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Keiron Root explains why SMEs should trade on their local reputation against their larger national competitors. There is certainly no shortage of people prepared to give advice to the aspiring entrepreneur. The business consultancy trade has mushroomed over the last decade or so, and one of the ways in which its practitioners like to display their wares is by conducting regular surveys that highlight what small businesses are doing and how they might do it better.
These reports can be of variable usefulness, ranging from the sobering - regular updates on the failure rate for new businesses, for example - to what can seem to be the downright frivolous. A few months ago Holden Pearmain Research carried out a survey on behalf of Norwich Union that asked the managements of 500 UK SMEs what type of animal they saw their companies as representing. Nearly 20 per cent saw themselves as domestic cats and another 17 per cent as dogs, with the former group describing themselves as "independent and shrewd" while the positive qualities displayed by the 'dog' companies were reliability and resilience.
Such surveys may provide a little light relief to City newsdesks, but do they actually mean anything? Well, possibly. The animals survey gave an interesting insight into the psychology of small company managers, not least because large numbers of them emphasised independence and resilience over some of the more aggressive character traits usually associated with the entrepreneurial spirit.
Having said that, there was a greater tendency among larger SMEs - those with more than 200 employees - to see themselves as cheetahs or tigers rather than domestic pets, but by and large smaller company managers tended to emphasise their more conservative virtues.
As anyone involved in running a small business will know, the most difficult thing about the process is managing its growth. The assumption is that the success of a small business is measured by the speed with which it grows its revenues and market share. It is a recurring theme among these same business consultants that SMEs should guard against expanding into too many areas too quickly. This applies both in terms of the types of business activity they are involved in and the location of the markets they serve.
While some technology-based set-ups, for example, may be operating on a global scale almost from Day One, more traditional businesses, be they widget manufacturers or service suppliers, are more likely to start building their customer bases much closer to home. Clearly this has the practical advantage of familiarity, but there are also more direct benefits. A business model which concentrates on the local market will inevitably involve lower costs than one that seeks to take on the world and there is a growing number of examples of successful businesses that have remained successful simply because they have concentrated on maximising their presence in their local markets without incurring the extra costs of expanding their businesses further afield.
Indeed, concentrating on strengthening and maintaining relationships with local customers may prove more profitable in the long-run than seeking to expand to other areas, not least because there is evidence that consumers actually prefer dealing with local firms with which they can identify, rather than major national or international names, and that SMEs can use this goodwill to their advantage.
Lloyds TSB Business, the business-support unit of the high street bank, recently conducted a survey among a selection of its customers to find what influenced their purchasing habits. From a small business perspective, one of the most significant conclusions was that over half the population as represented by the survey would prefer to buy goods and services from a local business start-up rather than large established nationwide businesses.
Some 53 per cent of surveyed firms said they would positively discriminate in favour of local enterprises in this way, while a further third insisted they would regard local small businesses with no less favour than their bigger competitors.
These figures reflect a considerable level of goodwill that customers tend to feel towards companies based in their own locality. One quarter of those surveyed thought it was important to help and support local industry, while 17 per cent liked the idea of the more personal service offered by smaller local companies, and 11 per cent suggested small local firms are more likely to do a good job to make sure that they stay in business.
Stephen Pegge of Lloyds TSB Business, commenting on the findings, observed: "While the UK may no longer be a 'nation of shopkeepers' it is clear that people still identify with the entrepreneurial spirit, and are willing to support smaller local firms. This is a real vote of confidence and shows potential entrepreneurs that they can compete with the 'big boys' if they have a good product or service to offer."
Such findings mirror a growing reaction away from the notion that 'big is beautiful'. Even the fear of small-company collapse, the reason traditionally given for consumers preferring to deal with larger national or international names, no longer seems to have a detrimental effect. The Lloyds TSB survey found that only eight per cent of people would be put off from using a small company because of fears it could fold, while only five per cent expressed concerns over a small company's ability to compete with larger companies on price and product.
If these findings are mirrored in the wider market they represent something of a sea change in consumer attitudes. Again, an assumption has built up over the past 50 years that, particularly in retail markets, brand is everything. Yet only three per cent of the survey said they would be more likely to buy from a larger company because it was well known, rather than a small local business.
Interestingly, the over 55s were the most supportive of local small businesses, with nearly two-thirds of this age group saying they would favour local small business.
It was the younger generation, 16-24-year-olds, who were least likely to let the size and locality of a business affect their purchasing decision, while 40 per cent said it would not affect their decision one way or another.
Another recent survey by Lloyds TSB Business, looking at the public perception of small business owners, confirmed the general image of the risk-taking entrepreneur. This reported that just under a quarter of the UK population view entrepreneurs as innovators or creators, people with creative flair, imagination and a desire to break new ground. However, perhaps the most revealing aspect of the survey is that the general public seems to see small business owners as a breed apart, with only 13 per cent identifying with business owners and thinking of an entrepreneur as being someone like them.
Put these two sets of findings together and there is a very clear message - consumers not only have a high level of respect for people who are building businesses within their local communities, but they are also prepared to support such businesses with their hard cash. Pegge adds: "Small firms play a vital, but often unrecognised, role in the UK economy, providing employment to millions, as well as being a 'hothouse' for innovative ideas. It is good news that people have such a positive image of entrepreneurs. The fact is that people from all backgrounds and with very different personalities run successful firms, so it is a worthwhile and achievable goal for many more than may realise it."
With business confidence steadily improving, accountants BDO Stoy Hayward's quarterly Industry Watch Survey is now predicting that the rate of business failures will fall steadily through 2005 and 2006 to around 0.7 per cent, compared to one per cent in 2003 and that SMEs will be turning their attention again to managing growth rather than simply ensuring their survival. Shay Bannon, Business Recovery Services Partner at the accountants, argues: "The uneven growth that has dogged the UK economy has been replaced by stability. This is positive news for British business, but companies must not get carried away."
Indeed, why seek to take on the world when you could be more profitable by focusing on the market that is literally on your doorstep? BiographyKeiron Root is Editor-in-chief of What Investment and Personal Finance magazines and Editor of What Investment Trust as well as Consulting Editor of Treasury Management International. He contributes to a wide range of specialist financial and investment publications as well as the financial sections of the national press.
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