Creativity and Innovation in the Development and Growth of Small and Medium Enterprises in the UK - Case Study Example

CREATIVITY AND INNOVATION IN THE DEVELOPMENT AND GROWTH OF SMES Name Name of Class Name of Tutor/Professor Institution Affiliation City and State Date Creativity and Innovation in the Development and Growth of SMEs Introduction The role of Small and Medium Enterprises (SMEs) in the United Kingdom economy cannot be overestimated. Through entrepreneurship, creativity and innovation, the sector makes immense contributions to the U.K. economy, and it becomes important to examine the exact mechanisms and factors through which SMEs influence the economy. Entrepreneurship refers to the capacity and willingness to take risks to develop, organize and manage a business with an overriding objective to make profits (Business Dictionary, 2016; Bridge & O'Neill, 2012). Entrepreneurship and SMEs are very crucial to the UK economy in which research shows that there exists a positive and significant relationship between new businesses and SMEs on one hand and growth on the other, a factor that makes SMEs and entrepreneurship crucial in economic growth and recovery in the U.K (BVCA, 2011, p. 11). This paper seeks to examine the role of entrepreneurship, creativity and innovation in the growth and development of SMEs in the United Kingdom. The endeavour of the paper is also informed by the fact that in Europe, SMEs are the major source of growth and employment (European Commission, 2016). To achieve this objective, the paper examines two external factors, access to finance and competition as well as two internal factors, human resources management and lack of capital to comprehend how they influence the growth and development of SMEs in the United Kingdom. Innovation and Creativity in the SMEs The development and growth challenges to the growth and development of SMEs in the disguise of factors listed in the preceding section of this paper need a high level of innovation and creativity if a solution is to be developed. Innovation refers to the process of creating a new idea, method, product or even enhancing existing systems to create value for an organ (Merriam-Webster, 2016; Yale, 2016). Creativity, on the other hand, refers to the process of turning new and imaginative ideas into reality and is a process that entails an ability to perceive nature in new ways, establish relationships between concepts, find hidden patterns and generate solutions (Creativity, 2016; CSUN, 2016).In essence, an analysis of the two concepts, innovation and creativity, reveals that they are both attempts to find new and optimal solutions to problems in an organizational context. The implication of this finding to the objective of this paper is that creativity and innovation are crucial in finding solutions to internal and external challenges that impede the growth and development of SMEs in the United Kingdom. According to OECD (2010), innovation and creativity are crucial in entrepreneurship for their ability to not only generate new solutions but also lead to value creation that enhances business performance (p. 4). Innovation and creativity processes in SMEs, mostly manifest in the research and development (R&D) efforts often results in outcomes that provide optimal solutions to perennial problems in the organizations and ultimately improves their performance (Rosenbusch et al., 2011, p. 442). According to Brown & Lee (2014), the major problem facing SMEs in the United Kingdom is a source of funding. Precisely, the researchers note that the ability to access finance is a critical factor which influences the growth of UK SMEs since it enables them to expand and access other growth resources such as ideas, people and new markets (p. 41). Financial innovation and creativity has played a key role in increasing access to financial resources by SMEs thereby solving this problem (to some extent though) for SMEs that embraced creativity and innovation. According to ACCA (2014), innovation and creativity in the SMEs in the financial sector of the United Kingdom has led to development of technologies that increase access to online financial services, electronic data and structures that create new ways of obtaining funding and for investors, borrowers and savers to meet and do business (p. 3). Therefore, financial innovation, management of credit and inventory and systems management come across as one of the ways through which creativity and innovation enable SMEs to overcome its growth and development challenges. Moreover, innovation and creativity mostly help in overcoming the many development challenges through solving problems related to the major SME growth constraint that is the difficulty of access to finance. Innovation and creativity is crucial for SME growth and development because it yields optimal and firm-specific outcomes that go beyond problem-solving to spur growth and development (Millard, 2011, p. 178-195). To comprehend the impact of creativity and innovation on solving SME growth problems, it is important to examine the key internal and external factors that influence growth and development in the UK SMEs. External and Internal Factors Influencing Growth and Development of SMEs in the UK This section provides an examination of the major factors that influence the growth and development prospects of U.K SMEs. A systematic approach is adopted that examines two external factors and two internal factors. 