Smart SMBs: fine-tuning the engines of growth


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Smart SMBs: fine-tuning the engines of growth

  1. 1. 1© The Economist Intelligence Unit Limited 2013Smart SMBs: Fine-tuning the engines of growthSmart SMBs:Fine-tuning the engines ofgrowthTo achieve growth, economies the world over rely on small businesses to create jobs, increasecompetition and spur innovation. In return, these small businesses often look to governments forassistance, from cutting bureaucratic red tape to providing financial incentives such as tax breaks. Yetthis growth model is stuck in second gear. In the latest forecasts from The Economist Intelligence Unit,global GDP growth for 2013 has been revised down to 3.1% - only slightly up on GDP growth for 2012(2.9%). Meanwhile, small and medium-sized businesses (SMBs) from around the world find regulationto be a top business concern, on a par with shortages of financing and behind only the weak economy,according to a survey conducted by the EIU for this paper. With growth prospects and regulationunlikely to improve overnight, smart SMBs are targeting the improvements they can make to their ownbusinesses.Key FindingsTo assess how SMBs are focusing on growth through smarter internal operations, The EconomistIntelligence Unit surveyed owners and senior managers of these businesses from across the globe*.The main findings to emerge from the research are as follows: Smarter internal operations are key to growthNew businesses have a high chance of failure within the first five years, so revenue growth isunderstandably of utmost importance to the owners and senior managers of SMBs. Next to revenuegrowth, the strategicfocus of SMBs is nowfirmly on improvementsin operating efficiencyand attracting andretaining talent.Optimising existingcompany operationsin this way is seenas a higher prioritythan other strategicobjectives likeentering new marketsor developing newproducts.Top five strategic objectives for SMBs over next 12 months(% of respondents scoring it 4 or 5 on scale of 1 to 5, 5 being highest priority)Full widthRevenue growthImprove operatingefficiencyAttracting andretaining talentDeveloping new productsor servicesEntering new markets ordistribution channelsChart 140%49%53%78%56%Source: The Economist Intelligence Unit.* The survey of 118 SMBs,each with no more than250 employees, took placein February 2013. A fullbreakdown of the surveyresults and the demo-graphics is available inthe appendix.
  2. 2. 2 © The Economist Intelligence Unit Limited 2013Smart SMBs: Fine-tuning the engines of growthThe majority of SMBs, moreover, have a complementary view of pursuing revenue growth andmaking improvements to the way the company operates. Over the next 12 months, expanding the businessis likely to be the strongest reason for driving efficiency improvements, according to more than half (55%)of survey respondents, whereas only a quarter of respondents (24%) are motivated by reducing costs. Evenfewer respondents are motivated by reducing complexity (12%) or by pressure on profit margins (5%).This striving for smarter growth is borne out in the concrete steps that SMBs are taking toimprove internal operations. The top efficiency initiative, being undertaken by more than half (58%) ofrespondents to the survey, is training employees to work smarter. A similar number of SMBs in the survey(57%) are investing in IT upgrades to hardware or software. In contrast, only 14% of SMBs are reducingheadcounts, working hours or expanding temporary workforces. SMBs should embrace new technologiesTechnology is a crucial component of this smarter growth strategy. As SMBs invest in staff training andIT upgrades, the overwhelming majority are seeing the benefits of technology: over nine in ten (91%)of SMBs surveyed say they have benefited from tech-driven improvements to the business in the past 12months.Looking ahead, the survey respondents pick out mobile working, cloud computing and “big data”(enhanced data collection and analysis) as the three technology developments likely to have the greatestimpact on their business in the next 12 months. This should come as little surprise. These advances haveenormous potential tohelp businesses be moreefficient, by streamliningprocesses, enablingflexible working andreducing fixed capitalcosts.Exploiting mobiletechnologies to the full iscritical for the majority ofSMBs training employeesto work more flexibly.Five tech-themed efficiency findings9 in 10 SMBs have benefited from technology in last 12 months (mobile workingand cloud computing expected to have biggest impact in next 12 months)57% of SMBs have upgraded existing technology to improve efficiency,compared to 41% that have invested in new technologyLack of technology skills or know-how is deemed the second biggest barrier toefficiency improvements, only behind a resistance to changeInternet speed and connectivity is less of an obstacle to efficiency improvementsthan restrictive regulationA minority of SMBs believe technology is too expensive and changes too fastStrongest drivers of efficiency improvements over next 12 months(% of respondents)Expanding the businessIncreasing profitabilityRaising employee productivityReducing costsImproving competitiveness 15%24%24%55%33%Source: The Economist Intelligence Unit.Chart 2
