Drivers Impacting Small and Medium Enterprises - Essay Example

Table of Contents I. Terms of Reference……………………………………………………………...…….3 II. Procedure……………………………………………………………………………...3III. Introduction…………………………………………………………………………...3 IV. Findings……………………………………………………………………………….4 i. Political and Legal Factors…………………………………………………….4 ii. Economic Factors……………………………………………………………...6 iii. Social Factors………………………………………………………………….8 iv. Technological Factors…………………………………………………………9 v. Environmental Factors……………………………………………………….10 V. Conclusion………………………………………………………………………...…11 VI. References……………………………………………………………………………12 Report on Macroeconomic Analysis of Current Drivers Impacting Small and Medium Enterprises in Greece Terms of Reference To report on macroeconomic analysis of current drivers impacting small and medium enterprises in Greece as requested by the Contemporary Entrepreneurial Studies course lecturing team through the coursework sheet of Monday 11th February 2013. Procedure The information compiled in this report was obtained entirely from secondary sources of information because such sources are easily available, are cheap, and are easily verifiable. Information was obtained from hard copy sources such as European and Greek economic journals and recent books about the economic situation of Greece. Information was also sourced from reliable online sources such as newspaper articles of major media houses such as CNN, and reports posted on websites of international financial and economic organizations such as the International Monetary Fund and the Organization for Economic Cooperation-operation and Development. These online reports were used because they obtain their information from official government sources and thus this information is valid. In addition, online articles of peer-reviewed economic and business journals were used because in some, cases hard copies were not available. Introduction The Greek small and medium enterprise (SME) sector plays a very crucial role in the country’s economic development. The SME sector employs the majority of Greece’s labor force and accounts for two thirds of the non-primary sector sales volume. The SME sector has particularly been important in the wake of the debt and economic crises that have been facing Greece for a couple of years now. As numerous companies went bankrupt and retrenched thousands of workers, the SME sector proved to be a valuable source of employment as it absorbed many of the employees who lost their jobs (Markatou, 2012, 56 – 65). Although many SMEs also went bankrupt because of the crisis, majority of them survived, and many start-ups are still coming up as a result of entrepreneurship driven by innovation. The general decrease in demand for goods due to falling income levels led to fierce competition among SMEs forcing businesses to initiate value-driven innovations in a bid to obtain an edge over competitors. Through the PESTLE analysis, this report evaluated the competitiveness of Greek SMEs by analyzing the factors that affect the ability of businesses to become or remain competitive. Factors that this report analyzes are the PESTLE factors which include political, economic, social, technological, legal, and environmental factors. Findings Political and Legal Factors The political factors that affect the ability of SMEs in Greece to conduct business are government tax policy, trade restrictions, and political stability. Austerity measures enacted by the Greek government have led to a massive increase in taxation and spending cuts which have impacted both positively and negatively on the competitiveness of SMEs. The government enacted the austerity measures in order to secure a series of bail-out loans from the European Union and the International monetary fund (Labropoulou & Smith-Park, 2012, edition.cnn.com). The increase in taxation has affected both the public and the private sector. Increased taxation on industrial goods such as transport materials, electronic goods, construction materials, and clothing has seen a drastic fall in the profit margin of many SMEs in industry, agriculture, and fishing. As a result, their profits have declined considerably impairing their ability to finance key components of their business such as product promotion. This has led to a corresponding decline in sales volume. Many SMEs have been left with the single option of channeling more resources into product innovation in order to increase their competitiveness by increasing product demand (Hyz, 2011, 50 – 61). Newly enacted austerity measures also involve massive cuts in government spending, which have resulted in a drop in infrastructure development. This is a huge blow to SMEs considering that they have a high dependence on transport infrastructure, power sources, and communication facilities to procure raw materials, produce their products, and transport them to points where they will be accessible to final customers. This has led to increased production and distribution costs for SMEs, many of which have found it necessary to introduce cost reduction measures such as contracting specialized companies to provide transport support services such as transportation of final products to the market (Liargovas & Skandalis, 2010, 134 – 176). The political environment in Greece has been heated following the adoption of austerity measures. Majority of Greeks are opposed to austerity measures due to the drastic fall in living standards and lay-offs that result from such action. As a result, Greek cities have been marred with numerous demonstrations, protests and riots against austerity measures that are already in place and those that the Greek government plans to introduce in the near future. This widespread social unrest has created an