The Return of Small Firms in the United Kingdom - Essay Example

1. Theories Supporting the Return of Small Firms in the UK The small business community in the UK plays an important role in current economic development and social harmony. Small businesses are dynamic and flexible, and provide a range of product and services both nationally and internationally. To date, small businesses generate 52% of turnover annually in the public sector, employing about 2.6 million people as Small to Medium Enterprises (SMEs). Entrepreneurship has provided the platform for individual investment that is the dominant driver for small business achievements. Currently, discourse and political debate focuses on structures to stimulate, support and evaluate enterprise through aid to overcome barriers to growth. For these reasons, small business industry is critical to UK economic development and social cohesion. They provide a medium for retirees and other potential unemployed persons to have gainful employment and contribute fully and independently to wider society. Small businesses have been contributing to employment and manufacturing since the 1960s. The increasing rates of self-employment have been attributed to; a parallel rise in rates of unemployment (e.g., retirees, unspecialised graduates); reductions in levels of unemployment benefits and government incentives; and the increasing importance of technology in the information service industry. In the early 1970s there were changes to the industrial structure across the globe of industrialised nations. Initially, the value of the small business decreased, but by the 1970s the structure of manufacturing saw dramatic changes and small firms began to provide better quality of products and services than larger corporations, particularly in areas of rapid technological changes (e.g., electronics). Over time, small firms began again to add value to the UK economy, and among many small businesses their rates of employment increased. So that there has been a significant shift in industrial structure back to the small firm amongst industrialised nations (Landstrom, 2005). The shift brought within environmental opportunities to be exploited by entrepreneurs with their innovations and business developments. Political discourse began to focus upon entrepreneurship, receiving support from Margaret Thatcher in the mid 1980s and strong policy was introduced to support small businesses and entrepreneurship. The research interest in small business increased during this period, and social scientists began to contribute to research directions and understandings. This has led to a strong multi-disciplinary approach to small business research in the UK today. (Landstom, 2005). During the 1990s the interest become more about growth orientated established businesses. Tony Blair took a much more narrow and focused approach to reforms as compared to Thatcher, targeting technology-based firms and socially inclusive entrepreneurship as ways to bring 'life' back to weak regions of industry (Landstrom, 2005). The present government provides most of the funding for research into small business dynamics and the contributions of such entities to the growth and strength of the UK nation. However, this also biases the areas that research goes into, what interests the government and this could counter advances in knowledge and processes. However, funding from the government does require the use of empirical investigative techniques, ethical considerations and a policy focus to research endeavours. With the consolidation of small business research there was a great support for entrepreneurship. As industrialised nations shift manufacturing sectors to less developed nations to lower the costs of production, the likelihood of unemployment has increased. This global shift in industry structure has fostered employment opportunities for some through small businesses (AusIndustry, 2006). Current trends of redundancy for older workers, such as those in middle management positions have seen some retirees adapting self employment as a viable option to retirement. These are professional and skilled workers with hands on practical experience in their fields. Such persons can present themselves as consultants to other businesses (Turing, 2001). Other employees who have received redundancy payouts have an opportunity to purchase an existing business, or to initiate a new one. The Blair Government has supported the growth of potential small businesses that are not only self employed operators, but exhibit characteristics of long-term growth and the potential to become viable employers. At the present time consultants are in high demand in local, national and various government departments, as well as networking internationally. This involvement has created many opportunities for professional consultants to be small businesses with the growth potential in the service industry. Hence, industrialised nations are shifting their industry structures more toward a service orientation. In countries such as Australia, the USA, Singapore and the European Commission, small business consultants are highly geared toward the IT services. The 'birth' of small businesses is growing internationally as well across-nationally in the UK. This pattern of growth appears to be consistent and a function of three core factors; population growth and growth in income leading to increased demand; a population of business that are predominantly small firms; and an extensive urban setting that benefits from agglomeralisation (access to customers, sources and suppliers, and capital). In direct opposition, unemployment, personal wealth, a liberal political context and government activities tends to weaken the growth strength of new firms (Landstrom, 2005; Storey, 1994). 