Exploring the Potential of the North West's Small Firms to Drive Forward Economic Recovery

FOREWORD

BY PROFESSOR LYNN MARTIN

The North West of England is home to 427,000 small enterprises. At the Centre for Enterprise we are very experienced in supporting entrepreneurial behaviour across different types and sizes of organisations. We are also passionate about research, and even more passionate about taking research and turning it into practical knowledge for the region’s businesses.

Of course, business growth is high on the political agenda given the economic downturn since 2008, with job creation among SMEs expected to help drive economic recovery. We were delighted to be commissioned by PSP to undertake research exploring the potential of small businesses to support economic recovery. Much of our current research is about business growth, in particular understanding the behaviour and “mind-sets” of the most dynamic high-growth business leaders. The focus of this report is rather different. It is about how North West business leaders themselves think businesses can drive and sustain economic recovery and job creation.

Our research emphasises the important contribution of many kinds of business, some but by no means all of them achieving exceptional increase in turnover and employment. Many do not fit that high growth model at all, including family businesses and social enterprises driven by strong values.

The report shows that businesses in the “micro” category (with fewer than ten employees) can be agile and proactive, making an input into the economy that belies their size as measured by formal employment.

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Foreword by Private Sector Partners (North West) During the past decade Private Sector Partners (PSP) has represented in excess of 140,000 businesses, employing 1.3 million people in the Region.

PSP established in 2002 encompassed a wide range of trade associations across many industries as well as broad spectrum representative bodies including the Confederation of British Industry, Federation of Small Businesses, Forum of Private Business and Engineering Employers Federation. It represented more than 140,000 business and 1.3m employees in the North West, its key purpose being to devise, promote and sustain initiatives concerned with economic growth in a market economy and provide a fair-minded but challenging foil for regional governmental structures.

Fundamental to PSP has always been the recognition that 98% of businesses in the NW, and indeed in the UK, are small. This then reinforces their importance for any economic recovery, a sentiment strongly echoed by Government.

We felt it was vital for there to be a clearer understanding of the breadth and depth of SMEs, and their potential in terms of growth and support for the economy, so that the business support can be geared to give maximum benefit for companies and the economy as a whole. This therefore is the basis for the research which MMU has carried out on our behalf, ‘Exploring the Potential of the North West’s Small Firms to Drive Forward Economic Recovery’.

It is worth noting that PSP is more strongly focused on generating policy ideas from research than are Universities and these differing approaches should be borne in mind when reading this report.

Miranda Barker Holly Bonfield Directors of PSP North West

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EXECUTIVE SUMMARY ............................................................................................... 4 High Growth and the realities of job creation ........................................................ 4 Research approach: Business owners as experts ................................................... 4 Measures of Growth Identified by Small Business Owners .................................... 5 Jobs and Employment ............................................................................................ 5 Ways that Small Businesses Contribute to Job Creation ........................................ 6 Introduction ............................................................................................................... 8 Review of evidence .................................................................................................... 8 Problems of Defining and Categorising Business Growth .......................................... 9 What is Known about How Firms Grow? ............................................................. 14 Sustaining Growth................................................................................................ 15 Alternative Conceptualisations of Growth ........................................................... 16 Summary of evidence .......................................................................................... 20 Research Approach and Data Collection .................................................................. 20 The Perspectives of Business Owners ...................................................................... 23 Rationales for business start-up........................................................................... 23 Rationales for growth and the growth process .................................................... 28 Alternative growth patterns ................................................................................ 34 The Role of Networks ........................................................................................... 36 Flexible employment ........................................................................................... 38 Approaches to employing .................................................................................... 42 Discussion ................................................................................................................ 45 Conclusions .............................................................................................................. 48 References ............................................................................................................... 52

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EXECUTIVE SUMMARY The potential of small businesses to support economic recovery and growth is high on the political agenda. In their recent mid-term review, the Coalition Government assert that ‘this Government believes that the private sector, and SMEs in particular, is the crucial driver of jobs and growth for our country’ (HM Government, 2013). On the whole, research evidence tends to support confidence in the ability of small businesses to regenerate local economies and create jobs. This is the report of a short research project funded by Private Sector Partners North West in 2013 to gain insights into the potential of small firms in the region to generate value and create jobs in the context of a declining public sector. The emphasis was on utilizing the knowledge of small firms themselves to advance understanding of ways they can deliver on such potential. The research consisted of three interlinked 0tasks: a review of published evidence, an on line poll, and two facilitated workshops on the realities of small business growth.

High Growth and the realities of job creation The potential for a few ‘high growth’ businesses to generate a disproportionately large proportion of jobs has been widely reported. It is increasingly clear, however, from an emerging body of statistical evidence that exceptional high growth businesses are only part of the story. The literature indicates that rapid high growth is often not sustained or sustainable. There are many ways of generating new economic activity that do not fit the high growth firm model. Examples include firms that emphasise quality rather than expansion (sometimes called small giants), flexible forms of quasi-organisation, and clusters of interconnected but interdependent enterprises.

Research approach: Business owners as experts Our original empirical research explored the variety of ways that small businesses are contributing to economic recovery in the North West. We did this by asking business leaders about their business experiences and ambitions, firstly via an on-line poll and then to share their thinking with us, and each other, in facilitated workshops. Some supplemented this information with more detail in one-to-one interviews. Forty-six owners of Small and Medium Sized Enterprises (SMEs) with fewer than fifty employees told us about how their businesses had grown and / or planned to grow.

Some of them had already achieved very high growth or were on a trajectory to do so. But it was important for the breadth of the insights we sought not to limit the study to this group. Participants included owners of 4

micro businesses (with fewer than ten employees). There were also sole traders who do not employ at all as well as family businesses and social enterprises.

Measures of Growth Identified by Small Business Owners Participants in the study who had undertaken targeted growth programmes explained how their businesses had benefited, in some cases quite dramatically, in terms of increased employment and turnover. Business owners, however, described a variety of other measures of growth that reflected personal aspirations, including collaborative working, concern for their local communities, and long term commitments to their businesses and employees. Most of these self-defined measures of growth fell outside standardised indicators of increased annual turnover and/ or number of employees. Some alternative means of growth they identified were:       

Forming temporary alliances to undertake large projects Forming partnerships to increase capacity Building networks Diversifying into new or related markets Creating new small businesses, portfolio entrepreneurship Creating a reputation for excellence and quality Supporting local communities for example by sourcing supplies locally

Jobs and Employment Employment is an important element of economic regeneration, but simply recording the number of employees fails to capture the complexity of the labour market that small business owners described to us. Project-based working, freelancers, sub-contracting and other forms of non-standard employment were contributing to a vibrant, flexible labour market that may fall below the radar of policy makers. Twelve of the 46 participants in the poll had more than one business. Some business owners prefer to start a new businesses rather than grow their existing one. This form of portfolio entrepreneurship adds to jobs created although each individual business may remain in the micro category and thus not appear in high growth figures.

There are businesses in the region growing by developing a reputation for excellence and quality. This was articulated, for example, by an owner who told us, “We set out to be good first and grow as a consequence....that then is more secure growth”. In the words of another, “I have been very keen to grow the business slowly, it is important to me that every job is sustainable”.

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This generates stable, long term employment and underpins skill development. Businesses concerned with supporting local communities are often able to offer work to marginalised workers and job quality was a priority for many of the business owners. Some of these businesses described themselves as non-profits or social enterprises. Insistence on social purposes and ethical contribution, however, was by no means confined to social enterprises.

Ways that Small Businesses Contribute to Job Creation      

Support a freelance labour market Generate sub contracted jobs Create stable employment Create high quality jobs Offer employment to marginalised workers Setting up new businesses rather than growing current ones.

All these themes are expanded in the report using business owners’ own words. In addition, four case studies highlight very different routes to making an economic and social contribution in the region. These are: A successful high growth entrepreneur; a social entrepreneur who act as a catalyst to animate collaborative working; a family business taking tentative steps towards employing; and a micro-business with more than 100 nonstandard workers, now expanding into the region from outside.

This research emphasises the many ways in which the region’s SMEs are making contributions to the economy and to their communities. Only a few firms that took part in the study have achieved the rapidly expanding sales and employment that meet formal definitions of high growth. That was not surprising. But although alternative concepts of growth increasingly feature in the academic literature, the researchers had not anticipated the sheer variety, energy and creativity of businesses revealed in this report.

Lord Young’s 2013 report Growing Your Business calls for actions to help micro firms to move forward. This research suggests that such action should be as much about supporting an enabling environment as targeting individual firms. We would argue it is this enabling environmental which helps to facilitate business creativity in terms of growth and therefore in contributing to their community and to the economy.

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From the in depth discussions and research done by MMU, on behalf of Private Sector Partners NW:-

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It is evident that the business community needs Government to envision the economic value of businesses in a new way - and to learn how to support, foster and grow them in all their forms.

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Economic potential should not be ring fenced using a narrowly defined measure, but should include all those SMEs that have the potential to support the economic recovery by employing, putting cash back into local economies, or by fostering the growth of other SMEs by driving new collaboration, product development and joint delivery of contracts.



These firms are just as valuable, just as worthy of support, as any other. It is important to build these businesses up so that they can make their maximum contribution to the economic recovery, and national business support mechanisms need to be geared to support them wholeheartedly in this.