1. External Factors These are the factors that are beyond the control of SMEs but to which they can condition internal responses to influence the firm-specific performance. Here, access to finance and competition are discussed. i. Access to Finance This refers to the availability or lack of avenues for small and medium enterprises to obtain funding for their respective organizational activities. According to the European Commission (2016), the major factor that influences the performance of SMEs in Europe ( therefore, the United Kingdom) is the ability to find finances for their activities such as research and development (R&D), development of new products and access to new markets. In essence, access to finance comes across as the major factor that influences growth and development of SMEs in the United Kingdom because the availability of finances for SMEs determines whether an organization will undertake growth and development activities and sometimes the extent to which such activities can be undertaken at the organizational level. Accessing finances is an external factor since SMEs cannot control the sources of funding for their activities which are mostly determined by external factors such as government policy and macroeconomic variables. According to a survey conducted by the European Central Bank, most SMEs reported that their greatest need for growth and development was finance, with most of them requesting for bank loans as much as most SMEs reported an improvement in the availability of external finance sources (ECB, 2015). ii. Competition Competition influences the growth and development of SMEs since such organizations have to scramble for similar sources of finance, clients and also devote a lot of resources in marketing and branding to survive in their respective sectors and this is particularly manifest in the U.K retail banking SMEs (EEF, 2014). Competition is a key factor among all SMEs including profit and non-profit SMEs because the latter also competes for financing. This factor influences the growth and development prospects of organizations because a lot of resources are channeled towards positioning the business other than capital development. From a general perspective, competition for clients and positioning activities of SMEs lead to improved service provision which has a spiral effect of enhancing economic growth. The SMEs in the service sector in the U.K. are, for instance, characterized by cutthroat competition that mainly results from the behaviour of incumbent organizations making it difficult and costly to acquire customers and expand branch networks (HC, 2015, p. 75). Being an external factor that influences business operations and mostly in a negative way, competition is thus a critical factor. Nonetheless, in an SME-driven economy like the U.K’s, competition is a factor of interest. 2. Internal Factors This refers to the factors that influence growth and development of SME’s, factors that are within the control of the business. This paper examines human resources management and availability of capital as two most important internal factors to SMEs. i. Human Resource Management This internal factor pertains to the methods used by organizations to organize their human resources to achieve organizational objectives. Human resource management is an important internal factor because, for SMEs, human capital plays a fundamental role in developing and sustaining competitive advantage (Tsai, 2010). The implication of this finding is that to grow and develop, SMEs have to take into account the human resource management practices such as employee motivation and interrelations at the workplace. According to Olander et al (2011), in small firms (read SMEs), human resource is very important since creative employees are the most crucial resources to organizations since they generate innovation and HRM practices that protect firm-specific knowledge inherent in employees is important since such knowledge forms the prerequisites for future innovation and organizational performance. In the retail sector, for instance, the establishment of customer relationship management (CRM) structures is important since it leads to customer satisfaction and loyalty making employee-cantered HRM very important in SMEs operating in such sectors (Kamalian et al., 2013). Increased competition among U.K SMEs both in the service and manufacturing sectors led to SMEs increased focus on strategic human resource management for the growth and development of SMEs. ii. Availability of Resources, Management and Leadership Capital availability and its management is a critical success factor for SMEs across the world as it determines the nature and impact of its activities on organizational growth and development (Hove & Tarisai, 2013, p. 57-67). This internal factor is related to the external factor of access to finance as discussed in the preceding section since