The aim of this research was to understand why SME owners and potential SME owners in Scotland were either not partaking in growth-related behaviours, or did not have the ambition or desire to grow their business. Among the key research questions were:
- What factors influence why Scottish SMEs do or do not pursue growth, and how do attitudes’ towards pursuing various growth activities develop over time?
- Have growth aspirations of Scottish SMEs changed over various life stages, and, if so, what is driving this change?
- Why are Scottish entrepreneurs averse to some growth behaviours? Are there any barriers that are blocking growth aspiration, and do these change over time?
- How can the business support system in Scotland intervene to encourage growth behaviour and aspiration?
The research was conducted in two main phases.
- Phase one comprised a total of 75 in-depth interviews among SMEs based in Scotland, the majority of which were carried out by telephone, with around one third conducted face-to-face.
- Phase two comprised a series of workshops among key stakeholder groups aimed at exploring the implications of the phase one findings and identifying possible interventions to promote growth behavours among Scottish SMEs.
Phase one fieldwork was carried out between August 2018 and October 2018, and phase two workshops were carried out in October and November 2018.
The research was developed with reference to the “COM-B” model of behaviour change, which holds that for any behaviour to occur, a person must have the Capability, the Opportunity and the Motivation. This model facilitates interpretation of what is driving a given behaviour and the identification of related evidence-based interventions.
Growth behaviour among SMEs: Underlying motivations
Participants’ reasons for starting a business were multifaceted but, in broad terms, fell into one of three main categories: unplanned or opportunistic reasons (“falling into” business ownership); work-life balance considerations; and more material motivations (desire to build a successful, sizeable business that could generate substantial income).
It was clear that the first two types of reasons were by far the most common. In other words, a considerable proportion of participants did not go into business with the primary intention of being very successful in growth terms. This is not to say that they did not want to grow their business – indeed, some had grown and some had aspirations and or/plans to do so – simply that this was commonly not a strong driver for them.
Reflecting this, businesses segmented broadly into three main groupings: The ‘Growth Averse’ (those who did not want to grow); the ‘Ambivalent’ (those who wanted to grow but slowly and not too much); and the ‘Ambitious’ (those who actively wanted to grow their business). Encouraging growth among businesses in the Averse group will be challenging given the number and nature of barriers to growth reported. The focus of the report is therefore on the Ambivalent and Ambitious groupings, and how they might best be encouraged to grow their businesses.
Growth enablers and barriers: environmental and contextual factors
Businesses commonly reported that their growth had been impacted by a generally unfavourable financial climate in recent years, including the 2007 recession, which had caused them to hold back on pursuing particular growth behaviours. Other economic factors that had had an impact included the weakness of the pound and competition from other businesses. Running alongside these challenges was a sense of uncertainty around how the economy might be impacted by political and constitutional changes in the future, which had left businesses feeling insecure about their own future and therefore added to their caution about taking steps to grow.
Having ready access to finance when needed was commonly regarded as essential to business growth. While some businesses had secured bank loans to invest in their business, others had experienced difficulties securing finance from banks, particularly during the recession. The importance of finance from other external sources was also noted, including government or council-backed start up loans, and grants from support agencies. Grant funding from such sources was seen as favourable to taking out loans from banks, reflecting a reluctance towards getting into debt.
Policy and legislation were identified as both enablers and barriers to growth. In terms of the enabling dimension, there was reference to grant schemes or government-backed loans for start up businesses, and other more targeted grant schemes which had helped businesses in specific sectors such as agriculture and energy. In terms of barriers, some businesses were put off by the time, effort, and expense associated with compliance with legislation, including that relating to the minimum wage, workplace pensions, and health and safety regulations.
In terms of recruitment, a commonly cited challenge, particularly among rural businesses, was finding enough people with the requisite skills to fill positions, including both junior and more senior positions. This was compounded by competition from larger businesses offering higher salaries.
Retention challenges were particularly highlighted by businesses in the tourism and food and drink sectors, where work was often seasonal and tended to have high staff turnover. Businesses in remote rural locations highlighted further structural barriers that posed challenges for retaining staff; specifically a lack of affordable accommodation in their area for staff.