2. Government Support In the UK the Blair Government has stated its commitment to the stimulation and support of small busineesses. Evidence of this commitment is presented by way of The Government Action Plan for Small Business, 2006, document. The Action Plan detail a governmetn-wide strategy to develop the vision of successful small business in the UK. It is recognised that the flexible and dynamic nature of individual entrepreneursip that makes small businesse the success they are. By way of govenrment interrvnetions and promotion many opportunities can be created to stimulate innovation, support small business growth and to overcome barriers encounted by the individual enttrepreeneur. At present, numerous government departments contribute to the stimualtion and maintenance of the small business agenda. For example, Business Link is an organisation that provides business advice to approximately 300, 00-0 small firms annaully, particularly at start up and growth stages. Due to research activities, the quality and reach o f the business advice is increasing continually. It has been reported that the market penetration of Business Link has seen an increase of about 40% since 2005, and customer peceptionsn of satisfaction appear to have increased by 4% from 2002 to 2003. The government has also shown support with its introduction of fiscal measures that encourage entrepeeneruship and innovation and so the growth of small firms. Further, its 21st Centruy Skills:Realising Our Potential, 2003, takes an employer-cented approach that seeks to meet the needs of small businesses. Hence, it prioritises employer support such as accessing training and providing them with more choaiceas as to how that training is accessed and/or delivered. Also, following the Howard Davies' Review, Enterprise and the Economy in Education, UK schools have begun to provide students with an enhanced awareness of entrperneurial activities and opprotunitis, and how to start up and run a successful small business. Tailoring their approach willallow the government to access more disadvantaged areas and minortiy groups using the Phoenix Fund to support projects that require specialist busness input for disadvantaged communities. The governement of theUK aims to foster greater access to information and adcice about tac and other regulation standards as well as eing a source of support. Cross-government links have been available online since November of 2003. Another document, the No-Nonsense Guide to Government Rules and Regulations for Setting up Your Business was published in 2003 and networked governemental deparments to produce a concise and easy to understnd document that provide information on regulations for the starting up of businesses. Another department, the Inland Revenue and Cusotms and Exise have coordinated wupport teams to advise small busnisses to comply with tax laws. Also, in 2002, these teams were reported to have aided over 160, 000 emerging businesses. In the UK, policy development has developed parallel to the European Union strategy. As such, policy standards for entreperneurship define the term in a way which is broad to cover many components in which th eEU designates a small business. As such, the Blair Government can be considered to be taking an active part in determineing the agenda of policies with regard to small firms. It is anticipated that the government is aiming to devop policies that releflect the EU level of entrperenuship promotion that seeks better regulation so that domestic goals can be met. However, it has been contended by the Blair Government itself that more contirbution on its behalf can be provided. An assortment of government bodies are in contact with small businesses. It has been suggested in the Action Plan that the governemnt could do more to be more inclusive of employers and share objectives to workd more collaboratively. For example, in December of 2002 the small Business Service published a document called the Small Business and Government : The Way Forward. The startegy taken by the government ripples throughout its depertment and agenecies in its appraoch to a small businees focus. This framewok umbrellas seven dominant themes that are recognised to be core drivers for econmic growth, improved productiveity and enterprise; building of an entreprise culture; encouraging a dynamic start-up market; developing the capability for small business growth; improving access to finance for small firms; encouraging enterpirse in disadvantaged communities and minority gorups; improvement of small busineese experiences with governemtn depertments; and developing better regulation and policy. Turning now to the European Commission and its stance on government promotion of enterprise, there is the Green Book on Entrepreneurship in Europe, 2003, that was developed to encourage debate on the topic of the future of entreperneurship (Commissionof the European Communities, 2003). The complex policy development was begun to steer the focus on a wide range of issues that have the potential to support entreprenurial activity in Eruope. This document was initiated by the realisation for the need of a radical change within the economy. The Green Paper takes account of the widest range of stakeholders at it attempts to provide ansers to:How to increase the levels of entrrepreneurship; and How to get more small businesses to grow. Hence, the Green Paper extended beyond merely addressing the barriers to development of small businesses. Rather, the Paper places the focus on interesteing and motivating people to cecome entraprenuers. For example, by reducing barriers to development and growth of small busnesses; finding a balance between risks and rewards of being an entrepreneur; cultivating a social climate that encourages the values of entrepreneurship. 