  3. 3. 3© The Economist Intelligence Unit Limited 2013Smart SMBs: Fine-tuning the engines of growthMeanwhile, cloud computing is particularly advantageous for start-ups and high-growth small firms,because these businesses have less capital than established companies to tie-up in expensive servers oroffice space, but a greater need for the flexibility to scale-up operations during periods of high growth.The potential that these technologies have to level the playing field between smaller and larger companiesis reflected in the fact that only a third of respondents now see the cost of new technology as too steep.But despite these clear benefits and greater accessibility, many SMBs are still taking a cautiousapproach to new technology. For the time being, more companies are upgrading existing hardware orsoftware than investing in new technology. Such caution ultimately comes down to resources. Smallerbusinesses do not have the IT capabilities of larger enterprises, and many start-ups are unlikely to have adedicated IT specialist at all.The use of cloud-based services should help in this regard, for the reasons set out above. Butowners and managers of SMBs also recognise the role that IT specialists have to play in small businesses: alack of technology skills or know-how is rated the second biggest obstacle to improving operations. Managers must take the lead on changeAcross the world, SMBs are keenly aware they need to make improvements to the way their businessesoperate. An overwhelming 90% of respondents say their companies can do more to increase efficiency. Inaddition, over half are both unhappy with efficiency at their company and struggle to tackle inefficiencies.But aside from taking the focus off growth, there are few compelling reasons for not addressingthese issues. For instance, only 15% of SMBs surveyed believe that all obvious improvements to thebusiness have already been targeted. A similarly low number claim to be put off by the perceived high costof efficiency measures.At the individual company level, what seems to be holding businesses back more than anything isa resistance to change. This is cited by SMBs as the top internal barrier to launching efficiency initiatives,ahead of the aforementioned IT skills gap and ahead of taking the focus of growth (as well as being on apar with the percentage of respondents citing the weak economy as their top external barrier to makingthese improvements – see chart 4).A sizeable proportion of senior managers are clearly aware of the leadership role they must playin overcoming this resistance to change. To succeed with initiatives aimed at improving the business, threequarters of these senior respondents believe it is vital to get their buy in. What is more, a lack of urgency orinitiative from leadership is another highly ranked internal obstacle to improving the business.Still, there is some divergence of opinion among this leadership group. Business owners aremuch less likely to see resistance to change as an obstacle than other senior executives. This suggestsChart 3Say their company canimprove efficiencyBelieve efficiency isimportant but growthis a priorityAre unhappy withtheir companysefficiencyOffer financialincentives toemployeesto findefficienciesReckon efficiencyinitiatives must betop-down to besuccessfulWorry that competitors are improving efficiency faster than themSource: The Economist Intelligence Unit.How owners and senior managers view efficiency(% of respondents)90% 77% 76% 52% 42% 29%
  4. 4. 4 © The Economist Intelligence Unit Limited 2013Smart SMBs: Fine-tuning the engines of growththat some owners may be part of the problem – and not just the solution. Therefore, the first hurdle forsome businesses may well be to convince the ultimate decision-makers of the need for them to sponsororganisational improvement. New businesses should invest in smart growth earlyGiven the focus on smarter growth, it is striking how few companies perceive there to be a competitiveadvantage to be gained from pursuing these organisational improvements. As it stands, less than athird of respondents (29%) are worried their competitors are improving efficiency faster than theyare. In smaller businesses, with under $1m in assets, this concern is even slighter, with only 17%of respondents worried about the competitive advantage efficiency gives competitors. Yet suchcomplacency can cause longer term damage to the business.Putting off efficiency improvements risks the problems becoming embedded in the businessas it grows rapidly and reaches scale. The results of the survey clearly show that older companies,those with over 10 years in business, are more likely to struggle with their internal operations. Almostthree in five (59%) of the SMBs falling into this group admit to having difficulty tackling inefficienciescompared with 46% ofyounger companies.Together withtackling inefficiencies,the older companiesin the survey aremore likely to havefaced challengesto the bottom line:while most SMBs areprofitable, four in fiveof those that haveseen profits declineor become loss-making in the last 12months have been inbusiness for over 10years. Operationalinefficiency is likelyto be one of manypotential factorscontributing to thisdecreased profitability,so this should providemanagement withadded motivation topursue smarter growthfrom the outset.Inside the companyChart 4Source: The Economist Intelligence Unit.Top 5 barriers to improving company efficiency(% of respondents)Resistance to changeLack of technology skills/know-howLack of urgency/initiativefrom leadershipRisk of detracting fromgrowing businessWeak culture of efficiencyOutside the companyWeak economyLack of availablefinancingRestrictive regulatoryframeworkShortage of talentFixed costs ofkey inputs 22%27%31%45%32%27%27%27%44%30%