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Introduction There are high expectations that small firms can create new employment in English regions affected by public sector reductions. The aim of this report is to offer new insights into the potential of small firms in the North West to contribute to economic recovery.

International research evidence tends to support confidence in the potential of small firms to play an important role in creating jobs and regenerating local economies. Many studies demonstrate that a few rapidly growing firms generate a disproportionately large share of new jobs. It is unsurprising that those success stories have attracted intense interest from policy makers and researchers. Yet there are concerns that too narrow a focus on the very few exceptional small firms that grow big produces an incomplete picture of the economic and social contribution of small firms more generally. This report is about the potential ways in which Small and Medium sized Enterprises SMEs (with fewer than 50 employees) can contribute to economic recovery in the North West.

Very impressive high growth of a few individual businesses is part of the story but very far from all of it.

“…too narrow a focus on the very

few exceptional small firms that

We begin with a review of published evidence about high growth and various kinds of business growth that do not fit standardised high growth criteria. We then turn to what we learned from over 40 business owners who gave us their time to explain their own experiences of growth.

grow big produces an incomplete picture of the of

the economic and social contribution

Review of evidence Since the coining of the term ‘gazelle business’ by David Birch (1979, 1987) more than three decades ago, the phenomena of the high-growth firms (HGFs) has continued to capture the imagination of policy makers and the business community. The idea that there is an exceptional type of business that experiences high growth and, collectively, that these businesses account for the most significant persistent employment effects in the economy (Department for Business Enterprise and Regulatory Reform 2008) is an attractive one.

The contribution of high growth firms to job creation can be measured in two ways. Firstly the number of jobs created by high growth firms can be expressed as a percentage of the total number of all jobs created by all small firms. A second measure expresses the number of high growth firms as a percentage of all job creating small firms. The widely cited report from 8

of small firms more generally.”

NESTA (2009) uses both of these measures to suggest that while high growth firms accounted for just six per cent of businesses with 10 or more employees, the so called ‘vital six per cent’, they were responsible for more than half (54 per cent) of new job creation among firms with 10 or more employees in the three years before 2008. This headline figure of 54 per cent attracted the attention of policy makers and provided the rationale for focusing resources on a small number of high growth firms in order to stimulate economic recovery.

The celebrated 54 per cent figure excluded firms with fewer than 10 employees. Once the contribution to job creation of these micro enterprises was included in the analysis the percentage of new jobs created by high growth firms fell to 43%. Nevertheless this is still a considerable contribution and it is unsurprising that recognition and support for the small number of businesses with growth potential has attracted interest, given the enormously disproportionate level of job creation they are believed to account for (NESTA, 2009, Acs and Mueller, 2008, Mitusch and Schimke 2011, Parsley and Dreessen, 2003, Moreno and Casillas, 2007, Freeman, 2013). Enthusiasm for the concept of gazelles amongst policy makers, however, is not without criticism. According to a report from the newly formed Enterprise Research Centre (ERC) based at Warwick University:

“… it is unsurprising that recognition and

support for the small number of businesses with growth potential has attracted interest, given the enormously

It appears that policy makers have been running somewhat ahead of the evidence – HGF-orientated policy has been enthusiastically promoted, even though it is accepted that the evidence base is very weak (Anyandike-Danes et al, 2013, p.21).

disproportionate level of job creation they are believed to account for.”

In the following sections we examine definitions of high growth and evidence for how firms grow. Recent work in the field, we note, suggests that the situation is more nuanced, and the realities of job creation more complex than the notion of the “vital six per cent” would suggest. We then we to calls for growth that is sustainable rather than fast. Finally, we consider some alternative forms of growth that do not fit the ‘gazelle’ model.

Problems of Defining and Categorising Business Growth Despite huge interest in the phenomenon, there is no universally accepted set of measures of high growth. Definitions of HGFs are 9

numerous and fall into two main categories: by percentage of total firms or by volume of growth. This is a problem because these inconsistencies, and the lack of comparable data, hinder our ability to understand the phenomenon. The European Commission (2011) acknowledge “that the actual classification as high-growth firms may be influenced by the choice of growth-indicator” (p.5).

It was in response to the impossibility of comparable studies that EurostatOECD developed a unified definition of a High Growth Firm as one that experiences average growth rates in employees, or turnover greater than 20 per cent per annum over a three year period, where the firm has a minimum of 10 employees at the beginning of the period in question (OECD-Eurostat, 2007). This definition was a result of consensus among experts.

Defining High Growth  Ddes

There is no single definition of ‘high growth’



The most widely used definition is the one developed by the OECD and Eurostat which states that :



High Growth firms are those with an average increase of at least 20% in turnover or number of employees over three consecutive years, with at least 10 employees in the first analysed year.



This definition excludes firms that are either: o too young (less than 3 years old) o too small (fewer than 10 employees)

The minimum size of 10 was a pragmatic compromise on the basis that a higher threshold would exclude too many businesses, whereas no threshold at all would be too inclusive, with a business growing from one to two employees categorized as HG. What has become known as the ‘OECD definition’ has gained traction and is used by the European Commission. In the UK it is familiar from Department for Business, Innovation and Skills (BIS) reports. As a standard definition it has the important advantage of making longitudinal and international comparisons possible.

Yet estimating the contribution of HGFs to overall job growth is complex and the spectacular success of the six per cent of firms with ten employees or more that are high growth by the OECD definition tells only part of the story.

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This has been shown through analysis of firm dynamics and job creation recently undertaken at the Enterprise Research Centre at Warwick University (ERC) (Roper and Hart, 2013; Anyandike-Danes et al, 2013). These authors make the key point that the apparent contribution of HGFs to job creation differs markedly depending upon which firms are included in the data. The enormously disproportionate level of job creation commonly attributed to HGFs presents a somewhat misleading picture as a result of excluding micro- businesses (i.e. those with fewer than ten employees). This is important because the trend since the late 1990s has been for more people to work in micro businesses, including single employee firms.

Another notable exclusion is firms less than three years old at the start of the period under consideration. ERC’s analysis of the Office for National Statistics (ONS) UK longitudinal business dataset from 2007-2010 shows that the contribution to job creation of HGFs looks much smaller than the celebrated 54 per cent when micro firms and newly founded firms are included in the data. Indeed taking account of them, as Roper and Hart (2013, p 7) comment, “gives a rather different impression of the dynamics of growth”.

Measuring the Contribution of High Growth Firms to Job Creation 

Estimating the contribution of high growth firms to overall job growth is complex. The spectacular success of the six per cent of firms with ten employees or more that are High Growth by the OECD definition tells only part of the story.



The contribution of high growth firms to job creation differs markedly depending on which firms are included in the analysis



Research suggests that when micro enterprises with fewer than 10 employees and new firms less than 3 years old are included, the contribution of high growth firms to job creation is much smaller than the 54% proposed by NESTA.

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Measuring the Contribution of High Growth Firms to Job Creation 2007-2010 Table 1 below summarises the relative contribution of high growth and non high growth firms to job creation for the three -year period 2007-2010.

The figures are based on the total number of firms, including micro enterprises and firms less than three years old that contributed to job creation in the three year period. The table reports each category of firm as a percentage total job creating firms and also the number of jobs created as a percentage of total job creation. The analysis differs from that used in the NESTA ‘Vital Six Percent’ report because it includes both micro business with fewer than ten employees and new businesses less than three years old.

Table 1 shows that HGFs (by the OECD definition) comprised only one per cent of all job creating firms when micro businesses and new businesses are included in the data set (Roper et al, 2013; Anyandike-Danes et al, 2013), rather than the six percent reported by NESTA. This very small group of HGFs certainly made a disproportionately large contribution to overall job creation, with responsibility for more than a fifth (22 per cent) of new jobs.

However, other non-high growth firms with ten or more employees in 2007 comprised six per cent of all job creating firms in that period and were responsible for exactly the same proportion (22 per cent) of new jobs as the HGFs. These non high growth firms were defined as job creators because they had more employees in 2010 than 2007, but failed to be classified as ‘high growth’ because they didn’t meet the 20 percent growth in turnover or number of employees stipulated by the OECD definition.

Micro-enterprises (with fewer than 10 employees in 2007) and so omitted from conventional analyses of contributions to growth, comprised more than a quarter of all job creating firms. They were responsible for 15 per cent of jobs created. A high proportion (61 per cent) of job creating firms were newly founded in 2007 or later. They were responsible for more than a third (34 per cent) of new jobs. Table 1 suggests, in short, that job creation occurred in firms of all sizes and ages. Whilst HGFs were important job creators they were responsible for under a quarter of jobs created between 2007 and 2010 when micro firms and new firms are taken account of (Anyandike-Danes et al, 2013). Roper and Hart (2013) also comment that the proportional contribution of HGFs to job creation fell significantly post2005 in the UK.

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“…High Growth Firms (by the OECD definition) comprised only one per cent of all job creating firms when micro businesses and new businesses are included in the data set…”

“…whilst small firms are high job creators, they are also responsible for higher job destruction and thus net job creation figures tell us nothing about the persistence of jobs.”

Table 1 Relative Contribution of HGFs to Job Creation (2007-10).

