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The impact of globalisation on the management of British small and medium size enterprises (SMEs)

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Abstract 

The intersection between globalisation and local entrepreneurship, defined by specialists as “international entrepreneurship”, has started to receive more and more attention over the last two decades (Mathews and Zander, 2007, p. 395). In this era of globalisation, a great number of markets have become increasingly competitive and international, even though the situation is more distinct for small and medium sized enterprises (SMEs) than for multinational corporations (MNCs). This approach intends to study the effect of globalisation on small and medium enterprises (SMEs) in the UK, by addressing the current status of SMEs management in the local market and to identify, at the same time, the most appropriate strategies that SMEs could develop in order to successfully manage competition in a more globalised economy. 

Aims and objectives 

The main goal of this approach is to critically investigate the impact of globalisation on the management of UK small and medium sized enterprises (SMEs).

In order to achieve this main objective, an assessment of various theories investigating the concept of globalisation and its impact on small and medium sized enterprises together with a quantitative analysis of a number of survey questionnaires will be performed. 

Therefore, the resulting objectives for this approach are: 

  • Investigate and research the greatest threats that globalisation has brought for SMEs in the UK;
  • Critically analyse the financial evolution of the UK SMEs in the past decade, correlated with different management innovation strategies applied to the context of globalisation;
  • Critically assess different recommended innovation strategies for an appropriate management of SMEs in a globalised economy;
  • Examine and review the strengths and weaknesses of  the UK SMEs in the context of globalisation;
  • Gather information via online survey questionnaires from a wide number of SMEs and present it in a report format, critically analysing it;
  • Make recommendations about a number of management strategies that small and medium enterprises should take into account when creating a business plan in the context of globalisation;
  • Mention and observe potential improved methodologies for further studies and researches. 

Introduction

Small and medium sized enterprises (SMEs) play a significant role in the global economy and have a big impact on incomes, outputs and the employment sector.  However, many reductions have occurred concerning the demand for products and services together with a shortage of loans provided by banks and other financial organisations; all of these phenomena appeared due to the recent world financial crisis, which resulted in a much tougher environment for SMEs (House of Commons Welsh Affairs Committee, 2009). Since the Great Depression and the Second World War, the five years since the financial crisis began are considered to be the biggest challenge the UK economy has faced. The latest report of the World Economic Forum (WEF) stated that the main challenge for businesses, governments and individuals was the fragility and, at the same time, the flexibility of the economy. It doesn’t come as a surprise that small and medium-sized businesses in the UK, such as start-up manufacturers, sole traders, hair and beauty salons or local pubs are struggling with financial problems (WEF, 2014).

On the other hand small businesses all over the UK are improving and investing in a long-lasting platform to provide a competitive edge and resilience in the context of globalisation. “Many are moving to a more variable cost business model, providing financial flexibility during times of volatility, tight margins and rising operating costs.” (Mathews and Zander, 2009, p. 388)

More research needs to be undertaken in the field of UK SMEs concerning the impact of an increased level of globalisation on entrepreneurship. The change from an industrial model to a commercial model of production was led by globalisation (Kropp, Lindsay and Shoham, 2008). Furthermore, specialists consider the globalisation phenomenon as being “a level shock in the supply of unskilled labour to the world economy, a decrease in the level of political risk associated with foreign direct investments” (Kropp, Lindsay and Shoham, 2008, p. 103). This study underlines the basic building blocks needed for a successful global economic strategy and it has to be taken into consideration that the assumptions and recommendations will be of help in the current environment if they are properly observed by all political parties, including central and local government and the UK Government (Great Britain Parliament, 2009). 