they all entail the acquisition and availability of funds to run organizational operations. The leadership and management structure of SMEs also determines the manner in which organizational resources are used and is, therefore, an important factor in determining the growth and development prospects of organizations. According to Hayton (2015), in the United Kingdom, leadership and management skills are very important in shaping the growth of SMEs through facilitating the development of entrepreneurial, technical and organizational skills as well as strategy formalization and strategy responsiveness which all determine organizational performance (p. 8). An analysis of this factor, therefore, portrays it as an important construct of SMEs that entails creating an absorptive capacity and operational framework for the organizational infrastructure (see Appendix 1 for a practical conceptual framework). Impact of Factors on Organizational Performance This section examines the exact mechanisms through which the identified factors affect organizational performance in SMEs i. Access to Capital: Adequate access to capital is important since it enables organizations to acquire adequate funding for their projects and also for adaptabilities such as countering competition, positioning and speculation all of which have the spiral effect of economic growth and job creation. In the U.K banking sector, for instance, the more funding a business is able to obtain, the more successful it is likely to be since such SMEs make profits through credit creation which depends on the amount of money they lend out and the number of creditors other than other factors such as lending rates. In the manufacturing sector, where production is capital intensive, increased access to finance will enable organizations to purchase adequate and efficient capital equipment that will enhance productivity and hence the performance of firms. In essence, access to capital is an external factor that directly influences operations of SMEs in such a manner that the higher the ability to access funding, the more productive the SME is likely to become (Brown & Lee, 2014, p. 41). ii. Competition: According to EEF (2014), competition negatively influences the performance of SMEs by reducing the amount of funds available to spend on capital projects that directly contribute to productivity, limiting the sources of funding and the clientele base of a business. In the retail sector, for instance, cutthroat competition is likely to reduce prices of commodities in a bid to lure customers and the impact of this on businesses is reduced revenue and increased expenditure on promotional activities and positioning strategies. What we have then in a competitive environment is not only reduced revenues but an increase in peripheral expenditures both of which work in a mutually reinforcing manner to negatively influence growth and development of SMEs and by extension, economic growth and job creation in the larger economy. However, as much as competition negatively affects businesses, it increases varieties available to customers and the real income which positively (though mildly) affects economic growth and job creation in the economy. iii. Human Resource Management: Effective and strategic human resource management practices often lead to employee motivation and reduced labour turnovers that have the impact of increasing business performance in SMEs (Kamalian et al., 2013, p. 179). For instance, in the SMEs operating in the service sector, it is important to motivate employees since they come into contact with the clients of the business and their performance has a direct impact on the productivity of the organization. In such SMEs, the overriding intention is to provide high quality service to structure a customer relationship management (CRM) that will lead to customer satisfaction and loyalty, implying that employees are the most important assets of the business. Additionally, use of human resource best practices gives SMEs across all sectors a competitive edge, especially where the source of funding and other resources are equally available to all businesses. According to Tsai (2010) strategic human resource management leads to employee job satisfaction which enables employees to increase their effort input and hence productivity of organizations. iv. Availability of Resources, Management and Leadership: High and sophisticated leadership and organizational management skills lead to increased productivity of SMEs by influencing the quality of decision-making and resource benefits optimization (Hayton, 2015, p. 8). For instance, considering the SMEs in the banking sector, the use of organizational leadership best practices and resource availability may lead to technological innovativeness like mobile banking and internet banking which allows customers to transact businesses using their mobile devices. Such innovation that is attributed to apt leadership, effective management and availability of resources at the SMEs will solve problems relating to high wages and overhead expenditures while increasing clientele base and customer satisfaction thereby increasing growth and development