unsuitable environment for all types of businesses including SMEs, which has impacted negatively on their ability to remain competitive (Marquart, 2011, abclocal.go.com). Economic Factors Economic factors have also had a severe negative impact on the competitiveness of most SMEs in Greece. The Greek economy is in deep recession due to a debt/GDP ratio of 150% and the austerity measures adopted by the government. This has led to a large decline in industrial production, which declined by 8% from March 2010 to March 2012. The garment industry, which forms one of the most important sectors of the economy, was particularly hard hit. Building activity has reduced by 70% in the last two years. Retail sales turnover registered a decline of 9% in the same period, indicating a substantial decline in purchasing power. Over one million Greeks have found themselves jobless after unemployment skyrocketed from a low of 7.2% in the third quarter of 2008 to a historic high of 27% in November 2012. Currently, youth unemployment is at an all-time high of 61.7%. According to the OECD annual Taxing Wages report of 2011, the average gross income in Greece registered a real decline of 25.3%, falling to 15,729 euros in 2011 from 20,457 euros in 2010 (OECD, 2011, oecd.org). All this economic indicators reveal that the economic environment of SMEs in Greece is currently quite unfavorable for business. Decrease in retail turnover means that the sales volume of SMEs has declined in accordance with a decrease in purchasing power that has occurred due to a substantial fall in the average gross income. Therefore, the revenues of SMEs in Greece have declined, decreasing their finance base and negatively affecting crucial components of their business such as financing for product development and improvement (Lynn, 2011, 78 – 80). This has had an immense bearing on their ability to remain competitive. Only SMEs that have been able to adjust their promotion activities or improved their products to maintain their relevance in the market have been able to obtain a competitive edge and avoid bankruptcy or poor performance. The fact that over one million Greeks are now jobless means that they no longer have the purchasing power of acquiring products and services other than those that are basic. Consequently, the markets of SMEs have reduced in size, leading to fierce competition between SMEs to increase their market share in the smaller markets. This cut-throat competition has forced many SMEs unable to remain competitive out of the market (Bobillo, Rodriguez & Gaite, 2006, 867 – 890). Globalization has a massive impact on the Greek economy mainly because the economy is export-oriented. Export trade represents more than 50% of GDP. However, the trade balance is currently negative due to the drastic fall in exports that the recession caused. Exports are picking up as indicated by the 10% growth in exports in 2012 to €24.5 billion. This growth is expected to continue for the fourth year running in 2013. In addition, the export/import rate declined to 1.8 in 2012, a sharp decline in comparison to previous years. This trend, in combination with an increased shift towards Greek products, will significantly improve the country’s trade balance. SMEs involved in the shipping industry form the largest representation in export trade, although there are SMEs involved in international trade in all the key industries including fishery and agriculture. These SMEs have been particularly hit by the fall in Greek exports due to the recession, although their volume of international business has begun to pick up with the recent revival of export trade (Gurria & Padoan, 2012, 1 – 12). In addition to international trade, Greek SMEs have been exposed to the global economy through foreign investors who have invested heavily in Greek companies and capital resources. The withdrawal of many foreign investors with the onset of the economic recession has seen many SMEs lose a vital source of capital. This development is harmful to the practice of entrepreneurship in the country, which has been important for facilitating self-employment especially among the youth. The only positive economic factor for SMEs in Greece is the country’s exceedingly low inflation rate, which stood at 0.10% in February 2013. This low rate is conducive for SME planning and investment, since carrying out this activity during times of high inflation is challenging due to the uncertainty that arises because of rising prices and costs. In addition, Greece’s low inflation rate ensures that workers do not demand for higher wages. This prevents business costs and prices from rising, therefore, products of SMEs remain low-priced and competitive (European Commission, 2012, 13 – 18). Social Factors Greeks have a group-oriented culture which emphasizes personal relationships. This has a large bearing on the effectiveness of various types of business structures in Greek businesses. Bureaucratic business structures tend to be immensely unpopular in Greece because they impair the development of personal relationships among employees. Such a structure leads to social strain and low employee motivation at the workplace. Consequently, most SMEs in Greece have non-bureaucratic management structures which provide employees with the freedom to interact freely and develop positive working relationships with each other and their seniors. In this regard, international corporations with subsidiaries in Greece have found it quite difficult to maintain high levels of motivation among their Greek employees, principally because they stick to their long-established bureaucratic forms of business structure. Many of them lack organizational cultures that conform to the local Greek culture and social ethos, a