Category of Firm1

Age of Firm

Definition of growth

% of Job Creating Firms

% of Jobs Created

Non High Growth Small firms & larger firms (10 or more jobs in 2007)

Born before 2007 and alive in 2010

More jobs in 2010 than 2007

6

22

Young firms

Born between 2007 and 2010

More jobs in 2010 than 2007

5

5

Some jobs in 2010

61

36

27

15

1

22

100%

100%

Alive in 2010 New firms

Born after 2007 Alive in 2010

Micro enterprises Fewer than 10 jobs

Born before 2007 and alive in 2010

High Growth High Growth Firms

Born before 2007 and alive in 2010

at least 10 jobs in 2007 and 20% average annual growth between 2007 and 2010 TOTAL

Source: ONS Business Structure Database. Adapted from Anyandike-Danes et al, (2013: 27)

Research carried out for the Federation of Small Businesses (Urwin et al, 2008) drew attention to the propensity of analyses of the employment contribution of small firms to capture only the immediate, contemporaneous effects. In a similar vein Anyandike-Danes et al (2013) argue that what is missing from much of the focus on HGFs and job creation, is consideration of job destruction and churn. They note both that whilst small firms are high job creators, they are also responsible for higher job

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The ERC report distinguishes six category of firm:      

High Growth Firms born before 2007, alive at 2010 at least 10 jobs in 2007 and 20% average annual growth between 2007 and 2010 Smaller Non-HGFs firms born before 2007, alive in 2010 with more jobs in 2010 than 2007, with at least 10 jobs in 2007, but not a high growth firms Larger Non-HGFs firms born before 2007, alive in 2010 with more jobs in 2010 than 2007, with more than 10 jobs in 2007, but not a high growth firms Young Firms born during the period 2007-2010, alive in 2010 with more jobs than in 2007.

New firms – born after 2007 and alive in 2010 with jobs in 2010 Micro enterprises – non-HGF (fewer than 10 employees)

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destruction and thus net job creation figures tell us nothing about the persistence of jobs. Anyandike-Danes et al (2013) suggest that a greater focus on ‘growth trajectories’, is needed to understand both how new jobs are created and what determines their survival rates.

What is Known about How Firms Grow?

Interest in the mechanisms through which firms grow, especially how firms achieve high growth, has attracted the attention of academics for several decades. Debates range from seeing growth as a one-off act, the result of serendipity or random processes (Storey, 2011) to the result of strategic management (Wright and Stigliani, 2013).

Numerous research studies have used large scale, national and international data sets (Heshmati, 2001, Delmar et al, 2003, Wiklund and Shepherd, 2003, Moreno and Casillas, 2007, Parker et al, 2010, Morrison et al, 2003, Roper, 1999, Barringer et al, 2005) to attempt to identify the key variables that explain high growth. However, the heterogeneity of growth firms has meant consensus has not been reached.

In Greater Manchester a survey of 2,425 businesses by Wiseman and Balodis (2012) found very little difference in identified drivers and barriers to growth between growth firms and non-growth firms. More than four fifths (81%) of all business said that they had engaged in innovation in the last three years, and 80% said they planned to in the next three. With regard to the number of workers, there was a slight increase in the percentage of firms reporting an increase in staffing levels staffing levels in 2012, up from 16% of firms to 17%. However, during the same period there was a doubling of the percentage of firms that had decreased in size.

Table 2 The Manchester Business Survey 2012: Changes in staffing Source:Wiseman and Balodis, 2012

Manchester Business Survey – Changes in staff in the last 12 months

2011

2012

Increase

16%

17%

Decrease

8%

16%

Stayed the same

73%

65%

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What is clear is from the discussion above is that growth can be episodic and difficult to achieve and maintain. Despite attempts to profile the typical HGF, for example through interest in high technology small firms, growth is found in all sectors, sizes and ages of firm. Barringer et al., (2005) contend that growth, is a process that should be managed like any other business challenge. Delmar et al (2003) note that the demography of the firm and how patterns of growth are affected over time are under researched. This is supported by St-Jean et al (2008), who demonstrate that business growth is not a linear process but characterised by patterns of uneven growth over the lifetime of the firm. All of this adds up to a picture of spasmodic growth, which may be hard to sustain, with the associated potential for job losses as well as gains.

Sustaining Growth As the literature discussed above shows, high growth can be fragile and a focus on exceptional growth masks the complex dynamics of both growth and decline. Recognition of this has led to an interest in the concept of sustainable growth.

In a recent report from Demos Finance, it is argued that rather than focus on speed of growth, emphasis should be on sustainability of growth: ‘Very few companies go on and grow consistently for a sustained number of years. As businesses get larger it becomes ever more challenging to maintain high growth rates, while the tendency towards mergers and acquisitions can complicate our ability to tease out underlying growth rates.

Some top-line growth can be at the expense of sustainability of growth, so how should we measure ‘good’ growth as opposed to absolute growth in the short term?’ (Freeman, 2013, pp.71-2).

This question of how to measure ‘good’ growth is left unanswered in the Demos report, but must be given further consideration if sustainable growth is to become accepted.

Some critical voices demur from notions of small businesses as engines of growth for others reasons. Harrison (1994) went so far as to argue that the apparent strength of small businesses as economic drivers is largely illusory.

What was really going on, claimed Harrison, was large organisations outsourcing and transferring risks to separate, usually smaller suppliers, while maintaining control over their resources. As Down (2010) explains: 15

“Despite attempts to profile the typical high growth firm, for example through interest in high technology small firms, growth is found in all sectors, sizes and ages of firm.”

‘If a large corporation out-sources 50 per cent of its activity, reducing the numbers of people it employs directly by half as well, it might create a number of new enterprises (or create new business for existing ones) ........On the surface this looks as though both more wealth and more jobs have been created, but it might mean that all the corporation has done is shift the more costly and risky elements of its activity to other parts of the global economy’.(pp.8) In this analysis the focus on job creation has been at the expense of both the sustainability and quality of employment that arises from it. Insecure employment, low pay, reliance on ‘top up’ benefits and poor opportunities for training and progression are amongst the concerns.

Alternative Conceptualisations of Growth There is an emerging sense that some companies do not fit the prevailing model of business growth, either because they choose to remain small, or do not grow in the conventional sense of employing more staff. To ignore this economic activity because it does not sit within one influential growth model is to miss significant wealth activity that is occurring in firms of all types. For some international commentators this implies that support should shift from individual firm interventions towards creating an enabling environment (Welter, 2009. As one prominent UK academic recently asked in the light of overwhelming policy focus on HGFs, “what about the majority, are they really no-hopers because they stay small or mediumsized?”(Hamilton, 2013). Several alternative concepts of growth are discussed here which may be followed very successfully by the apparent “no hopers”.

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ALTERNATIVE CONCEPTS OF GROWTH 

SMALL GIANTS: business owners choose to avoid growing too fast, getting too big, or spreading out too much geographically in order to concentrate on excellence, reputation and making a difference to their local communities.



PORTFOLIO ENTREPRENEURSHIP AND DIVERSIFICATION: business owners develop multiple ventures to run alongside each other, or diversify within the same sector.



VIRTUAL ORGANISATIONS AND INFORMAL NETWORKS: business owners pool expertise and resources in order to offer their customers a common service that would be beyond the capacity of any individual participant. Frequently used to tender for large contracts.



CLUSTERS: owners of interrelated and interdependent business cluster in a specific geographic area. Cluster members gain competitive advantage through economies of scale, flows of information and well-developed infra structures.



ECOSYSTEMS: a critical mass of activity by a number of small firms that develops informally. Business owners form symbiotic relationships that generate mutual advantages for members.



GROWTH CATALYSTS: small businesses that support and develop growth either financially or by establishing networks and umbrella organisations.

Small Giants: Burlington (2007) identified successful businesses from a wide variety of sectors whose leaders consciously choose to avoid growing too fast, getting too big, or spreading out too much geographically. These ‘small giants’ are widely admired for providing excellent goods and services, and making a difference to the communities in which they operate. They choose to maintain this quality by limiting the volume and rate of growth.

Characteristics of small giants are stable employment and low job churn, strong community links and consistently excellent products or services.

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Portfolio entrepreneurship and diversification: Portfolio entrepreneurship involves small business owners developing multiple ventures to run concurrently and is a form of business creation generally associated with experienced entrepreneurs (Westhead and Wright 1998; Erikson 2003; Westhead, Ucbasaran et al. 2005). Experience in incubators, such as MMU’s Innospace, and research elsewhere suggests that portfolio entrepreneurship may be more widely used by less experienced entrepreneurs to allow businesses to remain small and focussed, whilst their creators establish new businesses to rung alongside them (Beaven, 2012). Diversifying within the realm of an existing venture is a form of portfolio entrepreneurship that supports the sustainability of the existing business. This is seen a lot in farm enterprises (Hildenbrand and Hennon 2008), where retail, holiday accommodation, food production and other associated ventures can help to secure the future of a farm.

Virtual organisations and informal networks: These are forms of organising work that support small companies bidding for and fulfilling larger contracts than they might be able to do otherwise. It is a form of working that is the norm in sections of the creative industries where micro enterprise and informal organisation of work is very common (Davis and Scase 2000).