Literature review 

Globalisation today 

In recent times, the economy of the UK needs to be seen from a global point of view in order to observe all the opportunities and threats that may occur. Nowadays, national economies are working together and they are no longer independent units working separately. Many of the previous management strategies for SMEs were made based upon the particular economic situation in the UK at the time (Great Britain Parliament, 2009). Since 2007, specialists in the field reported an increasing number of migrant workers coming to the UK. Since then, the difficulties of globalisation have become clearer from the global economic overview. Now that economies are interdependent, the problems in the economic system can spread more quickly from one country to another. Without a doubt, globalisation is an observable fact in the SMEs sector also. Experts consider that the time for the UK SMEs to maximise the economic return as an outcome of global trade has come (Jansson and Sandberg, 2008). If the UK SMEs desire to remain feasible in a declining economic environment, they must acknowledge their local strengths and the proficiency of their work force. In the UK, globalisation has been perceived as a negative influence that causes loss of jobs and started the decline in the industrial sector, which had long sustained the UK economy. In this case, it is a certainty that in the UK, globalisation represents a new and different form of economic activity. Now, it is not possible to sustain an economy based on the “production of mass market commodities which can be carried out more cheaply elsewhere” (House of Commons of Welsh Affairs Committee, 2009, p. 98). As an alternative, the UK SMEs must improve the value chain, making the best out of their specialist skills in order to provide top quality goods and premium services which cannot be sourced outside of the country. This development is challenging and the UK government has the responsibility to ensure that the UK SMEs management is organised so it can face the demands of the global marketplace (University of Surrey, 2012).

On a wider perspective, as the economy recuperates and markets develop, the rise in global trade will generate increased prosperity. To take complete advantage of the globalisation phenomenon, the UK SMEs management should exploit its strongest local values and identities. Research on this matter suggests that adaptation to globalisation should not involve adopting a “neutral brand identity” (The Economist Intelligent Unit, 2012, p. 14). Furthermore, the local work power will provide the basis from which to reach the world. SMEs have many attributes on which they can rely and use, such as expertise in high technology, tourism, hospitality food and drink, creative industries and broadcasting (Harms, Kraus and Schwartz, 2009).

Nowadays, the vast majority of the business stock is made up by small and medium sized businesses. Even if small and medium sized businesses may find the prospect of entering the global marketplace a bit daunting, they could be a strong asset to the SMEs prosperity by collaborating with one another and gaining the right support by joining forces. Even though globalisation presents a constant economic risk, there are a number of critical areas that can be tackled, the main purpose being to minimise the effects of the global economic downturn (Halabi and Lussier, 2010). To be able to compete with countries around the world, SMEs management must have the fundamental literacy, numeracy and interpersonal skills required for global trade, and as the pace of globalisation increases and economic demands modify more quickly, these will shape the ground work for lifelong learning as it becomes more and more important (University of Surrey, 2012).

Development and training of employees is also considered to be increasingly important and a powerful tool for dealing with skill shortages; specialists recommend that it should be recognised as a crucial response to the growth in competition as a result of globalisation and increased customer expectations (Great Britain Parliament, 2009). The UK government underlined, in the 1998 White Paper, their intention to develop a “knowledge driven economy” in which skills, knowledge and experience will become essential to the countries continuous economic success. “Successful modern economies are built on the abilities of their people. People are at the very heart of the knowledge driven economy.  Their knowledge and skills are critical to the success of British business. People are the ultimate source of new ideas. In a fast moving world economy, skills must be continually upgraded or our competitiveness will decline.” (DTI, 1998, p. 28, as stated in the House of Commons of Welsh Affairs Committee report, 2009, p. 8). 

The role of the SMEs in driving economic expansion is taken into consideration since the government’s proposal has so far concentrated on taking care of “entrepreneurship” and “innovation” in businesses. In the last couple of years the foundation of a large group of government-led institutions and initiatives intended to look at management skill deficits and to promote small and medium sized businesses. Considering the actual environment conditions, it is a real problem that most of the training and support offered didn’t reach those who needed it the most. The British Chambers of Commerce examination in 1998 stated that “existing skills deficiencies in sales, management and administrative staff were adversely affecting competitiveness in almost one-third of small firms” (House of Commons of Welsh Affairs Committee report, 2009, p. 10).  More recently, the Federation of Small Businesses survey of 22,000 British SMEs revealed that “only 9% of respondents stated that they were satisfied or very satisfied (1%) with the usefulness of government funded business support services, ‘whilst ‘49% were dissatisfied with the lack of suitable labour” (Edinburgh Group, 2012, p.  27). The results show that the current plan is failing in regards of the requirements of small businesses in a large way and could be ameliorated if the context of globalisation was properly understood. 

SMEs’ role in the UK Economy 

According to specialists in the field, there are wide ranges of definitions used in practice for SMEs. However, the Wiltshire Committee indicates a definition which is quite representative for the statute and the characteristics of SMEs in the UK: “…is a business in which one or two persons are required to make all the important management decisions such as finance, accounting, personnel, purchasing, processing or servicing, marketing, selling, etc., without the aid of internal specialists and with specific knowledge in only one or two functional areas” (Wiltshire Inquiry, 1974, as stated in the House of Commons of Welsh Affairs Committee report, 2009, p. 12 ). 

