Value delivered by SME to economy

Although, there is no one agreed definition of Small and Medium Enterprises (SMEs),
however, almost every country and all the scholars agree upon the fact that SMEs are necessary
for economic development and prosperity. It has been evidenced that SMEs contribute to vast
majority of business and commerce activities and economic prosperity. For example, it
employs major chunk of global work force. According to World Bank, about 95% of the
existing business set-ups across the world are formed by SMEs which employs about 60% of
private sector workers. Similarly, SMEs create huge impact on employment, income and
economic output at micro and macro level. The value of SMEs is evident from the fact that it
is even not affected or disproportionately affected by the financial crises. Hence, it contribute
significantly to economic growth of nations. At individual business level, professional service
firms that focuses on SMEs are particularly important as having SME set-up enable them to
overcome issues like access to finance, talking new markets and dealing with regulations.

SMEs are considered and proved as both engine for job creation and an important factor in job
destruction, making them the embodiment of “Schumpeter’s creative destruction”. A typical
example of this could be European Union’s (EU) research findings that depicts that about 50%
of the firms that started trading in 2001 survived for at least five years or more. Furthermore,
within business cycle, SMEs expose incumbents to tough competition and hence innovation
and value addition with forces them to change and become more productive. This SMEs
induced innovation helps economies grow. Vast majority of today’s product and services that
have been introduced to markets by SMEs are typically way better at identifying and adopting
new trends and economic needs, which in turn, bring establishment of new business. In this
way, SMEs create lot of new opportunities as well as greater resources and flow of investment
of larger firms.

In the light of above facts, figures to support value of SMEs in UK economy shows that there
were 5.2 million SMEs in the UK in year 2014, which was about 99% of all business activities.
According to statistical release of department for business innovation and skills, at the sart of
2015 there were 5.4 million SME businesses, which shows 0.2 million increase in short period
of time. There were about 5.0 million micro-businesses, accounting for about 96% of all
businesses. Similarly, majority of SMEs in the UK are engaged in international trade of goods
and services contributing significant foreign exchange, balance of payment, and trade surplus

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for the country. According to Storey (1994), SMES contributes in creating employment and
entrepreneurship opportunities, produce new management ideas and strategies, develop
productive organisational culture. This study finds that although, SMEs create vast majority of
economic and business opportunities in the country, they still face challenges in the above areas
and findings adequate financing and dealing with variety of challenges such as changes in
government policies, overall business and trade climate and son on. The study of Storey (1994)
explicitly finds and advocated that SMEs plays an important role in employment creation, in
innovation, and overall economic value. However, it was suggested in their findings that there
should be a small business management policy in congruence with social and employment
policy of the country. According to this study, the interest of society and small business owner
cannot always coincide so there is need to examine social and economic considerations. This
study also finds that the role of government in this context should be of promoter of SMEs by
locating them within wider economic and social framework.

Challenges of an effective infrastructure and supportive policy

perform

According to Tony Morgan1, Chief executive officer, Verus 360, a key issue for SMEs in the
UK is adequate cash flow. According to him, larger customers and main accounts continuously
imposing lengthy payment terms of suppliers which influence many SMEs to switch to comples
and expensive finance options available to them. The typical example this phenomena could
be of SME suppliers of large retail chain such as TESCO. This makes access to finance for
SMEs a challenge, particularly when traditional lenders becomes unable to meet the demand
for business lending. Further to this, along the same lines, the actual cost of borrowing for SME
is much higher than the actual rates. Many lenders even charge arrangement and management
fee and other array of changes. There should be government policy addressing the financing
need as well as protection of SME such as suppliers of large retail chains from being exploited
by the large businesses.

1
http://business-reporter.co.uk/2015/11/15/the-debate-what-will-be-the-main-challenges-facing-smes-in-
2016/

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As discussed in above section on the value of SME for economy, SMEs are considered as the
lifeblood of the UK economy and hence they deserve better facilities and arrangement through
adequate policies.