Informal and flexible forms of quasi-organisation are a response to environmental flux within the sector (Clancy 1994), and such work often takes place within temporary alliances (Summerton and Kay 1999) and changing organisations. Examples are rife in, for example, the gaming sector, where a group of micro enterprises may work together to fulfil a contract, presenting a face to the client of a larger company. A company specialising in code writing, another in designer and a branding specialist may work together temporarily to fulfil a contract, never formalising any partnership and dissolving the alliance when the contract is over. This is so prevalent that Bilton (2007) suggest that the very concept of a cultural organisation may be flawed and that, therefore, attempting to map the creative industries through its formally constituted organisations is, prosaically, ‘like trying to measure the bubbles on the surface of a boiling pot’ Handy’s (1995) model of the virtual organization, united by mutual trust and facilitated by information technology, has been highly influential. Virtual organizations enable small firms and ‘portfolio’ individuals to pool expertise and resources in order to offer their customers a common service that would be beyond the capacity of any individual participant. Lipnack and Stamps (2000) described the characteristics of the work that takes place in such organizations as:

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‘Where independent people and groups act as independent nodes, link across boundaries, to work together for a common purpose; it has multiple leaders, lots of voluntary links and interacting levels.’

Clusters: A cluster is a concentration of interconnected and interdependent businesses and institutions within a particular geographic location. Clusters are said to offer competitive advantages to individual businesses through economies of scale, good information sources, and well-developed infrastructure. This set of precepts has been highly influential, particularly through the work of Michael Porter (1995) in the United States. Porter argued that government and community organisations should avoid direct intervention and focus instead on providing an environment conducive to business, based on his model of inner cities with untapped competitive edge attractive to entrepreneurial opportunity spotting. This approach was imported to the UK in the form of City Growth pilots in London and elsewhere, on the basis that cluster activity (eg food parks and cultural businesses needing cheap accommodation) can take root in cities including areas of deprivation. These initiatives had some successes in attracting private investment and generating local business coalitions, but the bulk of investment derived from the state at the national and EU level (Blackburn and Ram, 2006).

Ecosystems: Less formal still are the ecosystems of business that grow up around a critical mass of activity by a number of small firms. Moore (2006) talks of “intentional communities of economic actors whose individual business activities share in some large measure the fate of the whole community”. Selander et al (2010) similarly identify “cooperative environments in which symbiotic relationships are formed to create mutual value for members”. Whilst research has tended to focus on high growth potential areas, such as the iTunes ecosystem, the concept is more widely seen and can be similar to a cluster, whilst not necessarily in a geographic location.

Growth Catalysts: Traditionally interest in growth catalysts has focussed on venture capitalists and their role as “scout and coach” for emerging companies. Researchers have recognised that this joint human capital can have a significant impact on growth, and this has been concentrated particularly in new high growth technology based firms (Colombo and Grilli, 2010). There are examples, however, of other types of growth catalysts, for example social enterprises supporting and developing a network of microsocial enterprises.

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Summary of evidence In this short review, we have highlighted recent literature in which leading experts have questioned the evidence base for some influential ideas of the exceptional HGF. High growth, they note, can be episodic and unsustainable. Moreover, most data sets relating to HGFs ignore micro enterprises (with fewer than ten employees) although such firms also contribute to job creation. There are ways of generating new economic activity that do not fit the high growth firm model. Examples include firms that emphasise quality rather than expansion, and individuals who start multiple businesses or diversify within one business. There are geographically based clusters of firms coming together for competitive advantages as well as many forms of flexible alliance and temporary collaboration to create mutual value for individuals and firms.

“There are ways of generating new economic activity

that do not fit the high growth firm model.”

Research Approach and Data Collection It is well established in a wealth of published literature that entrepreneurship can generate both ‘private’ value for the individual and wider social benefits for the local economy. We wanted to generate better understanding for what these processes look like from the perspective of business leaders currently active in the Northwest of England. Our review of evidence was followed, therefore, by original research with small businesses leaders. There were two distinct but inter-related components to the study: an on-line poll and facilitated workshops.

We designed and administered an on-line poll in summer 2013. This was based on the Delphi technique, which is widely used in policy studies. It is a way of gathering views of experts on a given topic. Typically, experts in this context are senior civil servants, elected politicians and high profile business people such as CEOs of large companies. For this research we took the view that the ‘experts’ are owners of small business active in the region. The participants were selected purposively, meaning they were chosen on the basis that we thought they would be able to make a contribution based on their special knowledge and experience. We therefore contacted businesses we know either to have already achieved high growth, or to be ambitious for it. Many but not all of these had been participants in various growth programmes offered at the university. However, it was very important for the breadth of insight we wanted not to confine the respondents to that group. We wrote to micro businesses (defined as those with fewer than 10 employees) including sole traders who do not employ at all, as well as to SMEs with between 10 and 49 employees. We wrote specifically to 20

businesses in sub groups such as social enterprises, co-operatives, family businesses, and residents in a start-up incubator, stressing that their contributions were important to us. We felt this was necessary to maximise the range and variety of insights because our experience suggests that owners in these groups can be inclined to see ‘growth’ as something that is only relevant to others.

RESEARCH METHODS 

ONLINE ‘DELPHI’ POLL of 46 high growth and non- high growth small businesses. Respondents were invited to write as much or as little as they wanted on six topics: o o o o o



reason for business start-up experiences of and, rationales for growth (or non-growth) future plans views on the regional economy things they were proudest of in their businesses.

INTERACTIVE WORKSHOPS in Manchester and Bootle with high growth and non-high growth businesses, most, but not all, of whom had participated in the poll o Small groups discussed and reflected on meanings and varieties of growth. o Data were generated by participants using flip charts and post it notes to capture their experiences and ideas and experienced researchers taking notes.



Video interviews o Some participants volunteered to record a short video interview during the workshop The poll asked just six questions plus a small amount of basic information about the respondent’s business (e.g. sector, number of employees, year of start-up). The questions were all open ended and respondents were invited to write as much or as little as they chose. The topics were: reason for business start-up; experiences of and rationales for growth (or non-growth); future plans; views on the regional economy and things they were proudest of in their businesses. Typically answers to individual questions were three or four sentences long but the quantity of material varied from a few words to several pages. There were 46 individual responses covering 64 businesses (12 respondents had more than one business).Of those who indicated the 21

age of the business more than half said it was started since 2005. The oldest business however was started in 1930. Sectors were varied and included high technology, businesses services (eg marketing), retail, personal services (eg care) construction and manufacturing. The largest businesses by employment had 38 full time workers.

We facilitated two lively interactive workshops with selected business leaders. These were mixed groups including established businesses that had achieved substantial growth by conventional standards and other businesses not in that category. Most but not all the participants were owners who had completed the poll. The first event, held on Merseyside, included many participants who were arts based and social enterprises as well as a few growth- oriented businesses from other sectors. The later event held in Manchester was more mixed with rather more HGFs but also some relatively new starts and ‘one-person bands’ working in various forms of collaboration and partnership.

Group discussion at the Manchester workshop Both sessions for around 20 people were facilitated by members of the research team who shared stimulus material based on the evidence review and the poll. At one event there was also an external guest speaker who talked about his own journey to high growth. We worked in small groups (two groups in one event and three in the other) to discuss and reflect on varieties and meanings of growth and contributions to the regional economy. Groups reported back to the whole session. Their conversations 22

were captured by writing on flip charts and post-its, supplemented with contemporaneous note taking by the research team. Some participants also took part in short interviews to elaborate on statements they had made in the groups and to comment on their responses to the event. We collected feedback from both events and participants reported that the experience was positive and useful. Comments included: “Useful to think about growth and share thoughts with others” and “Useful to review and reflect on the subject area.”

The Perspectives of Business Owners In this section we turn to report in detail what business leaders told us about their experiences of founding, maintaining and growing their businesses, and how they perceive their contributions to the economy and their communities. We make extensive use of their own words, mainly from written poll responses but also from their spoken contributions in workshops and short interviews. This is supplemented with more detail about selected case studies representing very diverse forms of growth in the boxed text. We sometimes comment on how often a particular point was made in order to give the reader a sense of the overall data but it must be stressed that this research was not a sample study intended to produce statistical generalisation. It was designed, instead, to capture the range and richness of insights business owners could offer.

Rationales for business start-up Starting a business is often fraught with difficulties and risk of failure. If small businesses are to fulfil their wider potential for economic regeneration it is important to begin by understanding what motivates people to establish their businesses in the first place. Therefore we began by asking respondents to our poll to tell us about why they set up their businesses.

Theories of entrepreneurial motivation fall into a number of categories, but can be defined broadly as either ‘push’ or ‘pull’ factors. Push factors generally relate to external circumstances such as redundancy, dissatisfaction at work, or family commitments. Pull factors, on the other hand focus on what draws individuals to start their own business. Two main ‘pull factors’ can be identified from the literature: a desire for greater independence and autonomy or a concern with wealth creation.

Alongside these ‘push’ and ‘pull’ factors numerous studies have focussed on the characteristics of entrepreneurs, including the ability to both spot and develop business opportunities.

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Push Factors Dissatisfaction with Previous Employer: Respondents to our poll mentioned a number of ‘push factors’ that had led them to start a small business.

Most commonly cited among these was some form of dissatisfaction with their previous employer. Causes of dissatisfaction fell broadly into two groups: a desire to escape unsatisfactory organisational cultures or working practices and a need to fulfil individual aspirations that were thwarted within an organisational context.

Among the first group respondents mentioned the need to escape from large corporations, long working hours and unsatisfactory management.