factor which severely impairs their internal business processes resulting in high operational costs and low levels of efficiency. This factor has provided SMEs with a competitive edge over international corporations in Greece because virtually all SMEs are home-grown businesses. Their proprietors are familiar with local social factors and make provisions for them in their businesses, enabling them to implement effective internal business relationships which are vital for high performance (Charalambis D et al, 2004, 136 – 167). Another social factor with a bearing on the competitiveness of SMEs in Greece is the shift from a locally fragmented and predominantly rural society to an urban and centrally-organized society. Approximately one third of Greece’s population resides within the Athens metropolitan area. This population distribution pattern determines the location of SMEs, with most of them preferring to be strategically located within or near urban areas where they can easily access the large markets. SMEs located far from urban areas have high transportation costs for both raw materials and finished goods, and their products may fail to reach the market on time. This reduces their competitiveness in comparison to SMEs located within or near towns and cities, which have low transportation costs and their products always reach the market on time, and are continually available to customers (Dabilis, 2013, greekreporter.com). Technological Factors Greece’s research and development landscape has recently experienced the emergence of embedded systems and micro-and nano-electronics. These technological innovations have been made possible by local technological institutions such as the Corallia cluster for Microelectronics and through involvement in international technology programmes such as joint initiatives like the Advanced Research and Technology for Embedded Intelligence Systems and the European Nanoelectronics Initiative Advisory Council. These technological advancements have effectively improved information technology and automated electronic systems in businesses and industry, making communication and production processes cheaper and easier to carry out than ever before (Passerini et al, 2012, 344 – 394). However, few SMEs in Greece have adopted the latest ICT technologies which considerably reduce operational and production expenses. As a result, many SMEs are still burdened with high operational costs, especially in terms of communication operations. Businesses which have acquired and successfully implemented new and improved technological innovations have obtained a competitive advantage over those which have not. This is because such technology has enabled SMEs to reduce their operational and production costs and, consequently, reduce the prices of their products, making them more attractive to customers than those of competitors with high prices (Gunasekaran & Sandhu, 2010, 203 – 208). Another technological trend that is emerging in the Greek SME sector is the outsourcing of IT services to specialized firms. This practice is associated with improved efficiency and reduced costs. However, it results in complication of IT operations, a challenge that may result in loss of crucial data or elevated risk of cyber attacks. Nevertheless, outsourcing of IT services is beneficial to Greek SMEs since the risk of data loss and cyber attacks is minimal, and can be entirely eliminated by procuring the right kind of technological expertise (Burgess, 2010, 102). Environmental Factors Environmental pollution has been one of Greece’s most contentious issues since the Second World War. The reconstruction process that was launched after the war resulted in unplanned industrial development leading to massive air and water pollution in urban areas. Critical levels of pollution led to the launching of numerous anti-pollution campaigns. Consequently, majority of Greeks are sensitized to the issue of pollution. Greek SMEs face the challenge of coming up with environmentally friendly policies that attract consumer good will which ultimately leads to an increased customer base. Some SMEs choose to be insensitive to environmental issues in order to avoid the costs that come with the proper management of wastes. Such businesses might lose consumer good will, which leads to decreased competitiveness in comparison to the businesses that allocate funds for waste management (Liargovas & Skandalis, 2010, 134 – 176). Conclusion Evidently, the business landscape for SMEs in Greece is very tough. External environmental factors are largely unfavorable to the survival of SMEs involved in small to medium scale business. There is a crucial need for extensive entrepreneurial practices, innovation, and cost-reduction among SMEs in order for them to remain competitive. The economic environment is highly unfavorable to SMEs due to the current economic recession. Average gross income has reduced, decreasing the demand for goods and services. Political and legal factors, especially the austerity measures adopted by the Greek government, have also impacted negatively on the competitiveness of SMEs. Increased corporate taxation has eaten into the profits of SMEs and reduced funds available to them for product promotion and product development through innovation. Similarly, reduced government expenditure on infrastructure has impaired the services of many SMEs. Social factors positively influence the competitiveness of SMEs since they provide them with an advantage over large corporations with regard to internal business structures. Finally, current technological trends in Greece put SMEs at a competitive disadvantage since they tend to adopt new technology slowly. 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