Another biggest challenge faced by SME as highlighted in Lange et al.(2000) is of lack of skilled
staff. This issue is so serious in some sectors that it cost SMEs to hold back their business
growth. Furthermore, it was highlighted in Smallbone and Rogut (2005) that stress is the biggest
emerging workplace challenge in SMEs. The causes for this issue are broad ranging from
increase in business competition, work practices, tough financial targets, and increased
customer and client expectations. There might need for sound guidance and policies to support
SMEs on how to keep up with workforce demand, business operations, and healthy workforce.
Another challenge highlighted by Gray, (2002 and in the reported case of SME is related to UK
economy as a whole and general economic climate. Business are not feeling empowered and
confident enough to take advantage of finance and assets based lending support. Furthermore,
involvement and invading of large firms into business and commerce activities of SME
develops major challenge for survival and growth of SME sectors in the UK. This phenomenon
is particularly evident in the reported case of a SME dealing in retail business. Further to above
mentioned and discussed challenges, following are the main challenges faced by SME, as
reported by the case.

 More volatile market condition.

 Cyber-security. Due to more reported case of large companies falling prey to hackers,
customer’s confidence on small firms has decreased.
 National living wage: national minimum wage which is although a good thing for the
economy, it poses challenge for small firms forced to deal with large wage bills. It
further develops issues of giving-up more skill workers against newbies.

Acknowledging the challenges faced by SME, the chancellor, Rt Hon Osborne MP, recently
announced 2that government will team up with European investment Bank in an endeavour to
provide support to SMEs and development of infrastructure and support projects which will
ensure they SME gets their required financing, with an objective of creating more jobs and
boosting UK economy. Along these lines, some measure has been taken in UK government’s

2
https://www.gov.uk/government/news/chancellor-unveils-more-than-6-billion-of-support-for-uk-smes-and-
infrastructure-projects-to-unlock-eu-financing

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budget 2016 3 with regards to banks’ funding cost. According to this, Government’s funding
for lending scheme will continuous to support SMEs until 2018.

Are SME supported by UK economic policy?

Acknowledging the contributions made by SMEs sector in the UK economy, government

policy has been supported to SMEs activities and promotion. The last Autumn statement of
government policy highlighted some measures that were designed to benefit small and medium
businesses which includes:

 100% increase in small business rate relief up to April 2015.

 A business rate discount of upto £1,000 retail premises with a rateable value up to
£50,000.
 The introduction of a £2,000 employment allowance from April 2014, which makes it
viable to employ staff aged 21 or under.

Following this policy statement to promote SMEs, the government also launched another
scheme called ‘small business: Great Ambition’ which devised number of measures to facilitate
SMEs to expand further. Following were the core points of this policy statement:

 Broad band vouchers of worth up to £3,000 were given to SMEs in 22 cities across the
UK. It enabled SMEs to enjoy faster broad band connectivity to needed for their
business operations and transactions such as online and card payment portals etc.
 Measures were taken to enhance the transparency in contract terms between SMEs and
energy companies.
 On the basis of recommendation of ‘Lord Young’s Report’ a new scheme was
formulated to facilitate SMEs in bidding and winning public sector contracts of worth
£230 billion a year.
 Measure was taken to ensure that SME are paid timely for their supplies to the public
sector and that they will be paid not later than payment to large contractors.

Therefore, in the light of above analysis and discuss, SMEs in the UK are supported by the
government policy.

3
https://www.gov.uk/government/publications/budget-2016-documents/budget-2016

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Part-B: In-depth evaluation of the challenges faced by small business
owner: A case of retail shops owner in Scotland.