The second group could be summed up as a desire not to be ‘a cog in a machine’. Several respondents were driven by a realisation that they could ‘do things better themselves’ but would not get the opportunity to develop their ideas as an employee. Making profit for others rather than oneself was a factor that pushed a number of these respondents towards setting up their own business: ‘I felt I could do it better and I felt passionately that our industry treated staff badly, the 'norm' was to work 12 to 15 hours a day with no payment and I felt I could run a business that offered a better work/life balance.’

‘I'd had enough of corporate life and working for managers who didn't have a clue how to manage people or make the most of my talents. I had heard plenty of my colleagues moaning about how awful cleaning services were and thought I could do better by offering a premium service with staff that are paid well I wanted the freedom of running my own business, the challenge of learning how to do it and hopefully the financial rewards of building an asset.’

“I wanted the freedom of running my own business, the challenge of learning how to do it and hopefully the financial rewards of building an asset”

‘I was making more money for my employer than I was making myself. Don't seem fair!’

‘I could not stomach making a lot of money for 6 men playing golf so I decided to leave and set up on my own.’

Redundancy: Three respondents listed being made redundant among their reasons for entering self –employment and one respondent had left the public sector in the belief that redundancy was inevitable in the near future:

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‘[I] was made redundant and was given the opportunity to go into a partnership within an established small business.’

Family commitments: The need to combine work and family commitments was an important motivation to start a small business for a number of our respondents. Whether this is a ‘push’ or ‘pull’ factor is difficult to disentangle. A desire for greater autonomy and flexibility certainly acted as a ‘pull’ towards self- employment, yet there was also an implicit sense that continuing to work for an employer was no longer feasible after the birth of a child: ‘I set up my business as I wanted to stay at home with my daughter when she was born instead of going back to working 60+ hours per week for someone else.’

‘Flexibility with regards to raising a family.’

Pull Factors A range of pull factors were mentioned as drivers of self-employment. A desire for autonomy and control over different aspects of one’s working life were the most commonly cited reasons. Again these fell into two broad categories. Firstly there was a desire for autonomy and control over the day to day, operational aspects of working life. A second theme to emerge from the responses to our poll was a desire for control over longer term career objectives.

Conventional analysis of entrepreneurial motivation suggests that alongside autonomy, wealth creation is an important ‘pull’ factor. Personal wealth was not mentioned explicitly as a rational for establishing a business by any of our respondents, although it could be argued that a desire to make money for oneself rather than an employer implies that personal wealth is at least part of the motive. The wider social values such as job creation and local regeneration are generally assumed to be an ‘external’ rather than a ‘private’ benefit of small business creation, and therefore not a driver of individual behaviour. Our poll suggests that this is not necessarily the case.

Alongside private benefits such as increased autonomy and control a number of respondents talked about their concern to ‘make a difference’. This difference could have a private dimension, most notably working in a business that was guided by one’s own personal values. However there was a clear external element. A desire to alleviate disadvantage, improve the 25

lives of local people and generate local employment were mentioned by a number of respondents as the principal reason for establishing their business.

Desire to be one’s own boss: Control over the organisation and operational aspects of day- to- day working life were a strong ‘pull’ factor for many of our respondents. Most common among these were a desire to for control over working patterns and hours, typically expressed as a need for a better work life balance, although with hindsight several respondents thought that this had been a naïve expectation, and a number of respondents believed that businesses started for this reason were unlikely to survive: “If you are driven by

the thought of an easy life, spending more time with family as opposed to doing everything humanly possible to make your business a success you won’t stand much chance of survival.”

‘It was very much a desire to be my own boss …..

I did also want to get a better balance to life.’

‘I believe that if you are starting a business from scratch you must possess a strong passion and intense determination to make it work …………………… If you are driven by the thought of an easy life, spending more time with family as opposed to doing everything humanly possible to make your business a success you won’t stand much chance of survival.’

A number of respondents talked about the freedom to make decisions about operational aspects of the business themselves. To some extent this overlaps with the dissatisfactions with employers discussed above.

However, the desire to be one’s own boss was not based entirely on negative experiences. Respondents also expressed the desire to be their own boss in terms of moving on, and fulfilling personal aspirations: ‘I've always wanted to build something (both real and culturally), and be in control of decisions.

When we need something, we buy it. When we get fed up with a customer, we fire them. When we have an idea, we often implement it very quickly.’

‘I had a longstanding ambition and desire to set up my own business and always had a belief that I would start my own business and was always looking for an opportunity to present itself.’

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Autonomy/control: Alongside the desire to be one’s own boss at an operational level a number of respondents referred to a desire for autonomy over long term career aspirations.: ‘To be in control of my own career. To have the flexibility to develop and deliver services without restrictions. To prove to myself I could set up and run a successful business’ ‘I was driven by the desire to control my own destiny I had the skills required to provide the intended services No, I did not spot a gap in the market work-life balance was not an issue I had no other commitments I was not made redundant’ ‘A desire to be able to exercise more control over my career choices, working hours and locations. I took voluntary redundancy in order to achieve this.’

‘Opportunity be become own boss and be in charge of own destiny with the comfort of doing something that i had previous experience in and existing contacts.’

Desire to make a difference: The decision to start a business had a clear ethical dimension for a number of our respondents. On the one hand this had a personal dimension, but there was also a social element that was expressed in terms of wider benefits to the community: ‘To feel that I was making a difference. To be able to work to my own values rather than other peoples’ ‘ I wanted to create a business which could potentially at some stage recruit local people and help them develop their horizons and aspirations and crack the glass ceiling and marginalisation BME community members often face. I also wanted to create an organisation where I could create and enhance my vision to create social development and improve lives for people particularly living in fringe, isolated communities.’

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‘I was aware that there was a gap in the market and I created a niche which undertook community development work in its stride and helped empower and facilitate social change.’

Identifying Opportunities: Finally spotting a gap in the market was mentioned frequently as a driver for establishing a small business. For some this was for a product or service traditionally supplied by the private sector, but for a number of respondents the shift from the public sector of services such as social care had provided the impetus to start a business:

‘l saw an opportunity in the market and knew l could make a success of it’ ‘We had spent many years working for others around the country and could see a gap in the market in the North West for our services.’

‘There was a gap in the market for higher quality private home care, particularly with the current changes in the system.’

Rationales for growth and the growth process Conventional analyses of growth, especially high growth, are underpinned by an assumption that wealth creation is among both policy makers’ and entrepreneurs’ principal motivation for ‘growing’ small business. This is captured, as discussed above, in the widely used OECD definition by annual turnover and number of people employed. However, high growth in these terms can be sporadic and unlikely to be sustained over any length of time. As a result, sustainable growth has entered the policy agenda, widening the focus to include discussion of how small businesses might be supported and encouraged to sustain growth over a longer period of time. Growth however, is still measured in financial and economic terms.

“Given the variety and complexity of

reasons for starting a business it is unlikely that

Given the variety and complexity of reasons for starting a business outlined above, it is unlikely that increasing turnover or employing people are the only concerns for many small businesses. Therefore to understand what ‘growth’ means to small businesses we asked respondents to tell us about how their business had grown. For some conventional measures of growth were important, but a range of meanings attached to growth emerged from the data that could be divided broadly into ‘hard’ measures relating to finance and economics

increasing turnover or employing

people are the only concerns for many small businesses.”

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and a range of ‘soft’ measures relating to quality, reputation, sustainability, ethical and social concerns and quality of life.

We began by looking at how respondents described the process of growth.

Several people used terms such as ‘fast’ or ‘quick’ but slow growth was mentioned more frequently. Growing slowly was described by many in positive terms and, for a number of respondents, slow growth was a deliberate strategy, for example, “I have been very keen to grow the business slowly, it is important to me that every job is sustainable”. For a few of our respondents, in contrast, slow growth was a frustration resulting from external factors, most notably access to finance. For some growth was not a strategic concern but rather something that developed organically as a natural consequence of running a business. A few described a strategic decision not to grow at all.

Fast Growth: There were respondents who described a period of rapid growth over the last five years, even in the face of economic recession.

Maintaining future high growth was also stated a strategic priority, often with clearly defined and ambitious indictors of success such as “double digit growth over the next 5 years,” or, as the respondent quoted in box 1 predicts, five-fold growth in a few years. These businesses conform to the OECD definition of High Growth discussed above and would be included in statistical reports of the importance of High Growth Firms: ‘The Company has grown vastly over the last five years. We have taken on 3 extra staff for admin work and 2 part time warehouse workers. The business has grown by looking at the weaknesses of our competitors.’

‘I have always wanted to grow and keep growing, there have been a few hairy moments especially in the early years and that gave me a sense of risk management - that is to say some things just aren't worth doing.’

High growing SME owners talked about measuring growth in their businesses by conventional means. There were some exceptional success stories: ‘We started off as a consulting company with just one employee. We now have three companies with six employees. We have grown in turnover and profit too.’

‘2 years ago I had 1 employee, I now have 18.

Turnover has been rather static at 1.5 million, however we are on track for over 2 million this year.’

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Some owners of high growth businesses explained how they had faced setbacks and challenges. These could be external factors such as difficulty in putting together a team with the right skills to ensure growth.

‘I chose to grow my company because that is more exciting that it being a lifestyle business. ….. Attracting and retaining the right people has been a key challenge and has also held us back somewhat.’