SMEs represent a very significant part of the British economy, because 99% of all the UK enterprises are small or medium sized. These ones provide “59.1% of private sector jobs and are responsible for 48.7% of private sector turnover” (Snyder, 2012, as stated in Smith, 2012, p. 1). Consequently, the performance of SMEs has a critical impact on the national economy of the UK and “in the current economic downturn, growth is most likely to come from SMEs” (Snyder, 2012, as stated by the University of Surrey, 2012, p. 1). 

The past five years of volatility and economic pressure have forced the UK SMEs management to search and implement the most important shift and adaptation in management behaviour in the past few decades (Great Britain Parliament, 2009). 

SMEs had to become stronger through deleveraging and diversification, “in addition to more operationally resilient and better prepared to manage economic challenges and the new risk landscape” (The Economist Intelligent Unit, 2012, p. 4). On the other hand, SMEs management became more risk-averse and cautious across the board, in comparison with five years ago, when determining specialists in the field were concerned about the fact that the SMEs sector would not be the engine of the UK economic growth anymore. The fact that the economy will never achieve the same level of stability encountered prior to the financial crisis from 2008 is more than clear. Therefore, even though nowadays, the SMEs managers are better prepared to deal with the problems raised by the new economic reality, they are still making great efforts “as operating-cost fundamentals are squeezing business margins” (Coleman, 2012, as stated in the Economist Intelligent Unit, 2012, p. 3). Low-performing SMEs appear to be “undercutting themselves” by adopting short-term strategies and by a lack of global perspective, decreasing their long-term survival. Evidences show that SME managers still don’t properly understand the significance of long-term global market trends, this lack of vision being the cause of their economic stagnation (Omar and Fraser, 2010). 

However, SMEs management appear to be quite optimistic towards the future; data collected by the Economist Intelligence Unit who surveyed over 500 UK SMEs, show that about 70% of the participants felt secure with the economic stability of their company. It appears that the financial crisis from 2008, one of the most dramatic consequences of the globalisation phenomenon, forced the UK managers of SMEs to adopt the most significant “management-behaviour shift in a generation”, implementing a more strategic and adaptable approach to the new economic context, creating long-term strategies based on global trends, and not only on local or national dynamics and adopting long-term financial planning (University of Surrey, 2012). 

Global competitiveness and management approaches for changing times in the SME sector 

Research approaches on competitiveness tended to focus mainly on large firms, while investigations on small and medium sized enterprises (SMEs) competitiveness have been quite limited, especially in the context of a globalised economy. The new economic context created after the economic crisis from 2008 proved the fact that the globalisation phenomenon created new challenges in the market place, impacting the validity of the traditional SMEs business strategies of tackling competitiveness (DTI, 2003). 

Competitiveness has increased dramatically over the last few years and, consequently, the need for new business approaches has emerged. In a globalised economy, quality standards, communication and information technologies, clustering and networking, innovation, internalisation and intellectual property management have all acquired new dimensions. Consequently, SMEs managers had to find new strategies to sustain their businesses on the local market and to enhance them on the global one, at the same time. Nevertheless, even though these aspects become crucial for the survival of SMEs in a globalised market, there is still insufficient knowledge on behalf of the UK SMEs management. On the other hand, further awareness of the advantages and risks brought by the globalisation factors would help managers and policy makers to create and implement appropriate and adaptable measures to improve the performance of SMEs. This understanding is particularly significant for the competitiveness of the UK SMEs and of the “European which account for 98.8% from all enterprises, two-thirds of employment, and 58.4 of gross value added (GVA) in the private sector” (Rhodes, 2012, p. 3). The minimal recovery registered in 2010 at a European level proved that the “innovative capacity of an economy is intrinsically linked to a Member State’s SMEs sector performance” (Edinburgh Group, 2012, p. 17). 