The practical evaluation of the challenges faced by small businesses owners were done through
conducting an in-depth interview with a retail shop owner in Scotland. The analysis of the case
revealed that the main challenges that were faced by the small business owner were: changing
business environment for retail business; inflation and high payroll cost; cut-throat competition
from large business organisations and large retail super store chains; difficulty in accessing
required finance; quality of employees; increasing checks and regulations by the government
on retail shop owners; reduction in customer demand due to emergence of large business by
opening-up small local stores and so on. Based on the presented case, analysis of the
opportunities and threats will be presented to obtain a broader picture of challenges faced by
small business owners in Scotland. Following is presentation of the case extracted from the
interview from a small business owner.

Case: Retail shop

I started my business back in 1980. That was the time when not many local people were
embarking of starting their own businesses. Prior to start-up my small business, I worked in
many firms, ranging from restaurants to small family businesses. This gave me realisation that
I have required skills to do my own business rather than investing my skills and efforts for
someone else. Essentially, I might at that point was thinking to become my own boss as well
as to grab maximum earning opportunities. At that point, my own interest and networking and
social skills help me a lot to successfully starting up and sustaining the business.

My business can be categorised as small family business where I own number of retail shops
in Edinburgh. I started with one shop and over the time grew and sustained them. What I believe
as the reason behind growth and sustainability of my business was I was free to reflect and
express myself and develop my concepts in my chosen ways. Although, there were some
financial constraints in beginning, but thanks to Banks policies on easy financing and loaning
which enabled me to implement my envisioned plans.

What I must say, having start-up and successful business firm is not about hard work rather it
is about attitude, interest, and patience which can provide one a successful profitable business.

5
I also did not believed that I would establish a large corporation that make big profits, but rather
it was to have great idea, timely exploitation of that idea or in other words appropriately and
timely hitting on a great idea can enable any business minded person to have millions at the
end of year, which even a large corporation cannot guarantee. Running own business can
potentially provide huge rewards. I feel that starting my small business have also earned me
social status and position. However, what I see in long term, all will be messed-up. The question
that bothers me a lot is about who is going to carry this all forward. My all three children has
been settled in their job. One in consultant (Doctor), other one is fire fighter, and third one
living in Canada with her family. Now you see, I did the right thing at that time. I send them
to the best schools, they are qualified with high degrees but then they have changed vision and
priorities. It created issue of who will succeed me. Specially, as there are many other challenges
going on around, I might wind-up this business and open something else which doesn’t need
any succession, or I may start community work, or I may rely on my employees and other
relatives to take care of the stuff in future. Right now, the best options to me is to rely on my
loyal employees and some relatives.

Working for my own small business of retail chain gives me immense pleasure, sense of
achievement, and autonomy in my actions and policies. Over the time, I have built strong
relationships with my employees, suppliers, and many other stakeholders. It has opened the
door for collaboration and monitoring that I would otherwise have struggled with.

Although, I have enjoyed and rewarded from my small business but it is not free from
challenges. The biggest challenge that I face these days is business structure and overall
atmosphere for business. It is not like when I started in 1980s. Lot of things has been changed.
It has made small retail shops business difficult. Even if I look at my sell and profit margins, it
has been decreased over the time. The competition is tough these days. We face competition in
terms of finding appropriate employers but also in terms of what and how others are offering.
For example, local and small retail outlets of big chains such as Sainsbury’s and Tesco has
affected us a lot. We use to deal in a niche of local neighbourhood shops which is not more the
niche. Apart from that, lot of rules and regulations affecting our business has been introduced
and enforced by local government authorities. Keeping in views all these challenges which
affect future sustainability of our business, I am thinking to navigate away from this niche and
start-up something else. However, for this, I need support from my sons who have to succeed
all this.

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Analysis

From the analysis of the above case it is clear that small business has grown in number across
the Scotland due to its perceived potential for growth and earning. However, over the time,
with the role and invade of large business organisation, small business of retail shops which
has traditionally enjoyed phenomenal growth and earning potential has suffered. Following are
the key threats and opportunities to small businesses of retail shops in Scotland.

