Drivers Influencing SMEs in the UK - Term Paper Example

?Current Drivers Influencing SMEs in the UK Introduction In this period of globalising economies, markets have become increasingly competitive and international (Dicken, 2007:5). However, the experience is different for Small Medium Enterprises (SMEs). This situation is no any different for SMEs based in the UK. The question on how these SMEs manage competitive pressures is intriguing (OECD, 2009). Besides this, political, economic, social, technological, environmental and legal pressures present the SMEs with numerous threats and opportunities. In any case, the viability of these SMEs in the local, regional and international markets is in question. It is clear that SMEs play an outstanding role in UK economy therefore there is need to study the challenges they face. The aim of this paper is to give insight on the challenges faced SMEs by using the PESTLE analysis. `General Analysis of the UK Market To begin with, the UK is a developed country that is considered economically stable and highly competitive in the global market. In fact, in 2008 it was ranked in terms of nominal Gross Domestic Product (GDP) in the European region. In addition to, it is the sixth largest economy globally in terms of Purchasing Power Parity (PPP) (Excellis Business Consulting, 2009). The country is a member of some of the most prominent organisations in the world including the European Union (EU), North Atlantic Treaty Organisation (NATO), Organisation for Economic Cooperation and Development (OECD), the United Nations Security Council, World Trade Organisation (WTO) and the G8 (Excellis Business Consulting, 2009). The country’s population was slightly below 50 million according to a census conducted in 2008 and ranked third in the EU (Excellis Business Consulting, 2009). The UK remains one of the proficient players in the global economy after recovering from the economic and political effects of the two world wars. Manufacturing is a key component of the UK economy however, it can be noted that it only accounted for approximately 13 percent of the output in 2003. The industry also contributes nearly half of the exports and ?150 billion annually (Excellis Business Consulting, 2009). This trend has led to the increased levels of transfer of the UK manufacturing base and foreign ownership. In the recent times, UK based companies are no longer the leaders in the manufacturing sector. Nevertheless, the UK still ranked sixth worldwide with regards to Gross Value Added (GVA) and manufacturing output (Excellis Business Consulting, 2009). Most conventional manufacturing companies have evolved into new activities such as silicon design, silicon design, in- flight refueling systems and Bluetooth technology. Other manufacturers have engaged in the development of state of the art technologies in nano-technology, information technology and communication. In 2006, 25 percent of the exports were in the high technology class compared to 22 percent in the US and 15 percent in France (Excellis Business Consulting, 2009. Globalisation Globalisation has both positive and negative impacts on SMEs. It poses numerous challenges such as increased competition and exposes the economy to pressures in the global economy such as recessions (Beise, 2004). Globalisation allows for the free trade and global companies can trade in the UK market resulting to increased competition (Dicken, 2007:5). This affects the viability and competitiveness of SMEs. Owing to the fact that SMEs are in search of an uncontested market space, globalisation leads to an increase in the number of players in the market and this increases the level of competition faced by the SMEs thereby negatively affecting profitability. Through globalisation, the global economy is viewed as one entity hence if there is an economic crisis in one economy it is likely to have a ripple effect on other economies. This means that SMEs are more exposed to global economic crises owing to the rising trend of globalisation (Dicken, 2007:5). These are the negative impacts of globalisation on SMEs. PESTLE Analysis Challenges to the growth and survival of SMEs resulting from globalisation, technological development, economic pressures and increased competition can be understood using the PESTLE framework. This model is used to analyse the external entity’s external environment. The model is a simplified analysis of the political, economic, social, technological and technological environment. SMEs in the UK should be proactive and stay ahead of these changes to remain relevant in the economy and compete with MNCs (Multinational Companies) (OECD, 2009). Political Factors This is the first aspect in the PESTLE analysis. Political factors affect the operations of SMEs in numerous ways. They impose duties and obligations on SMEs. These include tax breaks and levies, market regulations, legislation including minimum wage, trade restrictions and agreements. These legislations tend to weigh down the SMEs as they lack the ability to conform to the numerous requirements (Excellis Business Consulting, 2009). This makes the subject to harsh fines and negative publicity. Government legislation on various issues challenges the operations in SMEs since such entities lack the financial and managerial capacity to comply with such regulations (OECD, 2009). It can be noted that the support that government gives to SMEs in terms of funding is insufficient and this explains why the sector lags behind. In summary, changes in the political scene have a huge influence on SMEs performance. Minimum Wage:The UK government is highly concerned