3. Within Market Factors that Affect Entrepreneurial Decision Making There are various within market competition factors that influence the decision making of entrepreneurs. Starting with the general background of the small business, factors such as where to locate the business and how to deliver an online presence are essential (Powell, 1995). From the point of view of infrastructure the organisational hierarchy and company culture will also influence how entrepreneurship is approached. However, these later factors are heavily dependent on the culture in which the business is embedded. Hence, it is fortunate for small businesses in the UK that current political attention is focused on the support of entrepreneurial activity, so that the socio-cultural environment is geared toward innovation, risk taking and start-up of new businesses. Turning now to product and service issues, the entrepreneur would need to consider what the company has to offer the consumer, and the breadth and depth of the product line. Research and development strengths would indicate areas where new products could be developed and monitored to determine future viability (Schroeder, 2003). Entrepreneurs must accept too that at the start-up the company's brand has not yet been established, and that there will be a lack of brand strength portfolio or brand awareness that may be an initial barrier to market entry. However, there are also health and safety concerns, such as quality control of products and services, and also the legal need to obtain patents and licenses. These factors may involve the need for a significant amount of capital and may slow the speed of entry to markets for some entrepreneurs. In terms of marketing, the entrepreneur would need to seriously debate target markets, how to develop and maintain a customer base through the cultivation of customer loyalty and relationships with not only customers but also suppliers and retailers (Hill & Jones, 2004). A limited budget will likely affect the small business's ability to channel its promotional mix, and will determine the type and scope of advertising themes and the agencies employed to run campaigns. Initially the sales success rate and any online promotional strategies are likely to be low. The entrepreneur needs to also pay attention to options of distribution channels, both direct and indirect, and determine the medium of delivery that best meets the abilities of the company at this time. Another consideration is how to price products and services, as well as when to provide discounts and how much. With regard to the hiring of staffs and other personnel the entrepreneur must deliberate as to the number of employees that will be needed to meet goals, and also to remain a small business if this is desired for tax purposes (de Bono & Heller, 2006). Determining also the skill sets of staffs is essential to provide a consistent and quality product or service to the market. Initially as an entrepreneur/manager issues such as style of management and leadership must be considered. Alternatively if a manger is hired the entrepreneur will want to consider the characteristics of a manager that they think reflect their product or service. This will require that the entrepreneur continually improve their learning and professional development to stay up-to-date with research into small business processes, such as management styles (Hisrich, Robert, & Shepherd, 2006). Effective management is critical to the organisation, maintenance and ongoing assessment of a company. Company culture and its values and objects, such as represented by mission statements, marketing plans and growth plans plays a vital role in the competitive strength of a company. A mission statement needs to be a clear and concise message that reflects the values and goals of the organization, basically providing the underlying purpose of the organization (& Posner, 2005). As such, the mission statement should be inclusive of socially meaningful and measurable factors that seek to investigate the ethical position of the organisation, its public image, its target market, its products or services, its geographic location and the expectations for growth and profitability. The mission statement needs to be the primary consideration of any organization, as it helps to establish how to evaluate strategic outcomes (Thomas & Posner, 2005). They go on to state that management and enhancement of organisational processes can be achieved through focus of staff on a mission. However, Thomas and Posner make the case that the socio-political environment of the organization will also impact on how the organization defines its mission, and how the people working within the organization perceive their purpose. Further, the lack of documentation of strategic planning or evaluation of planning outcomes seriously affects the management a small business. Thomas and Posner highlight the need for entrepreneurs to apply assessment principles and concepts to strategic plans to allow review, modification and implementation. Firstly, it is necessary that an organisation actually measure variables that will provide meaningful data, such as what is of primary value to the company. Secondly, evaluation of performance outcomes provides feedback to management about staff and clients or customers. Thirdly, in order to provide a comprehensive assessment it is necessary that the entrepreneur use a selection of measures, data and feedback to cross-validate findings, and to provide depth to conclusions drawn about the data. Also, strategy assessment is an ongoing process, focused on continuous improvement, and so policies must state specific times that each step in the assessment process occurs. Finally, as an organisation wide enterprise, evaluation of business strategy unites the organisation, and promotes an assessment culture that fosters systematic practices and empirical decision making. All of which contribute to the competitiveness of a small firm. Gill and Jones (2004) contend that without adequate strategic planning, then good organization, creative leadership and economic control within the organization are at risk, and the likelihood of success is drastically reduced. 