Others had managed to overcome more personal limiting factors, such as lack of confidence, before embarking on a pathway to growth : ‘There is possibly a deep rooted fear in becoming too big, maybe driven by a lack of confidence or fear of failure……. knowledge has had to be learned through trial and error or mistakes. However, attending courses and having coaching has made improvements in confidence levels and business acumen. This has then allowed us to grow in a slightly more organized fashion.’

James Brayshaw founded AdaptiveComms in 2003 after identifying a gap in the telecoms services market. James has always had a strong commitment to growing the company. He plans to continue growing his business in the future, measuring growth through increased turnover and staffing levels: “I will grow five-fold in the next 4 1/2 years (5 since the end of the last accounts).

I will do that by organic growth without borrowing or business acquisition.”

He has a strong belief in the ability of small businesses growth as a solution to the current economic crisis: “Small businesses are essential to the economic recovery. The ability to be fleet of foot mean we are able to out manoeuvre bigger players and offer our customers a real quality of service. At the same time flatter management structures and being closer to the coal face mean commercial decisions can be made very fast.”

James is proud of the business growth that he has achieved: “Most of all I enjoy the feeling of success as despite ups and downs we continue to grow and flourish, employing more people and creating more wealth for the people who work so hard for us.”

Box 1 High Growth on the basis of increased Turnover and Staff.

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Growing slowly: Despite the concern of policy makers with high growth businesses, growing slowly was frequently seen as vital by respondents. In total eight respondents mentioned that they had deliberately avoided growing too fast in conventional terms.

Growing too fast …. is one of the most common fatal mistakes a business can make when setting up. You must make many mistakes and overcome numerous hurdles in order to establish a flawless mode of operation, no amount of money can buy that experience. If an operator is financially driven it is very easy to see rapid expansion as quick way to earning more money. The worst thing you can do is over stretch yourself as it will result in a drain on resources, letting original clients down and you losing everything you’ve worked hard for.

As the company has expanded we have ensured that we have the resources and infrastructure in place to cope. The process has involved us taking small steps over a period of time. So far we’ve achieved the desired results.’

“If an operator is

financially driven it is very easy to see rapid expansion as quick way to earning more money. The worst

thing you can do is over stretch yourself as it will result in a drain on resources, letting original clients down

and you losing everything you’ve worked hard for.”

‘…….my company will remain a small company. I want to do my very best by my employees. I like to know them personally learn their strengths, identify what they can contribute. I want to understand their weaknesses and see what can be done to help them grow and learn. I find it very rewarding watching employees develop and learn new skills.’

“My company will remain a small company. I want to do

For others slow growth was frustrating. Restricted access to finance as a barrier to small business growth is welldocumented and was a common theme running through these accounts. Alongside this a sense emerged that some respondents were responding to a general ‘feeling’ that growth was not a viable proposition in the current economic conditions, rather than any concrete experience: ‘Constrained by lack of finances, but that is beginning to change.’

my very best by my employees. I like to know them personally learn their strengths, identify what they can contribute.”

‘Access to finance and a good basic knowledge of business management slowed initial progress.’

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‘…finance was a major constraint after 12 months in business and developing cash flow issues. I was fortunate to be given a loan and an extended overdraft to prop me up.’

‘Outside issues such as the gloom in the market in the last few years does put a damper on the thought of growing.’

Reasons for choosing to grow slowly fell broadly into two categories. The first focused on internal issues, most notably maintaining a reputation for quality, a concern with job quality and retaining control over workloads.

The second related to the external environment, especially the ability to respond quickly to change.

A desire to maintain a reputation for quality was the most frequently cited reason for restricting growth: ‘Remained small to focus on skillset and reputation.’

‘The choices we have made are about our employees, volunteers, service users and ensuring we produce a quality product for our chosen markets.’

‘As a community interest company limited by guarantee we are not able to access overdrafts or loans. This restriction has had a massive impact on the way the business has had to develop but this has also given us the time to build up and sustain a reputation for excellence and quality.’

‘The quality and sustainability of our services are more important to me than the number of people we employ.’

“The quality and

sustainability of our services are more important to me than the number of people we employ.”

For others a concern with job quality was an important factor in choosing to remain small ‘All to do with control and making sure I worked on what I enjoyed - not managing people.’

‘As an employer l take the welfare and happiness of my employees very seriously. I am responsible for their careers; therefore have a duty to ensure my staff are challenged, motivated and content within their role. I am hugely driven by 32

employee satisfaction if they came to work with a negative attitude l would feel that l had of failed them in some way.’

A desire to maintain the ability to respond quickly to changes in the external environment was an important factor in the decision of several of businesses to remain small: ‘Yes, small is fast and agile, responsive to the external environment with less layers of decision-making needed.’

‘The best teams are typically small, and smart companies can generally design and automate very lean processes.’

Organic growth: Some respondents suggested that, for them, growth was not something they planned for, but rather a natural consequence of running their business: ‘Our growth has been organic and steady with the strength of our reputation being incredibly important to us. We have also combined the growth of our business with being mothers too.

The business started before the babies!’ ‘…it’s about secure growth being big is not necessarily good. We set out to be good first and grow as a consequence....that then is more secure growth.’ ‘……. Now feel it's time to expand, which is occurring naturally.’

Not Growing: From a personal perspective there were respondents who had chosen not to grow because they wanted to retain control over their working hours and commitments to the business: ‘I am not excessively ambitious. I am happy to build a business that will pay my bills and my pension and am prepared to work hard to achieve this - but not to the exclusion of 'a life'. So having taken on a part-time, self-employed administrator, and knowing several outsourcing companies who can help when busy, I am satisfied with the size of my company.’

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‘As an individual (Sole Trader) growth is probably best indicated by an increase in income but, as I control the amount of work I do in order to achieve a good work/life balance growth is not something I would consider to be important.’

“For us 'growing' is

‘For us 'growing' is not necessarily of huge importance. For us it is about offering a good quality service to our clients, earning sufficient to live and being able to have a good quality of life outside of the business and a facility to pursue other personal and professional interests.’

a good quality service

not necessarily of huge importance. For

us it is about offering to our clients, earning sufficient to live and being able to have a

good quality of life outside of the

Growing by making a difference For some while conventional growth was important, a sustainable business was also part of the plan:

business…”

‘I have been trading for a year now and have grown very quickly, but with a strong focus on quality of service. I am building a brand and not just a business. I have diversified my services after looking at my market and what my clients not only need, but are searching for.’

“In our on-line poll the most frequently

One SME mentioned ‘regrowth’ post credit crunch

mentioned mode of

‘Prior to the "Credit crunch" I had built a "portfolio" however most of these collapsed with the poor economy. …... We have certainly "regrown" from 4 people at the worst days of the "Crunch" to 10 again now and are currently looking for more staff. However, the true measure would be enhanced profits and this is not happening - it is simply additional salaries to cover additional projects.’

alternative growth during the past five years was through various forms of temporary alliances.

This was invariably linked to being able to

Alternative growth patterns

deliver larger contracts

We have discussed above the extent and rapidity of growth in the form of increased direct employment. As we have seen from the literature, many experts recognise ways of growing and creating value that do not fit narrow High Growth definitions. In our on-line poll the most frequently mentioned mode of alternative growth during the past five years was through various forms of temporary alliances. This was

than would not be within the capacity of

individual firms.”

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invariably linked to being able to deliver larger contracts than would not be within the capacity of individual firms.

‘Have developed wider network of contacts in the core (main) work areas and also in linked wider areas for example main areas - health and social care business strategy and creating new ventures, new linked area alliances with legal firms and civic society sector to bid for larger contracts.’

‘Wish to remain small for more 'self' control and work with an associates model with like-minded people.’

“Where we do

suddenly find we have a high volume of work or are asked by

Other forms of temporary alliance included subcontracting work during busy periods. This clearly generates employment and keeps money within the local economy, but is missed by conventional measures of small business growth

a client to do something slightly

different we have a ‘Where we do suddenly find we have a high volume of work or are asked by a client to do something slightly different we have a range of contacts we can approach to sub-contract the work to. We have been known in some situations to temporarily employ one of our contacts to do a job for us - we know them, we know their standard of work and we trust them.’

range of contacts we can approach to subcontract the work to.”

Brian Dawe founded SAFE (Supporting Arts for Everyone) Productions Ltd 13 years ago to “give people a voice” through public artwork projects in public spaces such as schools and hospitals. SAFE use a consortia approach to growth, which includes supporting other people in starting their own businesses and helping existing small businesses with growth.

SAFE acts as a “front of house” for a number of creative projects and services offered by members of the consortium. Brian describes this approach as a “creative hypermarket”. Working together with SAFE enables the businesses secure funding. SAFE helps with managing projects and managing funds to enable small businesses to grow. The consortium-based approach allows the small businesses access to larger contracts that they would not be able to fulfil on their own. SAFE assists individual businesses in 35

developing their own record of accomplishment through access to the core customer.

“We are a first port of call for organisations that are seeking some sort of creative and artistic services” SAFE has only four members of staff, but using the consortium approach provides a flexible workforce with access to around 35 people. This flexible approach to employment reduces costs and benefits the smaller organisations within the consortium.

SAFE has made use of the grounds of their premises to help the community and discover new business ideas. The grounds are used for growing vegetables and bee keeping. Volunteers help with food growing projects, which promote community involvement. One of the participants is planning to setup a new business to promote healthy eating and supply food grown and made at the centre to local communities.

