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1© The Economist Intelligence Unit Limited 2013

Smart SMBs: Fine-tuning the engines of growth


To achieve growth, economies the world over rely on small businesses to create jobs, increase competition and spur innovation. In return, these small businesses often look to governments for

assistance, from cutting bureaucratic red tape to providing fi nancial incentives such as tax breaks. Yet this 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 fi nd regulation to be a top business concern, on a par with shortages of fi nancing and behind only the weak economy, according to a survey conducted by the EIU for this paper. With growth prospects and regulation unlikely to improve overnight, smart SMBs are targeting the improvements they can make to their own businesses.

Key FindingsTo assess how SMBs are focusing on growth through smarter internal operations, The Economist Intelligence Unit surveyed owners and senior managers of these businesses from across the globe*.

The main fi ndings to emerge from the research are as follows:

Smarter internal operations are key to growth

New businesses have a high chance of failure within the fi rst fi ve years, so revenue growth is understandably of utmost importance to the owners and senior managers of SMBs. Next to revenue growth, the strategic focus of SMBs is now fi rmly on improvements in operating effi ciency and attracting and retaining talent. Optimising existing company operations in this way is seen as a higher priority than other strategic objectives like entering new markets or developing new products.

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 width

Revenue growth

Improve operatingefficiency

Attracting andretaining talent

Developing new productsor services

Entering new markets ordistribution channels

Chart 1

40%

49%

53%

78%

56%

Source: The Economist Intelligence Unit.

* The survey of 118 SMBs, each with no more than 250 employees, took place in February 2013. A full breakdown of the survey results and the demo-graphics is available in the appendix.

2 © The Economist Intelligence Unit Limited 2013


© The Economist Intelligence Unit Limited 2013

The majority of SMBs, moreover, have a complementary view of pursuing revenue growth and making improvements to the way the company operates. Over the next 12 months, expanding the business is likely to be the strongest reason for driving effi ciency improvements, according to more than half (55%) of survey respondents, whereas only a quarter of respondents (24%) are motivated by reducing costs. Even fewer respondents are motivated by reducing complexity (12%) or by pressure on profi t margins (5%). This striving for smarter growth is borne out in the concrete steps that SMBs are taking to improve internal operations. The top effi ciency initiative, being undertaken by more than half (58%) of respondents 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 reducing headcounts, working hours or expanding temporary workforces.

SMBs should embrace new technologies

Technology is a crucial component of this smarter growth strategy. As SMBs invest in staff training and IT upgrades, the overwhelming majority are seeing the benefi ts of technology: over nine in ten (91%) of SMBs surveyed say they have benefi ted from tech-driven improvements to the business in the past 12 months. 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 greatest impact on their business in the next 12 months. This should come as little surprise. These advances have enormous potential to help businesses be more effi cient, by streamlining processes, enabling fl exible working and reducing fi xed capital costs. Exploiting mobile technologies to the full is critical for the majority of SMBs training employees to work more fl exibly.

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 technology

Lack of technology skills or know-how is deemed the second biggest barrier toefficiency improvements, only behind a resistance to change

Internet speed and connectivity is less of an obstacle to efficiency improvementsthan restrictive regulation

A minority of SMBs believe technology is too expensive and changes too fast

Strongest drivers of efficiency improvements over next 12 months (% of respondents)

Expanding the business

Increasing profitability

Raising employee productivity

Reducing costs

Improving competitiveness 15%

24%

24%

55%

33%


Chart 2



Meanwhile, cloud computing is particularly advantageous for start-ups and high-growth small fi rms, because these businesses have less capital than established companies to tie-up in expensive servers or offi ce space, but a greater need for the fl exibility to scale-up operations during periods of high growth. The potential that these technologies have to level the playing fi eld between smaller and larger companies is refl ected in the fact that only a third of respondents now see the cost of new technology as too steep. But despite these clear benefi ts and greater accessibility, many SMBs are still taking a cautious approach to new technology. For the time being, more companies are upgrading existing hardware or software than investing in new technology. Such caution ultimately comes down to resources. Smaller businesses do not have the IT capabilities of larger enterprises, and many start-ups are unlikely to have a dedicated IT specialist at all. The use of cloud-based services should help in this regard, for the reasons set out above. But owners and managers of SMBs also recognise the role that IT specialists have to play in small businesses: a lack of technology skills or know-how is rated the second biggest obstacle to improving operations.