  5. 5. 5© The Economist Intelligence Unit Limited 2013Smart SMBs: Fine-tuning the engines of growthConclusionThe majority of SMBs in our survey are pursuing smarter growth, optimising working practices andinvesting in technology. Yet there remains an element of caution here, caused in part by a lackof technology know-how. This skills gap is important to address. Technology is widely identifiedas an important efficiency driver for SMBs in recent years, so companies should embrace newerdevelopments like the cloud and mobile working, which they expect to have a big impact in thenear future.Next year, the EIU forecasts global GDP growth to rise to around 4%, where it is expectedto remain until at least 2017. As the global economy returns to stability and greater predictability,companies struggling with operational difficulties will find they have fewer excuses for disappointingresults. To negate the threat of creeping inefficiency eating into profitability, the owners and managersof SMBs should tackle institutionalised resistance to change as well as their own complacency aboutwhat their competitors are doing around efficiency. New businesses with absolute focus on revenuegrowth should take heed of these lessons and build efficiency into their businesses from the very start. Smarter internaloperations are keyto growth SMBs shouldembrace technology Managers must takethe lead on change New businessesshould invest in smartgrowth earlyKey findings
  6. 6. 6 © The Economist Intelligence Unit Limited 2013Smart SMBs: Fine-tuning the engines of growthThe Economist Intelligence Unit surveyed 118 owners and senior executives of SMBs fromNorth America, Europe and Asia-Pacific. The survey took place in February 2013 and ourthanks go to all those who took part. For the purposes of the survey, we defined efficiencyto mean conducting operations, processes or tasks with minimum time, cost, wastage oreffort. Please note that not all answers add up to 100%, either owing to rounding or becauserespondents were able to provide multiple answers to some questions.AppendixOver 20% increase10% to 20% increase5% to 10% increase1% to 5% increaseNo changeDecreaseWent from profit to loss in the past 12 monthsYear-on-year loss widenedDon’t know16231215209411(% respondents)How has your company’s profitability changed over the past 12 months?Agree DisagreeMy company often struggles with tackling inefficienciesWe can definitely do more to increase our efficiencyIm worried that our competitors are improving their efficiency faster than we areEfficiency is important but growth is our priorityI am happy with efficiency at my company47107123525390297748(% respondents)Do you agree or disagree with the following statements? Select one column in each row.
  7. 7. 7© The Economist Intelligence Unit Limited 2013Smart SMBs: Fine-tuning the engines of growthSenior managementOperationsSales & MarketingSupport functions (eg, HR, legal, finance)DistributionITSupply chain301023818251220710617410Most efficient Least efficient(% respondents)Which parts of your business are the most and least efficient?Technology has saved time at my companyTechnology has optimised effort at my companyTechnology has reduced costs at my companyTechnology has minimised waste at my companyTechnology has achieved none of the above at my company33282379(% respondents)Generally speaking, which of the following best describes how technology has contributed to improved efficiency at yourcompany in the last 12 months?Expanding the businessIncreasing profitabilityReducing costsRaising employee productivityImproving competitivenessReducing complexityAdding new assets or operations to existing businessPressure on profit marginsMaking company more attractive to a buy out/mergerReturning value to shareholders/ownersOptimising environmental impact/carbon footprint553324241512115443(% respondents)Which if any of the following factors are likely to be the strongest drivers of efficiency for your business over the next 12 months?Select up to two.
  8. 8. 8 © The Economist Intelligence Unit Limited 2013Smart SMBs: Fine-tuning the engines of growth1 Low priority 2 3 4 5 High priorityImprove operating efficiency of our businessRevenue growthDeveloping new products or servicesBusiness acquisition/mergerEntering new markets/opening new distribution channelsAttracting and retaining talented staff/employeesRaising fresh capital (equity, debt)52 712263021175127132029211871511135421192817162924251012914281434(% respondents)How much of a priority are the following strategic objectives for your company? For each row, move slider along to numberbest representing the priority level.Train employees to work smarter/alter working practicesUpdate existing IT and technology (hardware or software)Change suppliers/renegotiate supply contractsInvest in new IT and technology not previously used (hardware or software)Move to or increased web-based sellingStreamline company structure (including selling assets and consolidating functions)Shift to greater automation, machinery, roboticsEmployee redundancies/reduce working hours/increase temporary workforceRelocate production/services to lower cost location/outsource company functions to third party (eg, managed service provider)585742413331181414(% respondents)Which of the following actions has your company undertaken in the past 12 months, or does it plan to undertake in the next12 months, with improved efficiency as part of the objective? Select all that apply.Mobile working (eg, employees working away from office)Cloud computing (eg storing company data in remote data centre)Enhanced data collection and analysis ("big data")Social networkingBusiness continuityRemote management (eg, managed service provider)Video conferencing /telepresenceCollaboration software & toolsBring your own device (eg, employees using own smartphone for work)VirtualisationOther, please specifyDont know35342423171212115431(% respondents)Which of the following technology developments are set to have the biggest positive impact on the efficiency of your businessin the next 12 months? Select up to two.
