Small and medium enterprises - Essay Example

Small and medium enterprises Section I: Introduction Small and medium enterprises have been playing a pivotal role in the economic development and uplift all around the world. Their part in creating new employment opportunities has been pivotal and decisive both in the first and third world countries. Being at a very limited scale and bound to some sanctions, SMEs have to obey some pre-defined protocols and best entrepreneurial practices in order to succeed. There are different success criterions for an SME some of them are discussed below in order to summarize the key points which can be a benchmark for the small and medium scale business initiatives all around the world (SMEs in the UK 2013). An SME should give the primary importance to alliance and strategic partnerships at both local and global levels in order to increase the productivity. This will give a huge boost to the yield to cost ration which is the most decisive factor in any SME as they are required to fulfill some business rules and rules to survive in the emerging economic world of today (Nelson & Prescott, 2003). The paramount reason behind these success criteria is the fact that in the ever increasing global economic scale, the SME finds itself being in some tightened conditions thus experiencing jeopardy and limiting factors in the economic growth. Alliances with some partners will not only give them important horizons and resources to get a global exposure but it will also expand the business opportunities to increase the profit and lifetime of the business initiative. A very famous concept in business studies known as transaction-cost theory should be followed in order to increase the certainty level of the success of the partnership (Yasuda, 2005). This theory illustrates and suggests that the SME should make alliance with a partner that can minimize the sum of the fixed and continual costs throughout the business process. The famous example in this case can be taken that of Austria economy which enjoys almost 99 percent of the SME initiative which were at the start partnership based. (OECD, 2005). Similarly, the other success criteria are limited target marketing because e increasing the target market at the start will exhaust all of the resources without any gain. The SME is always a limited business initiative when discussed in terms of resources and money so the expanded target market will not only put extra pressure on the already scarce resources but it will also decrease the productivity of the SMS. In UK, around 3.7 million businesses were setup due to SME initiatives that focused on limited target markets (Hillary, 2004). Small and Medium Sized Enterprises in the UK provide a major source of employment and wealth creation in the domestic market. SMEs in UK contribute with 36% of the total manufacturing output to the economy (OECD, 2005: p. 352). The UK economy is greatly benefitting by the emergence and development of SMEs. Approximately 1 trillion pounds of turnover is generated per annum by SMEs. As for the employment sector, SMEs contributed to 85% of the private sector jobs created during 1995 and 1999 (Analoui & Karami, 2003: p. 30). The increase in SMEs has tightened the competition in the UK market which directly led to innovation in terms of products, processes and culture. Hence, SMEs in UK are supposed to be a key contributor of innovation. Owing to the importance of SMEs in the UK economy, governments are continuously struggling to encourage and promote Small and Medium Sized enterprises. This paper highlights 6 major contributors for the success of SMEs, derived from research and case studies. It further provides recommendations for government policies to promote the success contributors using various strategies. SECTION II: Criteria for SMEs Success Innovation Innovation is a concept that needs to be embedded in the organizational culture. Innovation is a key to achieving competitive advantage in the modern and highly competitive business market, especially for the SMEs with limited resources and higher growth needs. Innovation provides a distinct image to the company’s products or services. Innovation in terms of products, for instance, grabs the attention of consumers who are in search of uniqueness, newness, modernism and improved products. SMEs have more tendencies to adopt innovative ideas and alter the existing culture as per the innovative change required. They are less prone to procedural implications of legal, statutory or other regulatory requirements. SMEs can adopt a highly flexible approach and may explore new ideas and viewpoints (North & Smallbone, 2000). Bovince Ltd. located in London provides a better insight into innovative processes and their direct impact on the company’s financial performance. Bovince, by investing innovatively in a modern technology, did not only achieve performance efficiency but also achieved a relatively lower environmental damage as compared to other’s in the screen printing industry. Their investment in Svecia direct projection system sidesteps the damaging production stage of large posters saving time, amount of chemical used and reduced wastes. The cost cutting of 1200 pounds per large billboard is an achievement for an SME (Great Britain, 2001: p. 17). Profitability Another important factor in the dynamics of establishing and sustaining the profitability of the SME is advertisement and awareness in the masses about the business initiatives and the details. According to a study, only in UK, the SME initiatives faced almost 12% of the problems while finding the new customers and this was solely because of lack of advertisements and opinion building prior to initiating. Satisfied Stakeholders The success criteria of SMEs include good relationships with the