Box 2: Consortium working to join up social enterprises in the arts In the cases mentioned above use of short term and flexible arrangements was typically adopted to manage one-off contracts or unusually busy periods. The creative pursuit of temporary alliances and short term consortia as a sustained (and sustainable) way of working has been noted in the literature, sometimes but by no means always animated by pro-active social entrepreneurs. An example of the success of this model driven by a social entrepreneur in Merseyside is given in box 2. One workshop participant spoke of how inspiring this has been for his business because “things emerge from relationships - people see it can be done”.

The Role of Networks Networks were an important driver of growth for many of our participants.

Business owners used networks both to support and promote their businesses. For example, the SAFE model involves working closely with networks of other businesses, sometimes entering into formal, short-term partnership arrangements to deliver work for clients. Other participants talked of the benefits of informal networks through which business owners support each other and learn together. Owners who have participated in business growth programmes often continue to meet up long after the end of the programme. As one workshop participant explained, “I have 24 nonexecutive directors” (referring to her fellow alumni).

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The type of ‘closed network’ described above is made up of individuals who know each other and share close ties. Closed networks like this were excellent sources of support for those participants lucky enough to be part of them. However, the downside of closed networks is that, by definition, they are exclusive (Baines and Robson, 2001; Antcliff & Saundry 2007).

One respondent felt that his/her growth choices were constrained by a ‘lack of access to networks and contacts with resources’. Another felt that growth was restricted because of a lack of ‘access to networks and infrastructure support’. Therefore, actively building this type of network was a key concern for many participants:

“I will also continue

‘I will also continue to develop new contacts and networks that allow me to collaborate with new partners for sustainability.’

to develop new contacts and

‘Size can be achieved by forming larger networks....providing resources to deal with the larger jobs.’

networks that allow me to collaborate

Other respondents talked about how they used networks as a ‘key marketing tool’. This type of informal network was ‘open’ and consisted of a broad membership with only weak connections to each other. Participants used this type of network to promote their business and build a reputation.

with new partners for sustainability.”

Business owners told us that they benefit from active networking with regional institutions including universities, Science Parks and Local Authorities. The public sector, however, was mentioned mainly as a customer or potential customer. Some social enterprises were suppliers to the public sector. One of the high growth businesses was actively investigating the possibly of moving into public sector contracts as a new market.

“Size can be achieved by forming larger networks.... providing resources to deal with the larger jobs.”

Participants belonged to a number of formal networks ranging from the Federation of Small Businesses to local village community groups. One workshop participant asserted bluntly, “businesses should get off their bums and network”. The close ties of family and friends are the most significant resources for some businesses. Family can be a constraining factor associated with ‘lifestyle’ choices but also an important source of moral support, expertise, flexible labour and finance. One owner reported raising £300,000 from family and friends to research new technologies.

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Flexible employment There were businesses within the micro category by employment (with fewer than ten full-time equivalent employees) whose business model was built around the extensive use of non-standard workers who may be contracted, for example, on a freelance, commission only or zero hours basis. This can be flexible and cost effective as the owner of a consultancy business with only 1.5 formal employees commented.

‘I find it easier to employ subcontract associates rather than employees - gives me greater flexibility and is cost effective - it also reduces the risk of employing the wrong people.’

“I was the only employee but found

Two micro-businesses reported in the poll that they used more than 100 non-standard workers. A self-employed arts practitioner with no employees explained in one of the workshops:

work for hundreds.”

‘I was the only employee but found work for hundreds.’

Non-standard employment contracts have of course attracted controversy and it is beyond the scope of this report to comment on conditions from the workers’ perspective. These businesses however, are clearly punching far above their weight in terms of input into the economy by generating economic activity and local spending.

One of the micro-businesses whose success is based on the use of a large flexible workforce is mainly active in the North East and Yorkshire but now starting to expand into the North West. The entrepreneur sees herself as a responsible employer who takes the welfare of her commission only workers as well as her small team of permanent staff very seriously. (See box 3.)

Some businesses especially social enterprises also expand their work force by involving volunteers. As one explained: ‘I recruited five individuals who have joined me on my journey. This has also facilitated nearly thirty volunteers.’

Work placements and volunteer opportunities were mentioned as part of the non-financial contributions businesses can make to the region. This is how the owner of a Biotech business explained the practice of providing

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placements for students as a social contribution as well as a source of future skilled staff members.

‘We provide work experience placements to at least ten students each year and have employed two. Also, we have decided to set up a mentoring programme which will enable us to match potential students with experts in their field. This is our contribution to society along with our main core business.’

Dynamite Pink is a sales and promotions agency for the leisure industry. The company formed in 2007 when the business owner, Liz Whiteley, identified a gap in the market for services. Liz has created a sustainable business model that can be transferred to different geographical locations in the UK to expand the business: “The business was originally founded and created in Newcastle upon Tyne. The real test was whether or not the devised business model would work in another geographical location. I relocated to South Yorkshire and began trading in Doncaster and Sheffield. I am pleased to say the business has been of equal here as it has been in the North East. More recently we have begun trading in Blackpool with great success. We have plans for next year for further expansion in the area. I have proved that my business model is sustainable and transferable.”

The business has 7 permanent office staff and 150 self-employed staff in sales and promotions on a flexible basis. The flexible working offered by the business often attracts students and young people. The commission-based approach is very successful in generating new business: “One of our unique selling points is that there is no costs to our service, we make profit by taking a percentage of the gross profit generated from our staff sales. If they don’t sell anything we as a company don’t make any profit and the client won’t incur any costs. One of our marketing statements is: ‘We can make you pots full of money and it isn’t going to cost you a penny’. This statement has led to the growth and development of the company.”

Care of these staff is important to Liz. Taking time to help staff develop confidence and learn new skills alongside a concern for staff welfare has produced payback in terms of business growth.

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“In turn the staff have become fantastic advertisers for the company, they always tell new staff what an amazing company we are to work for and encourage people to apply for work. Also whilst at work they do meet potential new clients and also sell the services of company as well as their designated product.

Because they speak of the company with such high regard, enthusiasm and positivity we have gained much new business.”

Liz believes that; “You have to consider sustainability and the factors that largely contribute to you company remaining sustainable. Such as; the welfare of your staff, your mode of operation, your professional reputation and establishment as a creditable operator. Running a successful business isn’t just about turnover, staff numbers and profit.”

Box 3: A micro-business with a high number of commission only staff

Diversification: Two main types of diversification where mentioned by respondents in relation to growing their businesses. Firstly, a number of people had diversified by increasing the scope of their business, either with new products or services aimed at their existing market, or by moving into new markets. A second form of diversification focused on developing new businesses, so called ‘portfolio entrepreneurship’ Diversifying into other related activities was mentioned most frequently.

‘I set up a marketing consultancy and have diversified in to training and event management due to requests to use previous skills to support existing marketing clients, or in order to work with previous contacts.’

“We have diversified

We have diversified over the years from our original remit of wig making to incorporate professional make-up sales and courses. We have also created an online forum for make-up artists and registered this as its own company. We are also considering an acquisition too.’

professional make-up

over the years from our original remit of wig making to incorporate

sales and courses. We have also created an online forum for makeup artists and

‘The business has developed to adapt to changes in the available work. I have also increased the scope of the business to include using additional skills I have so I can adapt better to variations in the type of work available, for instance consulting and installation work in addition to the core business.’

registered this as its

own company.”

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Portfolio Entrepreneurs: Other respondents had grown by developing a portfolio of small businesses. Again, as each of these typically remains small this form of growth is not captured using conventional measures.

‘In software, the idea of "Growth" is a bit strange. The best teams are typically small, and smart companies can generally design and automate very lean processes…….If we needed to "grow", I'd be more inclined to set up another business’ It is notable that the consortia, flexible employers and portfolio entrepreneurs who participated in this research are not visible in High Growth statistics despite their contribution the regional economy.

Figure 1 below summarises the range of ways that the small business owners who took part in the research felt that they were contributing to the local economic regeneration.

The centre of the diagram represents conventional measures of economic growth and the outer hexagons capture the alternative measures of growth that were important to business owners, but remain invisible in economic growth statistics

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Fig 1 Ways that Small Businesses Contribute to the Local Economy

build networks partnerships, & temporary alliances

create sustainable businesses

create sub contracted jobs

reduced job 'churn'

create quality jobs

Increased turnover & number of employees create new businesses through diversification and portfolio entrpreneurship

build local reputation for quality services & products

generate local business ecosystems

Approaches to employing On-line respondents mentioned various factors that deter employing. These could be grounded in negative experiences from the past, and also in more generalised concerns about the nature of the business and the owner’s relationships with clients. The strongest theme was around trust in potential employees, especially concern that they may not share the owners’ values, perform the work as well, or meet client expectations. Negative past experiences seem unlikely to be overcome. One sole trader reported that he had employed five people in an earlier business and “that experience made me determined not to employ anyone”. However, more generalised concerns about employing are often overcome.

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Most business owners who employ said in one way or another that they are proud of contributing to the economy as job creators. Many, as several of the quotations above indicate, stressed the importance of jobs that are good quality and sustainable. On the less positive side a much repeated theme was lack of appropriate skills among workers, but owners who wanted to recruit were quite persistent and resourceful in attracting people to employ in their businesses. An example is the business owner quoted in the last section who offers work placements and mentoring to students. One owner wrote at length about fear of being taken to an employment tribunal but this was an exceptional not a typical comment.

