'more often than not a direct extrapolation of his personal beliefs' (Mintzberg 1979 page 307). Curran (1996) makes a similar point; 'all decisions revolve around the entrepreneur with little reliance on formal planning techniques, except where these are harnessed to the entrepreneur's vision. Decisions can be swift, opportunistic, instinctive and bold and are rarely commited to paper' (Curan, p. 4513).
The reason for which the business was established in the first place is also very influenced by the personal goals and ambitions of the entrepreneur. The personality of the entrepreneur is, most of the times, playing a vital role on how the business is about to perform in the future. The owner's personality can influence the business in a number of ways; making it, for example, unlikely for the firm to raise external finance because of the entrepreneur's attitudes to risk, to collaborate with other firms because of the entrepreneur's autonomy or to develop managerial competencies, especially those ...
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The reason for which the business was established in the first place is also very influenced by the personal goals and ambitions of the entrepreneur. The personality of the entrepreneur is, most of the times, playing a vital role on how the business is about to perform in the future. The owner's personality can influence the business in a number of ways; making it, for example, unlikely for the firm to raise external finance because of the entrepreneur's attitudes to risk, to collaborate with other firms because of the entrepreneur's autonomy or to develop managerial competencies, especially those which are related to strategic management skills. The entrepreneur's management and/or entrepreneurial background, training, general knowledge of the sector and family history can both affect the management resource base of the company and the entrepreneur's motivation for running it.
Whilst the entrepreneur is a basic influencing factor for the future development of the business the characteristics of the firm it self are also affecting the growth of it. Researches from all over the world have shown that the newer small businesses are growing faster than older ones. Burns (1989) has observed that the new companies are more likely to grow fast on their early stages of life reducing the levels of growth by the time after a certain period of time, in which they are trying to earn a place in the market and secure their survival after starting-up.
Businesses' growing 'speed' is different at every stage of their life cycle. At the initial stage of survival the business has not wet developed a 'character' and so the owner is more likely to be the business performing all main tasks and supervising the employees introducing the aspect of leadership in the business. When the firm reaches the stage of success and profitability throw stabilization and growth it is likely to face a crisis of control within the company and so it has immediate need of co-ordination. It is a fact though that too much control will cause lack of emergence to the business and the growth will be starting to stabilize. After that the oncoming crisis is that of the bureaucracy pushing the small firms to collaborate with other external bodies. By this way it is easily understood that looking at the stages of each business life cycle researchers can in a more reliable way its growth prospects. However it is unlikely for a logical development path of a small business to be as considered in advance. In real life the businesses might grow and move back at any time of their life for a uncountable number of reasons. Entrepreneurs, though, must be taking into account such models of growth life cycle in order to be able to notice organizational problems and apply new ways of leading the business towards growth.
It is very important for a business that want to grow to make sure that the changes within the business will be periodically structured in a way that allows the owners/managers to manage the firm strategically. Strategic management is therefore an other major aspect of growth in the small businesses.
Strategic planning is a tool that helps bring out innovation, which can be based on the use of techniques to diagnose situations and make decisions, and that leads to thinking that can be embodied in plans. The concept of innovation can be seen as raising the issue of risk, but is better seen (according to some perspectives) as the key to successful business growth.
Strategic management can provide owners and managers in small firms with a means of expressing the purpose or the intensions of the organization. Mission statements are certainly seen as being a formal statement of the purpose of the organization, and some times defined as spelling out the benefits it intends to produce and who will benefit thereby. Plans are statements of what the business intends to do, in terms of its activities or actions. As strategic plans they may also set out long term goals, present the results of analysis, and set up contingency plans based on risk analysis. As business plans they may also provide shorter-term objectives and plans in terms of financial data (e.g. cash flow). But all three - mission statements, strategic plans, and business plans - express intentions about the future. Therefore we can say that business growth is significantly helped by strategic behavior and planning. For business growth to occur, however, it is plausible to argue that it is important that strategic behavior is based on sound strategic thinking. In turn, it might be suggested this means taking account of strengths and weaknesses, and seeking to make realistic assessments of the environment and of current and future opportunities. In essence, therefore, it seems more than possible that entrepreneurs need to make effective use of strategic techniques.
Storey identified three key strategy factors that fast growing businesses seemed to have had or adopted. The first was the open doors to new investors to increase the equity of the firm. The second is the concentration of the firm on niche markets so as to develop strengths such as competitive advantages based on quality and a base of customers' loyalty. Even though taking advantage of the new technology and introducing new products is a very important factor of those firms, the majority of the small businesses have no influence on the technological trends and innovations that impact on the business. The capacity to investigate and asses new technological developments that might impact on their competitive positions lacks from most of the small businesses. However technological competence has become an element of survival for small firms in many sectors because of the rising technological demand coming from the rapid development of technologies.
Managing business growth is almost the same important as growing. It can also be considered as an important way of growth since feedback from previous actions towards growth can be examined and help the business to avoid as more mistakes and problems as possible. Control of the change stages of a small business includes both internal and external as well as SWOT analysis formulation and strategies to reach its objectives and strategic planning. It is very important for the owners-managers of a small firm to know how to learn from its own experience of change and growth phases. The financial management capabilities are crucial facilitator of growth for a small business. The firm must pay attention to the fixed capital needs in order to be able to acquire requisite equipment, plant or premises. It must also have the ability to recognize the benefits of innovative sources of finance such as business angels and consider the appropriate balance of both internal and external funds. In the early stages of development the application and understanding of the marketing concept is very important for the future well being and growth of the organization. The firm's formulation of marketing activity effectively facilitates sustainable growth too. Small businesses have to identify, understand and satisfy the needs of their customer groups.
Because of the highly competitive environment small businesses are seeking efficient improvements within their organization in terms of service providers so as to maintain a competitive edge within their markets. In addition to that SMEs need to improve continuously their existing products in order to protect their customer bases and maintain levels of activity to facilitate any future expansion.
As small businesses grow the culture/structure prove to be inadequate to facilitate pace of development. This is an emergency bell for allocation of formal responsibilities and to differentiate the structure and the culture according to the dominant activities of the organization. In other words it is important for SMEs to decide when is the time to introduce new managers and modify their organizational structure to facilitate growth.
BIBLIOGRAPHY
* Birley, Sue (1997) Mastering enterprise, Pitman/Financial Times
* Burns, Pal and Dewhurst, James (eds) (1996) Small Business and Entrepreneurship, Macmillan, Chapter 3
* Carter , Sara and Jones-Evans Dylan (2000) Enterprise and Small Business. Principles, practice and policy. Prentice Hall/Financial Times, Chapter 23
* Deakins, David (1999) Entrepreneurship and Small firms, McGraw-Hill, 2nd Edition, Chapter 10
* Pierre-Andre, Julien (ed)(1998) The State and Art in Small Business and Entrepreneurship, Asgate, Chapter 5
* Storey, David (1994) Understanding the UK Small Business Sector, Routledge, Chapter 5