However, the competitive potential of the UK SMEs is still suffering from lack of sufficient access to finance, costly procedures for “intellectual property protection”, staff training means and small client portfolios (Blackburn and Wainwright, 2010).  Competitiveness represents a multidimensional leverage, which refers to a combination of local and global factors determining a SMEs performance in the actual economic context. The EC (European Commission)  defines the concept of competitiveness between SMEs as an “ability of firms to sustain and gain in market share through their cost and pricing policy, innovative use of production factors and novelties in product characteristics” (EC, Competitiveness proofing, 2013). At the SMEs level, “technology development and innovation (of business products and /or processes) are of primary importance for both the cost and quality competitiveness of products” (EC, Competitiveness proofing, 2013). 

According to experts in the field, SMEs management has to operate properly with the following factors, in order to achieve new performance levels in the context of globalisation:

  • “Assessment of industry and firm performance” in a local, national and global context;
  • “Identification of key factors affecting performance in vertical trading and horizontal competitive relationships”;
  • “Determination of how changes in the business environment may affect performance” (Moekotte and Freye, 2008, p. 49). 

However, the majority of business models indicated by specialists were applied during times of economic growth and did not consider possible changes as a result of a financial crisis. Analogously to the situation of large enterprises, the innovation-based factors are of great significance when trying to achieve sustainable advantages in a competitive global market and, unfortunately, the researchers did not relate these factors with the management of SMEs before the globalisation phenomenon took hold. Nowadays, these aspects are highly important for SMEs and managers in the field have to upgrade and adapt their strategies and approaches in order to perform in this new market, because their SMEs results depend “both on basic and globalisation-specific factors” (Moekotte and Freye, 2008, p. 49). 

Therefore, success in such challenging times depends on the capability of managers to adapt to the new market conditions and on their innovative capability. Accordingly to experts in the field, successful SMEs managers in a globalising economy, have to:

  • Find and utilise more than one finance source to sustain the business;
  • Proactively supervise the liquidities and cash-flows;
  • Consider “direct referrals and search engine optimisation as central to their success” (Surrey Business School, 2012, p. 2).
  • Always find innovative ways of promoting the firm to the market and, at the same time, encourage the SMEs employees to think and act innovatively;
  • Invest in personal and employee training in order to gain competitive advantages;
  • Seek external financial advice;
  • Always find ways to adapt to challenging market conditions (Surrey Business School, 2012).

However, the success of these theoretical frameworks depend on a manager’s ability to visualise their firm in a globalised economy and on their capacity to adapt to different changing situations in a permanently challenging market place. 

Methodology

This chapter will present the research methodology of this approach, together with the clarification of the research philosophy behind it.

Research Philosophy

There are a great amount of epistemologies attempting to explain the way in which individuals interpret and perceive phenomena and events around them. Research frameworks most commonly use positivist and the interpretivist philosophy. The positivist philosophy concerns “deductive reasoning” correlated with quantitative statistical data analysis, giving the researcher the opportunity to consider one or more hypothesis proved or disapproved during the study (Bryman and Bell, 2007, p. 134). The interpretivist one “deals more with inductive reasoning” and the researcher’s role is only to understand a phenomenon in terms of occurrence and evolution (Bryman and Bell, 2007, p. 135). This study will be based on the positivist epistemology.

Research approach

Bryman and Bell (2007) talk about three principal methodologies of research, more precisely qualitative, quantitative and mixed. Quantitative methodologies refer to data collection from a large sample of the representative population, statistically and critically analysed afterwards. Qualitative researches involve the use of different non-statistical methodologies (Interviews, group observation) with the purpose of collecting data in order to better understand a particular phenomenon. However, many researchers prefer to mix these methods in order to obtain more representative results on a particular subject (Creswell, 2003). This study will make use of the quantitative methodology in order to achieve the aforementioned aims and objectives.

Desk based research will also be used and presented within the literature review chapter. A desk based research refers to the gathering and review of information that is already available in books, articles, journals, studies and previous researches, usually in traditional libraries, on-line libraries or on the internet. (Bryman and Bell, 2007). The desk based approach will be utilised in this scenario because the analysis of already processed and investigated data from experts in the field will offer this study a more holistic vision upon the effects of globalisation on the development and evolution of the UK SMEs. 

Data collection method

One of the most utilised data collection methodologies is represented by the questionnaire. Even though questionnaires are not as flexible as interviews, nor do they allow a deeper insight to researchers, they are less resource consuming (time, money, etc.) and give the opportunity to access a larger amount of the sample population (Bryman and Bell, 2007). The advantage of gathering large amounts of raw data in a very efficient and easy manner gives the researcher the opportunity to reach more representative conclusions rather than that obtained when interviewing a small group of individuals. This approach will utilise an on-line questionnaire addressed to the UK SMEs managers in order to understand the impact of globalisation on the development and evolution of SMEs.