The availability and suitability of physical assets; specifically, premises and equipment, had also impacted on business’ ability to grow. Several commented that available premises were too small for their purposes or too expensive. The specific location of available premises was highlighted as an additional challenge, particularly by retail businesses, for whom footfall and passing trade were important drivers of sales.
The ability to acquire new or upgraded equipment had been a similarly important factor in some participants’ growth journey, either by allowing them to work on a larger scale, or by reducing their costs and making their practices more efficient.
Finally, though not a widely held view, in certain circumstances participants felt their growth had been hampered by the existence of “small town mindsets”. This manifested in resistance from local communities on account that they had not felt adequately informed or consulted about development of businesses, or simply because they were hostile to ‘incomers’ setting up businesses locally. A small number of participants also attributed their lack of growth in part to a lack of collective effort on the part of their community to promote the area positively and encourage new visitors
Growth enablers and barriers: behavioural factors
Business owners who took part in the research were fairly evenly split in terms of whether or not they had had such a plan during the initial stage of their development. At the time of interview, fewer than half had an up to date plan.
Among business owners who had developed business plans from the outset, several factors had influenced their decision to do so. These ranged from the plan having been a prerequisite for applying for financial or other support; to being encouraged by others (particularly support agencies) to create it; and personality factors (for example, describing how they “liked structure”, were “business driven” and keen to understand the business’ potential) or previous business experience.
It was relatively uncommon for participants to have maintained formal business plans in the long term, reflecting the fact that initial funding and support applications emerged as the main drivers for creating plans. In the absence of such external impetus, participants tended to prefer to review performance and make business decisions in less formal ways.
Businesses that operated without business plans did so for a number of reasons. Firstly, many businesses had lacked the external impetus to develop a business plan – for example, in the form of funding or grant application requirements – that has been so crucial for others. Equally, participants had often set up their business without a clear idea or aspirations of what they wanted to achieve, which meant that proactive planning had simply not been part of the equation. Others described having felt no need to develop a business plan, as they had a vision for the business “in their head” which they felt sufficed to guide their activities.
Perceived uncertainties in market conditions and other external factors led some business owners to believe that a business plan could, by definition, only ever be a theoretical document and, as such, would be of limited use. Personality factors emerged as further barriers to business planning, among those that disliked being organised, or were not “detail- “or “paperwork-oriented’. Not having business experience or skills similarly emerged as a barrier.
Operational improvements and innovation
Almost all businesses that participated in the research had undertaken at least some operational improvements or innovations and most reported positive impacts of these. Nonetheless, they identified specific barriers they had encountered in implementing such changes, including: motivation (being risk averse, lacking the confidence to try new things, wanting to remain in control of operational aspects and being motivated more by enjoyment than growth); a lack of time and resources; and external factors (uncertainty of the market and economy in general, and being put off employing more staff due to the extra time and cost involved).
Networking and collaboration
Networking had been important in driving business’ development and growth, through providing access to customers, allowing for the sharing of knowledge and the opportunity to learn from others, and opening avenues to sources of private sector funding. Businesses that did not engage in networking sometimes cited a lack of opportunities in their local area or commented that networking was just another task competing for their limited time, and therefore not a priority for them.
Many participants had engaged in some form of collaboration with other businesses; typically because this provided an efficient and cost-effective way for them to work around any skills gaps, to diversify, and to promote their business. Businesses that did not engage in any form of collaboration commonly reported having never needed to; for example, because they were content with their pace of growth.
Virtually all participants described their relationships with any suppliers they worked with in positive terms. Several factors were identified as having been important in maintaining participants’ good supplier relationships; in particular, the prompt payment of invoices; communicating regularly; and simply getting to know suppliers as people. Beyond these behaviours, however, very few participants had consciously made efforts to try to build more effective relationships with suppliers or achieve better value from them.
Marketing and promotional activity
There was general recognition that marketing and promotional activities were important facilitators of growth. At the same time, it was clear that many participants, particularly sole traders and other smaller enterprises, were not always doing a great deal if anything in this regard.