Threats:
 Number of large businesses and large super store chains entering into small retail
business through their network of local shops.
 Financial constraints: additional financing for growth and meeting short term operating
losses.
 Contemporary business structure and overall business environment of the country.
 Reduced sale and profit margins.
 Increased compliance cost
 Succession for sustainability and new star-ups
 Globalisation

Opportunities:
Diversified skills and entrepreneurial experience
Networking and social skills
Own vision and leadership
Local market needs awareness
Attitude, interest and passion
Great ideas for new start-ups
Ability to timely exploit the opportunities
Social status and position
Strong relationships with supplier, employees and other key stakeholders.

Based on the above presented case and identification of threats and opportunities to small retail
shop’s business from the external business environment confirms that although, SME sill

7
contribute significantly to the UK economy, however, it suffers in many of the sectors such as
retail shops. Government policies may be needed to protect this particular sector of SMEs.
In past retail shops has been proved as one of the engine for creating jobs but now they are
going through the phase of down-sizing and Divestiture. It not only cause UK economy to lose
major chunk of SMEs investment but also to change the culture of corner and local shops which
traditionally became the centre of networking and idea sharing for other entrepreneurial and
SME creations.

Although, the globalisation trends are taken as positive opportunity provider for many business
and economic activities, for SME dealing in retail shop business, it has been proved as threat.
It was particularly raised along the lines with advent of new technologies, and cross border
investment and start-ups of global giants, which has taken the share of small business retail
shops market from local retail shop owners. Furthermore, the local retail shop owners often
dealt their business as family business and employed majority of employees from same family
or close circle giving them less leverage to get advantage of new skills, knowledge and
capabilities. Moreover, the emerged trends where local shop owners wanted to see their
children highly educated and qualified has generated problems of succession of their
businesses. The children who after having done their higher studies tend to occupy professional
positons in large organisations created gap of who will succeed the business. This phenomenon
coupled with financing needs, volatile market, changing business environment and structure,
new government policies with regards to monitoring, controlling, and compliance such as
health and safety has created challenges for small business owners in this sector. The
government statistics which shows that there were increased SME business activities in last
years, depicts that many of the small business retail shops businesses has been diverted to new
start-ups which poses threat to this sectors, however, it can be taken as an engine to new
business activities and innovation in the economy. Although, there is government policies in
place for promotion and prosperity of SME sectors, it needs to be channelized for those sectors
of SMEs which are decaying over time.

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Reference:

Gray, C. (2002). Entrepreneurship, resistance to change and growth in small firms. Journal of
Small Business and Enterprise Development, 9(1), 61-72.

Lange, T., Ottens, M., & Taylor, A. (2000). SMEs and barriers to skills development: a Scottish
perspective. Journal of European Industrial Training, 24(1), 5-11.

Smallbone, D., & Rogut, A. (2005). The challenge facing SMEs in the EU’s new member
states. The International Entrepreneurship and Management Journal, 1(2), 219-240.

Small businesses and the UK economy Standard Note: SN/EP/6078 Last updated: 9 December
2014 Author: Matthew Ward and Chris Rhodes Section Economic Policy and Statistics

Storey, D. J. (1994). Understanding the small business sector. University of Illinois at Urbana-
Champaign's Academy for Entrepreneurial Leadership Historical Research Reference in
Entrepreneurship.

Morgan, T. (2015). A panel of expers discuss the top challenges facing SMEs in 2016
http://business-reporter.co.uk/2015/11/15/the-debate-what-will-be-the-main-challenges-
facing-smes-in-2016/

UK government policy document, Chancellor unveils more than £6 billion of support for UK
SMEs and infrastructure projects to unlock EU financing:

https://www.gov.uk/government/news/chancellor-unveils-more-than-6-billion-of-support-for-
uk-smes-and-infrastructure-projects-to-unlock-eu-financing

UK government budget 2016:

https://www.gov.uk/government/publications/budget-2016-documents/budget-2016