Box 4: Becoming an employer The Cake Nest is an online cake retailing business, which has been running for four years.

It was founded by Abigail Phillips and two years ago her husband Stephen Phillips joined her in running the business. This year, following participation in a small businesses programme for high growth firms, they decided to expand their business through recruiting new employees. This was a new experience for both owners, as Stephen described: “This is the first time for us, so from being employees two or three years ago, now we’re employing people. It is kind of strange and kind of surreal.”

Their experiences of employing new staff show the importance of evolving job roles, where candidates identified areas of expertise that they could bring to the business rather than following the roles initially advertised. Their first employee has “grown a position in the business for himself”. He has helped to drive business growth by bringing expertise in the use of social media for sales and marketing.

The couple then decided to advertise for a kitchen assistant but the advertised post diversified into a different job role when they were able to attract a candidate who brought previous contacts, administration and marketing experience from previous work in the hotel industry and wedding planning. This unexpected role has given the business owners the confidence to explore a new business area in the form of wedding related products.

A third employee has also filled the originally advertised role as a kitchen assistant.

Initially Stephen found it difficult to delegate some of the cake making to a new member of staff but both Stephen and Abigail now value the “fresh ideas” brought to the business by their new team. They encourage the team to share ideas though an ideas chart and weekly meeting to discuss product development and marketing.

“Having these extra people has given us the chance to actually produce new products” 43

The new staff add benefit to the business through offering; “…fresh ideas, it’s hard coming up with one idea but then coming up with the next idea is harder.”

One member of staff endorsed the business characteristics when she told the owners “I’ve never worked in such a happy place.”

In the long term, Stephen and Abigail would like to continue to develop their staff to enable employees to take over roles and allow the business owners to identify new areas of diversification.

In our workshops and interviews some owners talked in more depth about employing. One participant explained how he had been anxious that an employee would not ‘do it as well as I would’ but had very recently taken on a young worker to promote the business through social media. He described the experience of becoming an employer as ‘surreal’. The original intention had been to employ a kitchen assistant but the role changed after interviewing this applicant who brought contacts with her that were helping to grow the business (see boxed text). Another interviewee also explained how he interviewed for one post and took on two. As indicated above however employing directly is not the only way to expand a business and for some it is certainly not the best way.

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“…employing directly is not the only way to

expand a business and for some it is certainly not the best way.”

HIGH GROWTH BUSINESSES

Small Giants Excellent reputation Quality products and service

Sustainable organisations Long term relationships Skill development

Portfolio Entrepreneurs Diversification/expanding into new and related markets

Figure 2 The Iceberg of Small Business Growth Copyright showeet.com

Discussion Figure 2 summarises the types of organisation that our interviewees described and the patterns of growth that were important to them. The tip of the iceberg represents conventional HGFs. Below these are the ‘invisible’ forms of growth that remain unrecorded in official statistics, but which, our research suggests, underpin many of the activities and aspirations of small business owners and potentially make a substantial contribution to regional economic growth.

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© Copyright Showeet.com

Deliberately Small Agility/respond quickly to change

‘invisible’ forms of growth

Virtual organisations Partnership/ alliances

Supporting the Local Labour Market Mapping the different measures of growth in this way allowed us capture the multiple dimensions to employment that are important to small businesses, and to identify their relationship to the types of small business identified above. The range of ways that small businesses can help to support the local labour market are presented in Figure 3.

High Growth Firms At least 10 emps and 20% growth in employment in previous 3 years

Sustainable Businesses Create long term, stable Employment, reduce job churn

“…alliances gave

Figure 3: Small Business Support for Local Labour Markets

small business the

Beginning at the top of Figure3 - Networks and temporary alliances corresponding to Handy’s (1995) idea of a virtual organisation were clearly important mechanisms for expanding the scope and capacity of small businesses. These alliances gave small business the capability and capacity to tender for larger contracts, or undertake sizeable projects without ‘growing’ in conventional terms by employing more permanent staff, but rather by subcontracting work and employing workers on nonstandard contracts. Thus, temporary alliances and partnerships give rise to nonstandard forms of project-based employment that remain below the radar of policy makers.

capability and capacity to tender

for larger contracts, or undertake sizeable projects without ‘growing’ in

conventional terms by employing more permanent staff” 46

“For those of our small

Our research suggested that those businesses that focus on sustainability may be able to offer longer-term relationships and opportunities to develop skills. To some extent these overlap with the ‘small giants’ and their focus on reputation and quality, underpinned by stable employment.

businesses concerned with ‘making a difference’ job quality and engaging

For those of our small businesses concerned with ‘making a difference’ job quality and engaging marginalised workers was a more important driver than the quantity of jobs created.

marginalised workers was a more important driver than the

quantity of jobs created.”

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Conclusions The attraction of the "vital six per cent" of classically identified High Growth Firms is obvious in its power and simplicity. Recent quantitative analysis of UK firms, however, suggests a much more nuanced picture. The six per cent is actually only one per cent when new and micro firms are included2, and its responsibility for job creation is somewhat less spectacular than has been claimed. Moreover, these figures are based on maintenance of growth over a three year period. Only a very limited number of HGFs hold their strong growth rates for longer, short periods of growth may be part of a firm's lifecycle. The original research we undertook with business owners also adds to an impression of dynamics of growth rather different from the "vital six per cent".

The reports that we were given by businesses in this study suggest that this fixation on HGFs can be characterised as the "iceberg" view of the SME population - seeing only what is obvious above the surface. Below the tip of the iceberg lie many kinds of businesses making a contribution to the economy and to their communities.

Micro businesses (with fewer than ten employees) are proactive and dynamic contributors to the economy in many ways. In addition to their own small core team they may involve an extensive flexible workforce, in some cases more than 100 strong. Other micro businesses, including sole traders without formal employees, create alliances and partnerships that result in collaborative work, ranging from joint product development to collective contracting on turnkey supply contracts for primes.

Business owners in this research told us that they find themselves both enabled and constrained by their many social and economic relationships.

Relationships they highlighted as particularly important included family, community, professional associates and other business owners, some engaging with universities and local government.

Clusters, joint ventures, alliances, multi-agency partnerships, digital business ecosystems, business networks and so on can facilitate in individual firms punching above their weight. Government thinking about economic drivers needs to encompass context and interactions as well as individual firms. The research is consistent with calls for business support to shift more towards creating an enabling environment, providing a positive program of support to foster such development.

2

See Table 1, page 12

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This report comes at a time when Government is more convinced than ever that SMEs are the crucial driver for jobs and growth to secure economic recovery. Yet it is also a time of extreme uncertainty with regard to interventions to advance their potential. It is only two years since the regional infrastructure for business support was dismantled in England. The recently created Local Economic Partnerships (LEPs), of which there are five in the North West, have been tasked with promoting business growth, infrastructure and skills.

In order to begin to deliver on their remit, LEPs will need to identify and engage local enterprise leaders capable of opening up routes into diverse networks. This research suggests that it will be vital to involve some of the region’s business leaders including pro-active social entrepreneurs and “small giants�. Individual business leaders may be energetic networkers and catalysts for growth by animating partnerships between businesses, sometimes also bridging the divide between the public, community and private sectors. These people can help businesses collectively to develop joint working/contracting opportunities, and provide significant support for local business communities.

Authors: Valerie Antcliff Susan Baines Jacqueline Carter

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PSP’s recommendations, from research commissioned through Centre for Enterprise, MMU Exploring the Potential of the North West’s Small Firms to Drive Forward Economic Recovery 1. Widen the scope of business support beyond "high growth firms" It is vital that government support for business is widened to foster the economic growth of firms beyond the classic HGF six percent. Classification and clarification of business where support resources should be invested must be assessed using a wider band of measures of contribution to strengthening the economy.

2. Recognise non-traditional employment models Assessments should be made of the true employment potential of all SMEs, including micro SMEs, taking into account much more substantial pools of flexible employees supported by many micro businesses.

3. Recognise and invest in catalyst businesses Recognition should be possible of the impact of those SMEs, frequently “one man bands”, acting as sector specific or geographic catalysts - those micros who as part of their natural operation drive sector networking, development and collective economically significant impacts. Often this type of business to business support persists and is substantial even without public sector support, and such investment is a quick route to see a local niche sector thrive in economic and employment terms.

4. Support business collaboration Sector focused collaboration will often result in joint product development, bidding, tendering and purchasing, small investments of business to business expertise can have truly substantial economic benefits often in advanced technology fields.

Business support methodology should be enhanced to invest in total economic potential, supporting collaboration, and have metrics driven by the totality of its economic impact not the turnover of a single business invested in. Evaluation metrics and procurement policies in the public sector could be enhanced in the same way.

5. Create business support models formulated around business communities rather than confined by geographical boundaries Business support needs to be designed to deliver such benefits across a wide geographical area. Business collaboration will not respect council or LEP boundaries, and there is not enough financial power within individual LEPs to create duplicated systems of support in every area with the depth and business to business expertise required. Collaboration between public sector areas, bodies and leaders is needed to provide expert advice, geared to local specialisms and strengths but recognising the wider needs across the business community.

In essence, SMART investment by government nationally and locally should utilise the business to business support our SMEs already provide to each other.

The potential results of cooperation and collaboration between businesses can produce stronger economic benefit than current public sector financial injection alone. The business community is ready and willing to work with government, to make this to happen.

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