Those in the earlier stages of their journey commonly said that they did not have the time or resources to put into marketing or promotion. Others felt that marketing and promotional activities were expensive, particularly as the returns generated were not always obvious or discernable. Other participants expressed uncertainty as to how to go about marketing or promoting their business to their target clientele, commenting that they were unsure about what particular marketing avenues would be most effective. Less commonly, there were participants who said they had never needed to advertise because they had been able to develop a satisfactory customer base through word of mouth or other informal means.
The role of support and advice
Awareness of available support services for SMEs varied. It was common for participants to have at least heard of Business Gateway, but awareness of other agencies providing support was lower.
Participants with little or no awareness of support services reported being unclear where to find out about this, and there was a sense in which they conceived of the support landscape as confusing. There also appeared to be some misconceptions on the types of support available, with some participants believing that engaging with support agencies was something they would only do if their business needed to borrow money or apply for a grant, or that support was only available for new businesses.
Among those that had engaged with support agencies and services, perceptions of the services they offered were mixed; some participants were pleased with the amount of support they had been offered while others described having looked for support via an agency or organisation only to find such support was not offered – either because the agency had not seemed ‘set up’ to help businesses like theirs, or because it was unable to offer a very specific type of support they had been seeking. More generally, there was a perception that the quality of support provided by agencies and services sometimes varied, either by geography or by individual advisor.
Overwhelmingly, the main concern expressed about future growth was that of political and economic uncertainty, predominantly in relation to Brexit but also, to a lesser extent, the prospect of future Scottish independence.
Three further barriers to future growth were identified by participants: A lack of time, which was common to many businesses but particularly sole traders or those with a small workforce; skills gaps; and financial constraints – it was common for participants to say they lacked the necessary funding to invest in future growth activity.
The phase two stakeholder workshops led to the identification of a number of recommendations for addressing the barriers to growth outlined above. These were discussed in relation to the five policy categories of the COM-B model
- Legislation and regulation. Stakeholders identified a need to review legislation or regulation that might inadvertently be impeding growth among SMEs (particularly ‘micro’ and ‘small’ businesses). There was also reference to the potential for new legislation that might help promote growth - the Small Brewers Relief Scheme was cited as an example – and to the importance of minimising barriers to international trade. Stakeholders also suggested legislation to mandate entrepreneurial education in schools.
- Fiscal levers. Stakeholders focused on measures that they felt would improve the financial situations of individual SMEs and thus help position them for growth. Recommendations included lowering the rate of Income Tax; introducing temporary tax exemptions or holidays for new business owners (for example in relation to Corporation Tax); and reducing business rates. Stakeholders working in rural areas also called for subsidised, affordable housing to help alleviate difficulties experienced by rural businesses in recruiting and retaining staff.
- Environmental and social planning. Recommendations in this area included measures to promote an evolution of working patterns/culture to create greater ‘space’ for individuals to develop businesses alongside existing employment or personal commitments; and efforts to change attitudes towards ambition and failure so that both are viewed in a less negative light Stakeholders also suggested increased efforts on the part of local authorities and their partner agencies to promote their respective areas and business communities.
- Support and advice. Stakeholders felt the support and advice landscape needed to be streamlined, with different agencies working in a more co-ordinated and joined up way. Specific solutions proposed included: creating a national or regional support hubs through which businesses could be triaged to appropriate agencies or forms of support; the development of shared targets and metrics across agencies; support; and the creation of an online support “hub” or an App through which businesses could access support 24 hours a day. There were also suggestions for improvements to the nature of support and advice provided by agencies – in particular, an increased focus on individual/ company-centric support rather than on delivering support ‘products’; and on the promotion of business growth mindsets and ‘softer skills’, such as risk-taking. In terms of financial support, suggestions included lending to businesses that, on the surface, may appear ‘riskier’ but that advisors feel have high ambition and potential; and offering ‘bounce-back’ funding to businesses that fail at their first attempt.
- Communication and marketing. Recommendations in this area were predominantly concerned with instilling a greater sense of ambition among current and potential business owners. There was suggestion of a large-scale campaign, involving the use of case studies and/or positive role models to inspire and enable businesses to initiate positive change. A broader suggestion was that the language in communications and marketing must be designed to instil ambition and must be accessible and free of jargon. Stakeholders also highlighted the importance of ensuring that the language was consistent across the ecosystem.