The Sustainable SME

SMEs – are  they just smaller versions of big business?

“A small business is not a little big business”  is a quote from the Harvard Business Review from 1981.  31 years on, this still rings true today. The main difference is the amount of resources available and that small businesses are is at more at risk of failure than large ones. Small companies suffer from a shortage of resources, therefore cannot be managed in the same way. The risk of failure due to potential design flaws in a new product is much higher in small companies, caused by a lack of funds to absorb these failures. The same applies to new regulation – resources required to investigate new regulation and carry out the requirements,  needs resources to be in compliance.

SMEs don’t really like being called SMEs

Defining SMEs by numbers (as I did in a earlier post) does not really sit well with SMEs themselves. There is so much diversity that encompasses an SME.  For example Eirebloc, based in Macroom, Ireland make pallet blocks from recycled wood,  cannot really be compared to a hairdresser in the same town. Both are SMEs by definition, but their businesses are managed in very different ways and the marketplace where they operate are completely different.

The SME definition is there to help

However, it seems that these definitions are needed for standardisation of data collection by governments and support agencies. The official definition is a 50 page document, but for simplicity it is easier to look at if as less than 250 employees in general. Medium ones have 50 or more,   small ones less than 50 and micro is less than 10.This was  revised in 2005 by the European Commission, to guarantee that SMEs receive the support schemes designed for them and to make sure that they are not being accessed by larger institutions.

9 Common SMEs Characteristics

These numbers do not give us any idea about common characteristics of SMEs.  My own research has highlighted a number of common characteristics:

1. Independence seeking

An owner has chosen to set up a business to become his or her own boss rather than being primarily motivated by profit. Of course making a profit is the way an SME makes a living, but they have chosen to be in control of their income. On the other hand, the goal of most large companies is to make a profit for their shareholders.

2. Entrepreneurial & risk taking

Businesses are set up by entrepreneurs.  In particular first-generation business-owners are entrepreneurial and prone to risk taking, which differs from the perspective of the large firm when decisions are being made . They also can be more intensely motivated to the perform tasks or goals.

3. Personalised

Small businesses are wholly independent enterprises that are privately owned and managed in a personalised way. They don’t usually follow corporate structures and procedures.

4. Simple management structure & many hats to wear

There is a lack of a highly structured management hierarchy, as is common in large companies. Small businesses are usually managed by the owner(s) or a small team, who are its major decision makers. A small business owner-manager has to wear many hats! They typically play the part of CEO, financial controller, HR manager, R&D manager, Environmental manager and many more!

5. Small market

Take a look at your village/town/city. Most businesses  you see are SMEs dependent on local trade. Restaurants, pubs, hair-dressers, pharmacies , printers etc. They typically only have a small market share in the sector in which they operate.

6. Self-financing

Many business owners have usually risked their own money on their venture . Financing is limited only to business operations and personal guarantees are often required for financing the company when limited liability is present.

7. The business is the main income

The owner-manager has invested  his/her personal wealth in the business they don’t usually have diverse financial portfolios to provide their income.

8. Flexible

SMEs are very flexible. They can adapt well to their ever-changing external environment. They find it easier to adapt to changes quickly, which is important when competing with larger companies.

9. Sector influence

An SME’s behaviour and activity is influenced by other companies that are operating similar industries.

What do you think?

Can you think of any other ‘typical’ characteristics that are missing in this list? If so, I welcome your comments below.

References:

Ayyagari, M., Beck, T., & Demirguc-Kunt, ,. A. (2003, August). Small and medium-size enterprises: A new Database.

European Commission. (2010-c, Feb 17). European Commissiion, Enterprise and Industry. Retrieved April 11, 2010, from European Commission: http://ec.europa.eu/enterprise/policies/sme/facts-figures-analysis/sme-definition/index_en.htm

Hillary, R. (2000). Small and Medium-Sized Enterprises and the Environment: Business Imperatives. Sheffield, UK: Greenleaf Publishing Ltd.

Nooteboom, B. (1988). The Facts about Small Business and the Real Values of Its ‘Life World’: A Social Philosophical Interpretation of This Sector of the Modern Economy. American Journal of Economics and Sociology , 47 ( no. 3), 299-314.

Ricketts Gaskill, L., Van Auken, H. E., & Manning, R. A. (1993). A factor analyic study of the perceived causes of small business failure. Journal of Smail Business Management , Vol. 31 (Issue 4), 18-31.

Romero-Martinez, A. M., Ortiz-de-Urbina-Cria, M., & Soriano, D. R. (2010). Evaluating European Union support for innovation in Spanish small and medium enterprises. Service Industries Journal , 30 (no. 5), 671-683.

Storey, D. (2000). Small business: critical perspectives on business and management. Routledge.

Welsh, J. A., & White, J. F. (1981, July-August). A small business is not a little big business. Harvard Business Review .