stakeholders. These include employees, customers, investors, banks and so on. To achieve enduring finance availability, SMEs should have good and long term relationships with banks. This factor can only be achieved by showing a legitimate background and sound reputation in the day to day transaction in the banks (Proença & de Castro, 2005). Because the SME will need to have different loans and short term money borrows in order to cover up the costs therefore the relationships with the local banks matter lot in defining the success criteria for an SME. Firm Survival/Continuity Another criterion for success is the survival and going concern of the company. This can be achieved through reputational, operational and financial soundness of the company. At the heart of this criteria are sound technical support and know-how of the business domain. As depicted an illustrated by Cambridge Policy Consultants (1998), In the UK, 30% new SME stopped working and around 50% ceased their operation due to lack of knowledge and technical support. Contributing back to society The triple bottom line approach provides a better and deeper insight to the modern business success and operations. It suggests that businesses need to take 3 basic stances under consideration when devising the policies and strategies for successful and long-term life. The financial, social and environmental analyses of every operation, strategy and policy need to be assessed as the corporate social responsibility issues suggest. The modern business environment no longer relies on the financial aspect solely. Businesses need to discharge their social responsibility to be liked, encouraged and appreciated. Goodwill of a business is generated through its customer base, reputation and overall business profile in the market. Without properly exhibiting its social responsibility phenomenon businesses can no longer attract higher population. As for the Small and Medium Sized Enterprises (SMEs), at the first glance, social and environmental responsibility seems to be an additional burden. However, a survey suggests that 88% of the population under review suggested more inclination towards purchasing goods from organizations that are running campaigns or putting efforts for the improvement of society (Murthy & Krishna, 2010: p. 166). The UK based company B&Q transmitted its social responsibility message by opening a supercentre that consisted of employees over the age of 50. This was mainly initiated to reduce unemployment and improve the life style of aged population. It was noticed that the Macclesfield store flourished within half years time and profitability from this store was higher than all other branches. The profits were approximately 18 per cent higher with 6 times reduced employee turnover rate and an outrageous 39 per cent lower absenteeism (WWF, 2001). Utility or Usefulness It has been seen that customers are more likely to opt for product, services or companies that promote a social aim or society in general. The needs of society, when fulfilled by a company’s profits or strategies, are highlighted and considerable appreciation is noticed from general public, media and even government. This appreciation is either in terms of more profits or reputational benefits. Travelsphere, a tour operating company, provided particular importance to the needs of blind or people with sight issues. There distinct services to the special needs of blind or people with sight issues paved new paths of reaching and attracting customers. Proving itself to be socially responsible and aware company, Travelshpere won more business and customers than ever. The increase in revenue from the new customers was stated at about 100,000 pounds. Section III: Evaluation of SME Criteria and Government Policy Shortcomings The government is currently taking steps in increasing awareness about the social responsibility of businesses and encourages businesses’ success in this regard. Government advises SMEs on successful implementation of CSR initiatives and encourages reporting frameworks to encourage and promote socially responsible businesses. However, it must be noted that small and medium sized organizations generally do not have enough resources to initiate or implement CSR activities. The government needs to have policies that aid SMEs financially to develop socially responsible practices. The criteria for the success of small and medium enterprises may not be realistic in all the cases keeping in view the practical environments of different countries especially UK because there are numerous economic and political factors that can cast certain hurdles in achieving the success criteria for any small and medium scale enterprise initiative. For example if the first success criteria is discussed then the regulatory and monetary policies in UK sustain certain limits and vague clauses in this scenario. A recent example can be taken that of Vodafone and Telefonica O2 joint venture and partnerships because the rules and regulations of UKare not ready to accept the deal in between them without some conditions. The joint ventures and the partnerships are needed to be registered through a very long and tiresome process in UK and there are certain needs to submit a huge amount of money in doing so (Mole, 2002). So small partners and ventures ignore this cost many a time while creating joint venture. Hence, there are several issues after the partnership is done. Whenever there is a deal and there is a transactions form the bank then the issues starts to arise after a certain amount of time has passed. In UK there was a decline of around £21,199 from £33,232 in 2002-4 due to these strict policies as most of the new ventures got collapsed after a very start of the deals. There has been a dire need of the reflexes in the