Managers must take the lead on change

Across the world, SMBs are keenly aware they need to make improvements to the way their businesses operate. An overwhelming 90% of respondents say their companies can do more to increase effi ciency. In addition, over half are both unhappy with effi ciency at their company and struggle to tackle ineffi ciencies.

But aside from taking the focus off growth, there are few compelling reasons for not addressing these issues. For instance, only 15% of SMBs surveyed believe that all obvious improvements to the business have already been targeted. A similarly low number claim to be put off by the perceived high cost of effi ciency measures.

At the individual company level, what seems to be holding businesses back more than anything is a resistance to change. This is cited by SMBs as the top internal barrier to launching effi ciency initiatives, ahead of the aforementioned IT skills gap and ahead of taking the focus of growth (as well as being on a par with the percentage of respondents citing the weak economy as their top external barrier to making these improvements – see chart 4).

A sizeable proportion of senior managers are clearly aware of the leadership role they must play in overcoming this resistance to change. To succeed with initiatives aimed at improving the business, three quarters of these senior respondents believe it is vital to get their buy in. What is more, a lack of urgency or initiative 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 are much less likely to see resistance to change as an obstacle than other senior executives. This suggests

Chart 3

Say their company canimprove efficiency

Believe efficiency isimportant but growthis a priority

Are unhappy withtheir company'sefficiency

Offer financialincentives toemployeesto findefficiencies

Reckon efficiencyinitiatives must betop-down to besuccessful

Worry that competitors are improving efficiency faster than them


How owners and senior managers view efficiency (% of respondents)

90% 77% 76% 52% 42% 29%




that some owners may be part of the problem – and not just the solution. Therefore, the fi rst hurdle for some businesses may well be to convince the ultimate decision-makers of the need for them to sponsor organisational improvement.

New businesses should invest in smart growth early

Given the focus on smarter growth, it is striking how few companies perceive there to be a competitive advantage to be gained from pursuing these organisational improvements. As it stands, less than a third of respondents (29%) are worried their competitors are improving effi ciency faster than they are. In smaller businesses, with under $1m in assets, this concern is even slighter, with only 17% of respondents worried about the competitive advantage effi ciency gives competitors. Yet such complacency can cause longer term damage to the business. Putting off effi ciency improvements risks the problems becoming embedded in the business as 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. Almost three in fi ve (59%) of the SMBs falling into this group admit to having diffi culty tackling ineffi ciencies compared with 46% of younger companies. Together with tackling ineffi ciencies, the older companies in the survey are more likely to have faced challenges to the bottom line: while most SMBs are profi table, four in fi ve of those that have seen profi ts decline or become loss-making in the last 12 months have been in business for over 10 years. Operational ineffi ciency is likely to be one of many potential factors contributing to this decreased profi tability, so this should provide management with added motivation to pursue smarter growth from the outset.