  9. 9. 9© The Economist Intelligence Unit Limited 2013Smart SMBs: Fine-tuning the engines of growthResistance to changeLack of technology skills or know-howWeak culture of efficiencyLack of urgency/initiative from leadershipRisk of detracting attention from growing businessReluctance to pursue efficiencies beyond cost-cuttingNot the right time/stage of companys developmentHigh cost of efficiency measuresAlready pursued all obvious efficienciesOther, please specifyThere are no meaningful internal constraints443027272718171715811(% respondents)Which if any of the following internal factors currently limit your companys ability to undertake efficiency initiatives?Select all that apply.Weak economyLack of available financingRestrictive regulatory framework (eg, employment laws/environmental laws)Shortage of talentFixed costs of key inputsPoor quality of communications infrastructure (internet speed, connection)Political uncertainty (eg, tax treatment, legislative deadlock)Influence of labour unionsLack of transport infrastructure (roads, airports, seaports)Other, please specifyThere are no meaningful external constraints4532212722161486414(% respondents)Which if any of the following external factors limit your companys ability to undertake efficiency initiatives?Select all that apply.Strongly Agree Agree Neutral Disagree Strongly disagreeA culture of efficiency runs through my companyMy company has made good use of the changing global economic climate to become more efficientEfficiency initiatives must be driven from the top down to be a successEmployees at my company are financially incentivised to find efficienciesChanging existing IT systems could eliminate delays and disruption at my companyNew technology is too expensiveNew technology developments change too fast6747212928146162840923243314411935413429241061421411816333312(% respondents)To what extent do you agree or disagree with the following statements? Select one column in each row.
  10. 10. 10 © The Economist Intelligence Unit Limited 2013Smart SMBs: Fine-tuning the engines of growthUnited States of AmericaUnited KingdomCanadaIndiaGermanyNetherlandsSpainSingaporeSwitzerlandAustraliaBelgiumChinaPortugalSwedenDenmarkIndonesiaMalaysiaNew ZealandPolandRussiaThailandTurkeyVietnam2220985554111111114222221(% respondents)Where are you personally located?Western EuropeNorth AmericaAsia-PacificEastern Europe4831201(% respondents)In which region are you personally located?
  11. 11. 11© The Economist Intelligence Unit Limited 2013Smart SMBs: Fine-tuning the engines of growthLess than 250,000 dollars250,000 to 499,999 dollars500,000 to 999,999 dollars1m to 9.99m dollars10m to 49.9m dollars351073512(% respondents)What is your company’s annual global total assets in US dollars ? please select the most appropriate option if your company doesnot report assets in US dollars1 to 910 to 4950 to 99100 to 149150 to 199200 to 249472912634(% respondents)How many people does your company currently employ full-time (including yourself)?Owner/manager/partnerChief executive officer (if different)Chief financial officer (if different)Other C-level (if different)Manager (non C-level)591281012(% respondents)What is your job title?
  12. 12. 12 © The Economist Intelligence Unit Limited 2013Smart SMBs: Fine-tuning the engines of growthTechnologyFinancial servicesProfessional servicesManufacturingMedia & entertainmentAgriculture & agribusinessBiotechnologyLogistics & distributionPharmaceuticalsAutomotiveHealthcare/provider careReal estateRetail & wholesaleConsumer goods:EducationMining & metals (including coal, steel and aluminium)Power & utilitiesAerospace & defenceConstructionDiversified industrial productsOil & gasTelecommunications1916157744443332211111322(% respondents)What is the primary industry your company is in?Under 1 year1 to 2 years3 to 5 years6 to 10 yearsOver 10 years14212054(% respondents)How many years has your company been in business?
  13. 13. While every effort has been taken to verify the accuracyof this information, neither The Economist IntelligenceUnit Ltd. nor the sponsor of this report can accept anyresponsibility or liability for reliance by any personon this article or any of the information, opinions orconclusions set out in this article.
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