All collected data will be operated and analysed using Statistical Package for Social Sciences (SPSS) version (15) software.

Sampling and research population

As aforementioned, the survey online questionnaire will be intended to be answered by SMEs managers from the UK. All collected data will be correlated with the desk-based research represented by the literature review.

Ethics

Having in regard that this piece of study will be based mainly on primary data interpretation performed via online questionnaires, all collected information together with the identity of participants will remain confidential.

Findings and Results

This chapter will provide the statistical and critical analysis of the obtained results. The analysis will be conducted in SPSS, using statistical instruments and tools. The presentation will also be conducted through frequency tables using the percentage calculation.

Conclusion

This chapter will provide a summary of the findings that have been achieved during this piece of research. The results will also be correlated with the desk based findings and with some other previous empirical researches and theoretical papers. Final conclusions will be drawn from the discussion and potential recommendations will be indicated.

References:

Blackburn, R., Wainwright, T. (2010). The Year Ahead: A View from Britain’s Small Businesses. Project Report, London, UK: Barclays Bank PLC. [on line]  Available at: http://eprints.kingston.ac.uk/ 17522/1/Blackburn-R-17522.pdf.  [Accessed the 13th of March, 2013] 

Bryman and Bell, 2007. Business Research Methods. Oxford University Press.

Creswell, J., 2003. Research Design: Qualitative, Quantitative, and Mixed Methods Approaches. SAGE.

DTI Innovation Report, 2003. Competing in the Global Economy: the innovation challenge.  [on line] Available at: http://www.innovation.lv/ino2/publications/publications_anglija/innovation-report-full.pdf [Accessed the 13th of March, 2013]

EC. Competitiveness proofing. 2013. [on line] Available at:  http://ec.europa.eu/enterprise/policies/smart-regulation/impact-assessment/competitiviness-proofing/index_en.htm [Accessed the 13th of March, 2013]

The Economist Intelligent Unit, 2012. Adapting in tough times: The Growing Resilience of UK SMEs. Zurich, 2012.

Edinburgh Group Research, 2012. Growing the Global Economy through SMEs. E.G., 2012.

Great Britain. Parliament: House of Commons: Treasury Committee, 2009. The Stationery Office, 2009.

Halabi, C., Lussier, R. (2010). A Model for Predicting Small Firm Performance: Increasing the Probability of Entrepreneurial Success. Universidad Diego Portales, Working Paper No 03. 

Harms, R, Kraus, S., Schwarz, E. (2009). The Suitability of the Configuration Approach in Entrepreneurship Research. Entrepreneurship and Regional Development, 21(1): 25-47. 

House of Commons Welsh Affair Committee, 2009.  Second Report of Session 2008-2009, HC184-I, The Stationary Office Limited. 

Jansson, H., Sandberg, S. (2008). Internationalization of Small and Medium Sized Enterprises in the Baltic Sea Region. Journal of International Management, 14(1): 65-77. 

Kropp, F., Lindsay, N., J., and Shoham, A., 2008. Entrepreneurial orientation and international entrepreneurial business venture start up. International Journal of Entrepreneurial Behaviour& Research, 14: 102-117.

Moekotte, W., Freye, S., 2008. The Impact of Globalisation on SMEs. Copenhagen Business School, 2008.

Mathews, J.A., Zander, I., 2007. The international entrepreneurial dynamics of accelerated internationalisation. Journal of International Business Studies, 38: 387-403.

Omar, O.E., Fraser, P., 2010. The Role of Small and Medium Enterprise Retailing in Britain. University of Hertfordshire Business School, 2010.

Rhodes, C., 2012. Small Businesses and the UK Economy. House of Commons, 2012.

University of Surrey, 2012. Success in Challenging Times: Key Lessons for UK SMEs. Kingston Smith LLP, 2012.

WEF, 2014. The Global Competitiveness Report, 2013-2014. [on line] Available at: http://www3.weforum.org/docs/WEF_GlobalCompetitivenessReport_2013-14.pdf [Accessed the 13th of March, 2014]