about the welfare of the workers and continuously reviews the minimum wage (OECD, 2009). This is to ensure that the employees get a fair wage. However, this negatively affects SMEs that lack the proper financing and capital to finance and expensive labor force. Compliance with International Organisations: As earlier stated the UK is a member of various international organisations including WTO, the EU and NATO (Excellis Business Consulting, 2009). This means that all companies operating in the UK economy must comply with the regulations imposed by these organisations. Some conditions that are set by these organisations are complicated for the SMEs to abide by. Gender Equality: This is an important policy in the UK labor laws that have impacted on SMEs performance over the years (OECD, 2009). All companies are required to recruit and hire employees by taking into consideration the concept of gender equality. In other words, SMEs are required to reflect employment opportunities for both genders. Government Regulation: The government plays a key role in business regulation in the UK. This poses a challenge to the SMEs since their operations are closely watched and regulated by the government. SMEs could have an easier time if their operations were not closely monitored. It is easier for SMEs to prosper in a free trade economy (Excellis Business Consulting, 2009). Market regulations imposed on companies including SMEs influence business operations and set boundaries on what is considered healthy or unhealthy business practices. Tax Levies: Taxes imposed on SMEs in the UK are too high and this negatively affects their profitably and survival (Excellis Business Consulting, 2009). The government should exempt SMEs from taxes and this will ensure their increased survival and profitability. Economic Factors SMEs are influenced by international, regional and national economic factors. Global and national fiscal policies and interest rates set the conditions of the economic environment. The status in the economy determines how suppliers, consumers and other stakeholders behave within a given society thereby impacting on the overall performance of SMEs. The economy experiences general booms and slumps (OECD, 2009). During slumps, SMEs are likely to experience reduced economic activity and productivity. One of the major economic limitations facing SMEs in the UK is the lack of enough capital to support exports. In actual fact, challenges related to finances and resources have been highlighted as the major setback facing SMEs. This means that the SMEs lack the financing to expand their operations in the international markets. Additionally, the SMEs lack adequate capital to support export production. This means that SMES are not in a position to reach potential customers in foreign markets (OECD, 2009). This further inhibits SMEs growth. There are lower productivity rates in the UK than in most competing economies. This can be attributed to the higher cost of production that is mainly felt by the SMEs. There is an increasing cost of living in the UK consequently SMEs are subject to higher labor costs than in other emerging economies (Excellis Business Consulting, 2009). This results to increased production costs among SMEs that may lead to increased prices and reduced profitability. SMEs are highly exposed to global economic pressures in the short term. These pressures may be as a result of a reduction in export orders and manufacturing which means that SMEs have limited chances to sell their products in the international market. The business activity (Manufacturing Purchasing Index) is considerably low in the UK economy and this influences the level of business activity in SMEs. Domestic and export prices of good s and services are failing in addition to the profit margins of SMEs (OECD, 2009). This means that the SMEs make fluctuating profits or even losses that negatively affect their performance and survival. SMEs experience cash flow problems that prevent them from making high profits or any investment plans. There is an increased cost of financing and this means that the cost of operations is expensive and this results to reduced profit margins. The above discussed are short term trends in the UK economy that shape the present and future performance of SMEs. SMEs that are involved in the manufacture of electronics and automobiles are likely to be the hardest hit by the short-term economic pressures in the domestic and foreign markets. The government and other trade organisations should work to ensure that they tackle the short-term challenges facing SMEs (Excellis Business Consulting, 2009). It is clear that the most important trend affecting SME sector is the value supply chains. This means that the UK is a relatively expensive economy and SMEs compete with MNCs and other well-established companies through supporting services and differentiation instead of price. The economic growth in the UK economy has slowed down following the global economic down turn and this leads to a negative impact on the economic performance of SMEs. High interest rates also impact negatively on SMEs since they discourage domestic borrowing since the cost of credit is too high for them (Excellis Business Consulting, 2009). In the past, SMEs relied on the strength of the Sterling Pound to gain a competitive edge over SMEs in other economies, however, the currency has been weakening over time making it difficult for these companies to compete in the global market. Social Factors The third aspect pays attention on the forces within society including the media and other forces that shape the