Inside the company

Chart 4


Top 5 barriers to improving company efficiency (% of respondents)

Resistance to change

Lack of technology skills/know-how

Lack of urgency/initiativefrom leadership

Risk of detracting fromgrowing business

Weak culture of efficiency

Outside the company

Weak economy

Lack of availablefinancing

Restrictive regulatoryframework

Shortage of talent

Fixed costs ofkey inputs 22%

27%

31%

45%

32%

27%

27%

27%

44%

30%



ConclusionThe majority of SMBs in our survey are pursuing smarter growth, optimising working practices and investing in technology. Yet there remains an element of caution here, caused in part by a lack of technology know-how. This skills gap is important to address. Technology is widely identifi ed as an important effi ciency driver for SMBs in recent years, so companies should embrace newer developments like the cloud and mobile working, which they expect to have a big impact in the near future. Next year, the EIU forecasts global GDP growth to rise to around 4%, where it is expected to remain until at least 2017. As the global economy returns to stability and greater predictability, companies struggling with operational diffi culties will fi nd they have fewer excuses for disappointing results. To negate the threat of creeping ineffi ciency eating into profi tability, the owners and managers of SMBs should tackle institutionalised resistance to change as well as their own complacency about what their competitors are doing around effi ciency. New businesses with absolute focus on revenue growth should take heed of these lessons and build effi ciency into their businesses from the very start.

Smarter internal operations are key to growth

SMBs should embrace technology

Managers must take the lead on change

New businesses should invest in smart growth early

Key fi ndings




The Economist Intelligence Unit surveyed 118 owners and senior executives of SMBs from North America, Europe and Asia-Pacif ic. The survey took place in February 2013 and our

thanks go to all those who took part. For the purposes of the survey, we defined eff iciency to mean conducting operations, processes or tasks with minimum time, cost, wastage or effort. Please note that not all answers add up to 100%, either owing to rounding or because respondents were able to provide multiple answers to some questions.

Appendix

Over 20% increase

10% to 20% increase

5% to 10% increase

1% to 5% increase

No change

Decrease

Went from profit to loss in the past 12 months

Year-on-year loss widened

Don’t know

16

23

12

15

20

9

4

1

1

(% respondents)How has your company’s profitability changed over the past 12 months?

Agree Disagree

My company often struggles with tackling inefficiencies

We can definitely do more to increase our efficiency

I'm worried that our competitors are improving their efficiency faster than we are

Efficiency is important but growth is our priority

I am happy with efficiency at my company

47

10

71

23

52

53

90

29

77

48

(% respondents)Do you agree or disagree with the following statements? Select one column in each row.



Senior management

Operations

Sales & Marketing

Support functions (eg, HR, legal, finance)

Distribution

IT

Supply chain

3010

238

1825

1220

710

617

410

Most efficient Least efficient(% respondents)Which parts of your business are the most and least efficient?

Technology has saved time at my company

Technology has optimised effort at my company

Technology has reduced costs at my company

Technology has minimised waste at my company

Technology has achieved none of the above at my company

33

28

23

7

9

(% 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 business

Increasing profitability

Reducing costs

Raising employee productivity

Improving competitiveness

Reducing complexity

Adding new assets or operations to existing business

Pressure on profit margins

Making company more attractive to a buy out/merger

Returning value to shareholders/owners

Optimising environmental impact/carbon footprint

55

33

24

24

15

12

11

5

4

4

3

(% 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.




1 Low priority 2 3 4 5 High priority

Improve operating efficiency of our business

Revenue growth

Developing new products or services

Business acquisition/merger

Entering new markets/opening new distribution channels

Attracting and retaining talented staff/employees

Raising fresh capital (equity, debt)

5

2 7

12

26302117

512713

20292118

715111354

2119281716

2924251012

914281434

(% 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 practices

Update existing IT and technology (hardware or software)

Change suppliers/renegotiate supply contracts

Invest in new IT and technology not previously used (hardware or software)

Move to or increased web-based selling

Streamline company structure (including selling assets and consolidating functions)

Shift to greater automation, machinery, robotics

Employee redundancies/reduce working hours/increase temporary workforce

Relocate production/services to lower cost location/outsource company functions to third party (eg, managed service provider)

58

57

42

41

33

31

18

14

14

(% 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 networking

Business continuity

Remote management (eg, managed service provider)

Video conferencing /telepresence

Collaboration software & tools

Bring your own device (eg, employees using own smartphone for work)

Virtualisation

Other, please specify

Don't know

35

34

24

23

17

12

12

11

5

4

3

1

(% 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.