policies and this has been demanded by many companies and short partners all around the world. There has been an enormous set of problems in UK when SME’s try to establish the financial relationships with the banks in order to get loans for increasing the productivity. For example, there are only a very few banks there are providing the resources to the newly created SME initiatives and they can be counted on fingers for example Royal Bank of Scotland Group, Lloyds TSB, HSBC and Barclays Bank. These banks it turn place very strict requirements for the SME to have in their pockets in order to have some even a minute financial helps at the start. The rates of the rejection of the loans show a clear sign of the glimpse of the overlooking the importance of SME in the United Kingdom. For example in 2001-4 4.2% SME initiatives got a rejection letter in reply of their request to have some loans for the start up processes. Similarly, this figure experiences a huge rise in 2005-8 and there were around an increase of 10.9% rejection letters for the SME financial help requests. (Freedman, 2011) The employment problems in UK are affecting the success criteria for the SME. The SME people always try to hire the local talent in order to enjoy the public awareness and marketing edge but this is also facing hurdle due to many social policies as well (Peel, 2004). Many SME are not from strong background and people from UK do not feel good or obliged to be a part of them. Similarly the employment policies in UK are also not in favor if such actions because this fact is inter related with the first point which says that in order to have any transaction with the bank or to hire someone the SME should be officially registers and this needs quite a big amount of money that is reality avoided by a bunch of organizations. Similarly there has been numerous advertisements rules in the united kingdom which prevents the new ventures from spreading the public awareness because it need a lot of money and effort to give a single add in the television in the united kingdom (Mitchel, 1993). There are also many problems for the new business ventures in the innovation processes because innovation requires a great deal of resources and workforce whereas the SME cannot hire a great deal of workforce both due to the organizational limits and political burdens therefore they have to compensate the problems are invent different workaround in order to meet the organizational needs for the fulfillment of short and long term goals (Qyser et al, 2008). Section IV: Recommendations to Government to Develop A Long Term SME Strategy In UK The government of UK should first amend the taxation policies that are proving to e most detrimental for the SME initiatives and harmful for the new ventures for the past several decades (John, 2003). At the present times the taxation policy is creating harm for the local ventures which are most the SME ventures at the primary level. The profits are charged with taxes immediately when they are produced but in order to compensate an over charged tax, a long time has to be passed until the business produces the enough money to have the tax on. This policy should be changed so that the SME organization can easily nurture their processing in a profitable way. Principle of neutrality can be overlooked for some time because there is a great need of small and medium scale business which is the main causes of employment opportunities in the UK. There has to be some clear cut policies that can benefit the new comers in this domain of interest so that maximum people can have a chance to get employed in the first world countries and European countries. The financial reporting standard for small entities (FRSSE) should be made more flexible for the small ventures because they do not have always a large amount of resources in order to support the tasks of the organizational needs (Napier, 1995). The election of the labor party in 1997 came up with much more improvement in the policies but still there is a lot more to be done (Pierson, 2003). The second most important recommendation for the government is to improve the relationships of the banks with the new and joint ventures. If the relationship of the banks and customers will be easy then there will be more chances for the exposure of the SME in UK. The government should inculcate the fact that the expansion of new ventures in only in its own good interest as it will create massive employment opportunities and will solve a lot of the problems that the government has been facing since long. Similarly, there is another sub problems in relation to the relationship of the bank and the customers and that is “what should a new SME do when it entrants UK in regards to the cash”? The access of the cash should be very easy in order to make the business flourish. Similarly another very important point is that the normal business in the industry and an SME should not be checked on the same benchmark rather they should be different in regards to accountability and checking. AS the SME is a small scale business initiative so it does not have the sufficient resources in order to fulfill the needs of the customers at large so the advertisements and loans are the primary sources for the business for these types of organizations. They government should pay a strong heed in regards to the new entrants and their access to market resources. There should be absolutely no polarization in the market rather a very competitive environment should be nurtured to achieve success. (Fraser, 2007) References Analoui, F., & Karami, A. (2003). Strategic management in small and medium enterprises. Australia, Thomson Learning. Consultants, C. P. (1998). Regenerating London Docklands. DETR, London. 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