The Case for Strategy
Posted on 30/06/2020
By Michael Kianfar
During the last few months we have focussed much of Forward Newhaven’s communications on strategic thinking. It is probably worth explaining why we believe this is important.
The UK seems to have a distinct lack of growing businesses. There are almost 4.4 million firms and 4.2 million of which are one-man-bands. A more staggering statistic is that of the 220,000 firms that employ more than one person, just 100,000 have net assets over £500k.
The mission of the Newhaven Enterprise Zone is to improve the economic prospects of the region through ambitious development of businesses. That takes strategy.
Some insight from failure
In 2006, recognising the difficulties for small firms to access development capital, my firm launched a service that would enable small firm owners to pitch to an investment audience their strategy and need for investment.
The service focussed on first conducting an hour-long telephone interview with the business owner, talking in-depth about their business and aspirations for growth. We conducted almost 1,500 of these interviews and I know of no other such extensive research into the thinking of SME owners. The outcome was very surprising.
- Most firms derived 80% of their sales from 20% of their customer base.
- Single owner businesses were very reluctant to take investment risks and multi owner firms struggled with getting consensus for growth plans.
- Most firms built their strategy around their few customers as oppose to addressing the market.
- None wanted to get external equity investment due to fear of being accountable or losing control. Any that did, looked to sell out.
- Financial skills and formal business education were very low.
- Decisions were based on gut feel as opposed to analytical data – critical thinking skills non-existent.
- Most businesses were personal and emotional – these weren’t businesses, this was self-employment.
A nation of shopkeepers?
It has often been said that Britain is a nation of shopkeepers and there is strong evidence that this may well be the case. The question is why?
Germany has a strong medium-sized business base. Privately owned businesses that employ between 500 - 2,000 people (the mittlestand) are the anchor to many of Germany’s economic regions. The German government benefits from a broad view for its economic policies because it gets feedback from not only the big multi-nationals but also the ‘local engine’ businesses. The UK on the other hand gets strong lobby from the big and makes a load of assumptions about the tiny.
Germany does not have a huge business investment model but what it does have is a very effective debt financing system. Businesses can borrow money to invest in their production capabilities far more effectively than in the UK.
Comparing the UK to USA, the dynamics are different again. There are many multi-nationals, many medium sized businesses and many more small firms. The great benefit of the US is that it has a large homogenous market, a strong equity investment system and an extremely effective debt financing system. The US has one more advantage – business owners want to build their business, sell it and retire to a beach in Florida.
The quest for business development drives everything up to where it ought to be. You can’t do it unless you invest in your infrastructure, your management systems, your staff capabilities, your customer service and your market offering. Everything has to go a few notches up the scale.
I don’t think the UK wants to be a nation of shopkeepers, but progress is going to need some fundamental developments. I believe that the most important one is to encourage strategic planning and execution from business owners and the other is better representation of SMEs at a policy making level.
In most of central Europe the local Mayor has a huge influence on policies that impact the firms in their region. They can take central government to task and resist policies that favour the large firms that have easy access to capital. They can make a strong case to prohibit legislation that puts developing firms at a disadvantage. Furthermore, you can talk to them and they are prepared to get in a car and visit you to discuss the issues. I am not asserting that central Europe has the answer, simply stating that there is a sensible channel for SMEs.
The SME sector is responsible for nearly 50% of UK GDP. It is highly fragmented and poorly represented at a policy making level. I would love to see more collaboration and ideally an SME minister at central government (preferably one that has actually been an SME!)