Resistance to change

Lack of technology skills or know-how

Weak culture of efficiency

Lack of urgency/initiative from leadership

Risk of detracting attention from growing business

Reluctance to pursue efficiencies beyond cost-cutting

Not the right time/stage of company's development

High cost of efficiency measures

Already pursued all obvious efficiencies


There are no meaningful internal constraints

44

30

27

27

27

18

17

17

15

8

11

(% respondents)

Which if any of the following internal factors currently limit your company's ability to undertake efficiency initiatives?Select all that apply.

Weak economy

Lack of available financing

Restrictive regulatory framework (eg, employment laws/environmental laws)

Shortage of talent

Fixed costs of key inputs

Poor quality of communications infrastructure (internet speed, connection)

Political uncertainty (eg, tax treatment, legislative deadlock)

Influence of labour unions

Lack of transport infrastructure (roads, airports, seaports)


There are no meaningful external constraints

45

32

21

27

22

16

14

8

6

4

14

(% respondents)

Which if any of the following external factors limit your company's ability to undertake efficiency initiatives?Select all that apply.

Strongly Agree Agree Neutral Disagree Strongly disagree

A culture of efficiency runs through my company

My company has made good use of the changing global economic climate to become more efficient

Efficiency initiatives must be driven from the top down to be a success

Employees at my company are financially incentivised to find efficiencies

Changing existing IT systems could eliminate delays and disruption at my company

New technology is too expensive

New technology developments change too fast

6

7

4

721292814

6

1628409

23243314

4

1193541

34292410

6

14214118

16333312

(% respondents)To what extent do you agree or disagree with the following statements? Select one column in each row.




United States of America

United Kingdom

Canada

India

Germany

Netherlands

Spain

Singapore

Switzerland

Australia

Belgium

China

Portugal

Sweden

Denmark

Indonesia

Malaysia

New Zealand

Poland

Russia

Thailand

Turkey

Vietnam

22

20

9

8

5

5

5

4

1

1

1

1

1

1

1

1

4

2

2

2

2

2

1

(% respondents)Where are you personally located?

Western Europe

North America

Asia-Pacific

Eastern Europe

48

31

20

1

(% respondents)In which region are you personally located?



Less than 250,000 dollars

250,000 to 499,999 dollars

500,000 to 999,999 dollars

1m to 9.99m dollars

10m to 49.9m dollars

35

10

7

35

12

(% 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 dollars

1 to 9

10 to 49

50 to 99

100 to 149

150 to 199

200 to 249

47

29

12

6

3

4

(% respondents)How many people does your company currently employ full-time (including yourself)?

Owner/manager/partner

Chief executive officer (if different)

Chief financial officer (if different)

Other C-level (if different)

Manager (non C-level)

59

12

8

10

12

(% respondents)What is your job title?



Technology

Financial services

Professional services

Manufacturing

Media & entertainment

Agriculture & agribusiness

Biotechnology

Logistics & distribution

Pharmaceuticals

Automotive

Healthcare/provider care

Real estate

Retail & wholesale

Consumer goods:

Education

Mining & metals (including coal, steel and aluminium)

Power & utilities

Aerospace & defence

Construction

Diversified industrial products

Oil & gas

Telecommunications

19

16

15

7

7

4

4

4

4

3

3

3

2

2

1

1

1

1

1

3

2

2

(% respondents)What is the primary industry your company is in?

Under 1 year

1 to 2 years

3 to 5 years

6 to 10 years

Over 10 years

1

4

21

20

54

(% respondents)How many years has your company been in business?

While every effort has been taken to verify the accuracy of this information, neither The Economist Intelligence Unit Ltd. nor the sponsor of this report can accept any responsibility or liability for reliance by any person on this article or any of the information, opinions or conclusions set out in this article.

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