attitudes, opinions and interests of the consumers. These forces determine how people behave and what they buy. Changes in population also influence activities in SMEs. It can be concluded that SMEs must produce goods and offer services that are in line with the population’s behavior and lifestyle. Adults make up the greater percentage of the UK population and SMEs should consider this aspect while making production decision. The UK population is becoming increasingly cautious about the consumption of organic products (Excellis Business Consulting, 2009). This means that SMEs have to shift their production from that of normal goods to organic foods that are more population. This calls for investment in improved technology and more research into organic products. Technological Factors Technology has become an important aspect of the manufacturing process in the UK. This calls for SMEs to be always on their toes by making use of the latest technology in manufacturing. As earlier explained, SMEs may lack the sufficient resources to put in place the latest technology. There has been a gradual decline in scientific and technology knowledge and skills in the manufacturing process (OECD, 2009). There is excessive dependency and emphasis on the service sector and this leaves little room to the manufacturing sector. There are low rates of investment in research and development (R&D) and this adversely affects the level of technology that is applied by the SMEs. SMEs can only compete with other players in the market through the differentiation of products that can be achieved through innovation and technology. In addition to, SMEs lack the necessary technology to improve efficiency in the manufacturing process. Innovation and technology are expensive initiatives that require investment of funds. It can be noted that SMEs lack enough funds to finance such ventures hence cannot compete appropriately with other players in the domestic and international markets (OECD, 2009). Poor access to technology by SMEs leads to limited access of information on market trends and overseas markets. SMEs lack the financing to adopt the latest technology and IT solutions that improve production, cut down on costs and improve efficiency. This creates the gap between MNCs and SMEs. Over the years, it has been observed that IT solutions designed for MNCs are not practical for SMEs (OECD, 2009). Therefore, the government and other relevant stakeholders should invest heavily in R&D to ensure that SMEs can benefit from modern and effective technology. Legal Factors The legal aspects challenging SMEs in the UK economy are similar to the political aspects. This is because the political front is responsible for drafting the laws governing their operations. For instance, there are laws governing customer protection and this determines how SMEs price their goods in the domestic market. The health and safety standards are strict and determine whether the goods manufactured by SMEs are safe for consumption. Strict employment laws characterise the UK economy and all companies must abide by them since they govern important issues including working hours, minimum pay and the overall welfare of the workers (Excellis Business Consulting, 2009). Finally, the UK economy is transforming to a ‘low carbon economy’ and all SMEs are required to emit the lowest levels of carbon. In summary, there are stringent laws governing the operations of SMEs in the UK and this slows down their operations and minimises their operations. Environmental Factors Environmental issues have become of increasing importance in the UK economy. The economy is on its transition to a low- carbon economy. This is an effort to deal with climate change through a variety of coordinated industrial, economic and social initiatives. This has posed a major challenge to SME s in the manufacturing sector to keep their carbon emissions at a minimum level. In addition to, there is increased demand to manufacture products and offer services that promote environmental efficiency (OECD, 2009). There is also increased pressure on SMEs to use renewable energy in their production process. Environmental policies have had a negative impact on SMEs as they are heavily fined if they violate them. Conclusion In conclusion, SMEs in the UK economy face numerous challenges in their day-to-day operations. In spite of the fact that they play a key role in the economy, they continue to receive limited government support in terms of financing, R&D and incentives. This explains why SMEs with limited capital and resources cannot venture into foreign markets and have minimum cushioning against the negative impacts of globalisation and global economic pressures. A PESTLE analysis of their external environment reveals the challenges facing SMEs in the UK economy. This is ironical since the UK is among the fastest growing and most advanced economies in the modern world yet, the SMEs continue facing increasing challenges. The UK government is thereby advised to take up an active role in supporting SMEs since they play a pivotal role in economic growth and development. References Beise, M. (2004) ‘Lead markets: country-specific drivers of the global diffusion of innovations’ Research Policy, vol. 33, pp. 997-1018. Dicken, P. (2007) Global shift. London: SAGE Publications. Excellis Business Consulting. (2009) Analysis of the UK manufacturing engineering sector. Viewed http://www.irmaproject.eu/results/AMESC/uk.pdf OECD (2009) ‘Top barriers and drivers to SME internationalisation’ Report by the OECD Working Party on SMEs and Entrepreneurship, OECD, viewed 03 November 2013 from . Read More