4. Issues with Innovation and Small Business in the UK Many issues face the ability for small businesses to compete in markets with larger corporations, especially with regards to innovation. Across the globe for the past two decades these has been an increasing recognition amongst policy makers that new and small firms re a valuable source of innovation, new technological developments and the creation of employment opportunities (Roper, 1999). These three factors have been identified as key areas for economic development within a nation in the 21st century. However, despite the increase in research interest of small business processes, little empirical studies have been undertaken into the contribution of new and small businesses toward these economic factors (Cantwell & Iammarino, 2000). It has been suggested in the UK that the US system of innovation is based on entrepreneurship and that some start-up companies have actually developed into corporate giants within a short space of time (Roper, Love, Dunlop, Ashcroft, Hofmann, & Vogler-Ludwig, 1996). However, there is little research to support a similar pattern of growth within the UK. As such, this has initiated debate as to whether the USA has a better system to support innovation, and if the UK should aim to modify its system of innovation to mirror that of the USA and so encourage entrepreneurship. However, regardless that innovation is recognised and an important element of economic growth there resists limited evidence to support policy changes made over the past twenty years. An important assumption made is that the economic value of innovations is not a function of the size of the small businesses that introduce them. One study has found this to be an invalid conclusion (Tether, 1998 as cited in Gustavsen, Finne, & Oscarsson, 2002). Instead, the importance of innovations has been found to be increase with the size of a small business. Although new and small firms do practice innovation, in general they tend to introduce a lower rate of value with their innovations. It is also recognised that small businesses contribute in other ways with innovation and the networks they develop cross -nationally and internationally. Innovation policy for the UK is the culmination of observations that there has been an ongoing decrease in innovation among small businesses, this has been indicated from the comparison of "innovative indicators" (CRIC, 2006). It may be that there exist at present too few small and new businesses to stimulate innovation and subsequent economic growth. Potential entrepreneurs may lack the skills, knowledge and competencies to contribute to innovation. Alternatively, potential innovators may lack the right incentives, such as a demanding customer. The largest barrier to innovation though has been attributed to the conceptualisation of innovation as an inherent construct, of which some people or nations may "naturally" have more of. This is could be considered to be reflected in the current UK policy which seems to restrict amendments to "British" innovators. The basic principle of innovation is that returns on investment are a function of the scale of the market that the innovation is exploited in. Profitable investments use mechanisms such as science, technology and market operations, to enter into cross-national and international markets (CRIC, 2006). The global networks of organizations promote the rapid exploitation of innovation. This global "distribution" of innovation processes encompasses national and international markets, facilitating the formation and participation in of distributed systems. In turn, conditions are created within the UK that provides small businesses are able to more fully participate within innovative systems. Also, conditions pull system member to the UK for work opportunities through migration. And there is an increased associated wealth that is created with systems adopted within the UK, such as policy that focuses on entrepreneurship. It is critical that amended innovation policy also align economic policies to support innovation. This will promote the UK as an attractive destination to stimulate and maintain innovative business (CRIC, 2006). Further, specific policies can be tailored to meet specific market system weaknesses in processes of innovation. However, Like the general population of small firms, however, the death rate amongst innovative and technology based small firms tends to be particularly high in the period immediately after start-up. A failure on part of the entrepreneur to make a comprehensive evaluation of their business and the market can lead to decision being made based on false assumptions (Vogan, 2006). Incorrectly positioning a company results in plans that are focused on irrelevant goals and plans tend not to have a systematic and logical nature and so do not "map out" how to achieve goals. Wasted time can seriously affect the ability and level of innovation for the entrepreneur. Assessment, positioning, planning and implementation are necessary sequential phases to start-up that enable the new and small business to have an objective view of themselves in terms of operational, financial, structural and interpersonal perspectives (Love & Roper, 2001). References AusIndustry (2006). An Australian Government initiative. Retreived 25 October http://www.ausindustry.gov.au/ Bjorn G., & Oscarsson, B. (2002). Creating connectedness: The role of social research in innovation policy. AI & Society, 40(1), 163-165. Cantwell, J. & Iammarino, S. (2000). Multinational corporations and the location of technological innovation in the UK regions. AI & Society, 34(4), 317-322. CRIC (2006). CRIC Project: The innovation performance of small firms. Retrieved 25 October, 2006 http://les.man.ac.uk/cric/welcome.htm de Bono, E., & Heller, R. (2005). Entrepreneurial managers. 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