March 4, 2019
Much has been written in recent years about a discernible shift in focus among business leaders and policymakers toward achieving SME growth. In particular, there has been a shift in focus away from how entrepreneurs start and run businesses to how they can grow them over time.
Some of the most successful SMEs grow rapidly over a short period of time. These are commonly referred to as high-growth firms (HGFs) or ‘scale-ups’, defined by the OECD as businesses with an average annual growth in employees or turnover greater than 20 percent per annum over a three year period.
The ‘productivity puzzle’
Despite only making up a small proportion of the global SME population, such high growth SMEs have been identified as a crucial source of job creation, and are particularly adept at boosting productivity by spreading new technological innovation. Such outcomes have been used to explain why high growth SMEs often experience higher productivity than other businesses.
This change has partly come about in response to the persistently flat productivity which many major economies have experienced since the 2007-08 global financial crisis. Even today, SMEs contribute significantly less to economic growth in aggregate terms than other sections of the economy, largely due to their low productivity.
ACCA’s research Scale-up success: What do SMEs need to supercharge their growth? therefore sought to understand how all SMEs interact and experience growth. In particular, we were interested to understand the differences between those businesses with moderate and high growth ambitions. This included running a global survey and interview program with 1,300 entrepreneurs globally.
A framework for growth
This research led to the development of a framework tool to help more SMEs scale-up successfully. The framework stressed the importance of SMEs producing a growth strategy from the outset of their business journey and developing a scalable managerial structure.
Many early stage SMEs often lack the resources to undertake a strategic approach toward growth. As such, the framework also highlights the importance of utilizing external advice and networks. Equally, creating a governance framework that increases the chances of businesses being able to access finance is another crucial dimension.
The research identified that the most important ingredient for scaling up successfully is the adoption of a growth mindset. While this may seem obvious, the importance of businesses articulating a growth mindset through a defined vision and purpose was an integral aspect of scale-up success. Business leaders need to be effective in instilling a growth culture across all levels of their organizations in order to overcome a wide range of barriers to growth that SMEs regularly encounter.
A growth strategy for scale-up
ACCA was then able to develop the following suite of recommendations as to how SMEs can look to maximize their long-term growth potential:
1. Define growth mindset – When staff share and are committed to the organization’s vision and strategy, they are more likely to see the future of the organization as their own. A growth mindset can be further supported by developing a strategy, vision and targets, which allow the business’s staff to see the future of the organization as their own.
2. Purpose and vision should underpin growth strategy – The growth potential of many SMEs is hindered by a failure to define the business’s long-term value. Being able to articulate this helps an SME to develop a more effective strategy for enabling growth.
3. Establish a governance framework to help build resilience – Growth prospects can be supported if SMEs build a governance structure from the outset of their business journey. This can be used to support the strategic direction of the organization and to provide it with greater flexibility and resilience as it grows.
4. Prioritize the management approach as you grow – Business founders who seek to retain control over all aspects of their business may run into trouble as complexity increases. It is therefore important to establish a management team that encompasses the broader skills and experience required to help grow the organization.
5. Align finance with your growth strategy – It is vital that the finance function of SMEs seeks to understand the organization’s wider goals and looks to add value to these activities. The appointment of a Chief Financial Officer or Finance Director can support this process, particularly in providing more informed and strategic advice to the management team.
6. Adopt new technologies and utilize the right data – Today, management teams in SMEs are better supported by technologies that help them to standardize operations and processes. This is important and requires management teams to address ever greater complexity as these activities increase in volume due to a growing business. Despite such technologies requiring SMEs to upskill and recruit staff in order to use them, it can often mitigate costs through the subsequent productivity gains that are generated.
7. Use external advice to help grow – With limited resources, every SME will encounter operational challenges during periods of growth. However, SMEs can help improve their resilience by developing relationships with relevant sources of external advice.
8. Build up an external funding network – Growth businesses are continually looking for opportunities to profile their business in order to attract investors and lenders. In building the right network, businesses looking to scale-up may increase access to external funding opportunities.
It is important to note there is no rulebook to growth itself, which can come at any stage of a business’s lifecycle. However, as the research demonstrates, there are a number of practical steps entrepreneurs can take in the strategic development of their business in order to maximize their best chances of achieving it.