of SMEs as well as economic growth and job creation in the United Kingdom. Essentially, research shows that the more resources an organization has, the more prudent its leadership and managerial structure and the more sophisticated the decision-making structure and problem solution, the more productive it is likely to be (Hove & Tarisai, 2013, p. 57-67). Therefore, the more intensively such SMEs are likely to contribute to economic growth and employment. Conclusion Innovation and creativity come across as very crucial concepts in the management of SMEs since they yield optimal solutions to perennial problems and additionally provide marginal benefits that surpass problem-solving such as value-creation therefore positively influencing the performance of SMEs. The paper has also examined the practical significance of innovation and creativity using four important factors that influence organizational performance. As for the external factors, the discussion has revealed that access to finance determines the nature, intensity and scope of organizational projects; therefore, its performance while competition stretches organizational resources thereby influencing performance. Financial and technological innovation comes in handy as constructs of creativity and innovation that can be used to solve problems relating to access to finances and competition. Meanwhile, for the internal factors, human resource management (HRM) is critical in enhancing performance through positioning while resource availability and management determines the efficacy of implementing growth and development projects of SMEs. To this end, strategic human resource management practices and organizational leadership best practices serve as crucial constructs of innovation and creativity that aids in solving organizational problems. References List ACCA, 2014. Innovations in access to finance for SMEs. 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Report on the results of the Survey on the Access to Finance of Enterprises in the euro area – April to September 2015. Retrieved on March 15, 2016, from https://www.ecb.europa.eu/press/pr/date/2015/html/pr151202.en.html EEF, 2014. Finance for Growth Increasing Competition in SME Banking. Research and Intelligence. Retrieved on March 15, 2016, from https://www.eef.org.uk/resources-and-knowledge/research-and-intelligence/industry-reports/finance-for-growth-increasing-competition-in-sme-banking European Commission 2016. Access to finance for SMEs. Banking and Finance. Retrieved on March 15, 2016, from http://ec.europa.eu/finance/general-policy/access/index_en.htm Hayton, 2015. Leadership and Management Skills in SMEs: Measuring Associations with Management Practices and Performance. Department of Business and Innovation Skills (BIS). Retrieved on March 15, 2016, from https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/418404/bis-15-204-leadership-and-management-skills-in-sme.pdf HC, 2015. Conduct and competition in SME lending. House of Commons, Treasury Committee. Retrieved on March 15, 2016, from http://www.parliament.uk/documents/commons-committees/treasury/Conduct_and_Competition_in_SME_lending.pdf Hove, P., & Tarisai, C. 2013. Internal factors affecting the successful growth and survival of small and micro agri-business firms in alice communal area. Journal of Economics, 4(1), 57-67. Kamalian, A. R., Ya'ghoubi, N., & Baharvand, F. 2013. Explaining Critical Success Factors for CRM Strategy (Case Study: SMEs in Zahedan Industrial City). International Journal of Academic Research in Business and Social Sciences, 3(5), 179. Merriam-Webster, 2016. Innovation. Retrieved on March 15, 2016, from http://www.merriam-webster.com/dictionary/innovation Millard, D. 2011. Management learning and the greening of SMEs: Moving beyond problem-solving. Zeitschrift für Personalforschung/German Journal of Research in Human Resource Management, 178-195. OECD, 2010. SMEs, Entrepreneurship and Innovation. Social Entrepreneurship and Social Innovation. Retrieved on March 15, 2016 from https://www.google.com/search?q=SMEs%2C+entrepreneurship+and+innovation&ie=utf-8&oe=utf-8#q=SMEs%2C+entrepreneurship+and+innovation%2C+OECD Olander, H., Hurmelinna-Laukkanen, P., & Heilmann, P. 2011. Do SMEs benefit from HRM-related knowledge protection in innovation management? International Journal of Innovation Management, 15(03), 593-616. Rosenbusch, N., Brinckmann, J., & Bausch, A. 2011. Is innovation always beneficial? A meta-analysis of the relationship between innovation and performance in SMEs. Journal of business Venturing, 26(4), 441-457. Retrieved on March 15, 2016, from http://strathprints.strath.ac.uk/35465/1/Rosenbusch_Brinckmann_Bausch_2011.pdf Tsai, C. J. 2010. HRM in SMEs: homogeneity or heterogeneity? A study of Taiwanese high-tech firms. The International Journal of Human Resource Management, 21(10), 1689-1711. Yale. 2016. What is Innovation? Information Technology Services (ITS). Retrieved on March 15, 2016, from http://its.yale.edu/about/innovation-its/what-innovation Appendix 1: Conceptual Framework of the Impact of Leadership and Management of SMEs on Organizational Performance Source: Hayton (2015), p. 7. From Read More