What Drives SME Growth? Introducing the Leader's Growth Mindset

What drives sme growth? introducing the leader’s growth MindsetTM MTROYAL.CA/businessgrowth Of central debate amongst academics, government and the private sector are the factors inluencing the growth of Small and Medium-sized Enterprises (SMEs). Understanding how SMEs achieve growth is essential to unlocking future economic productivity and performance. In practice, however, we know very little about what successful SMEs are doing to achieve success. In order to address this Professor Simon Raby brought together a team of researchers experienced on small business growth to evaluate the current practices of SMEs in Alberta. The team drew on the Promoting Sustainable Performance (PSP) research model that has been tested and perfected in the U.K. over the past 10 years. Navigate to page 41 for more information on how PSP works. Author - Professor Simon raby Acknowledgements There are many individuals and organizations that deserve recognition, and only a small space in which to achieve this. The author would like to acknowledge the invaluable support provided by the Leverhulme Trust and their International Academic Fellowship program. The author would also like to show gratitude towards three particular institutions: Mount Royal’s Bissett School of Business (Canada); the University of Calgary’s Haskayne School of Business (Canada), and the University of Kent’s Business School (UK), each of which played an important role in supporting this research. Finally, the author would like to personally thank PhD candidate Kanhaiya Sinha for his interest and continued support through the data analysis phase of the project, and in particular his statistical support for the analysis of survey results. This project beneited from the support of many other parties, recognized on page 47. About this research This research reports on a large survey with SMEs and in-depth interviews with a set of leaders building High Impact SMEs. The views and perspectives are of the author only, not of the organizations they work for. Cover image: Lightspring - Human Emotion/ShutterStock Copyright @ 2017 Simon Oliver Raby No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, without the prior written permission of the author. 2 What Drives SME Growth? Table of contents Foreword 4 The Author 5 Section 1. Executive Summary 1.0 Introduction 1.1 Implications 1.2 Summary Survey Findings 6 6 8 10 Section 2. The Leader’s Growth Mindset 2.0 Introducing the Leader’s Growth MindsetTM 2.1 Exuding the ‘A-I-R’ of Conidence 2.2 Filtering ‘A-I-R’ – Investing in Purpose, Vision, Values and People 2.3 Evolve Your Role As Leader 2.4 The Leader’s Growth MindsetTM Mechanism 2.41 Value Identiiers 2.42 Strategy Shapers 2.43 Culture Crafters 12 12 15 16 16 17 17 19 22 Section 3. What Drives SME Growth? 3.0 Demographics 3.1 Growth 3.2 Markets 3.3 Competitive Strategy 3.4 Innovation 3.5 Technology 3.6 People 3.7 Finance 3.8 Advisory Services and Networks 3.9 Supply Chain 23 23 25 27 28 31 32 33 36 37 38 Method 41 Endnotes 45 Thank You to Our Sponsors 47 What Drives SME Growth? 3 Forward Michael quinn Associate Vice President, Research, Administrative Assistant Scholarship and Community Engagement Mount Royal University is committed to teaching and learning informed by scholarship. We are evolving a vibrant research and scholarship culture that places high quality research at its heart. We place particular emphasis on research that is timely, relevant, collaborative and community-engaged. Research is woven more closely with teaching. Research questions meet practical or community needs in addition to traditional scientiic goals. Faculty are more directly involved with their undergraduate students – helping to engender that ‘spark’ that launches a new researcher on their way. Elizabeth evans Dean, Faculty of Business and Communication The study of Alberta’s Small and Medium Enterprises as drivers of economic growth and employment is an exceptionally relevant body of research from faculty member Dr. Simon Raby. The Bissett School of Business and the School of Communication Studies at Mount Royal University greatly values the creation and translation of knowledge that can inform the education of future leaders in our economy. Ray DEpaul Director, Institue for Innovation and Entrepreneurship The Institute for Innovation and Entrepreneurship at Mount Royal University is focused on developing the most entrepreneurial minds in Canada. Innovative and entrepreneurial talent is not only necessary for the creation of new ventures, but also for the growth and success of existing small and medium enterprises. The economic prosperity of Alberta and Canada relies on our ability to grow innovative businesses that can compete and thrive on a global stage. The Institute is fostering the talented innovators that are making this happen. 4 What Drives SME Growth? The author Simon Raby Professor, Innovation & Entrepreneurship, Bissett School of Bussines, Co-Founder and Director, Business. Improvement. Growth (BIG) Think BIG... Think Business. Improvement. Growth. Author of the Ten characteristics of successful SMEs, Simon Raby has researched 1,000s of growth-oriented organizations and has distilled this into an accessible, applicable and practical guide, downloaded over 10,000 times and internationally recognized for its quality and value for innovation. An Innovative and Entrepreneurial ‘Pracademic’ Simon is an academic and active practitioner in innovation and entrepreneurship, and strongly believes that the world of research has a lot to offer those who run their own businesses and deliver services to business. That is, if this knowledge can be understood and delivered in a way that is accessible and meaningful. Simon is Co-Founder and Director of Business Improvement and Growth Associates, a venture that uncovers the drivers of growth, challenges convention and offers practical ways that achieve lasting results for ambitious business owners, entrepreneurs, their teams and their organizations. Simon loves to challenge, learn and ind new ways of thinking, and has a deep-seated passion for facilitating strategic change. Simon consults with organizations, service providers and government on innovation and growth, holds a Masters and Ph.D. and is an accredited coach and facilitator. What Drives SME Growth? 5 1. Executive Summary 1.0 Introduction SMEs are actually responsible for development debates12. Overall, this the bulk of job creation6. This study study answers a call to embrace This report captures the main focuses on these more established Canada’s growth challenge13 , and indings of an 18-month study on SMEs. seeks to achieve this by developing new understanding on how the growth of Small and Mediumsized Enterprises (SMEs) in Alberta, Third, SMEs are disruptors of the organizations, in particular SMEs, Canada. While an SME in this study status quo. There is a reported grow. was deined as an organization with innovation gap that is growing between Canada and the rest of The study involved a large survey the world7. Building innovative of SMEs and a set of in-depth organizations is essential, however interviews with the leaders of ‘High what does this really mean, and Impact SMEs’. High Impact SMEs how do we go about achieving it? are organizations that are achieving There is a challenge to think beyond high growth (in revenue, proits and technological innovation to the many employment), and are disruptive. other types of innovation8. This study High Impact SMEs invest in a broader reasons. focuses on more innovative SMEs. range of innovative activities, and are First, there is a shortage of empirical Fourth, there are continued calls for serve. They exemplify organizations evidence on the growth of SMEs in increased diversiication away from form that many of us aspire to create. Alberta. The studies that have been a perceived reliance on oil and gas commissioned2 have tended to extraction and processing. While not We irst present those factors favour a particular type of irm (e.g., a new debate9, these calls are rooted associated with high growth (see technology-based) or sector (e.g., in the belief that diversiication will page 10), a summary of the indings oil and gas). Notwithstanding, these lead to a more responsible, and hence that emerged from the survey. We sustainable economy. It is believed reserve the detail behind these essential that Alberta continues to indings for later. We quickly move which we seek to extend in this report. transition from boom and bust cycles to present a new model called The and ‘super-heated artiicial growth’ to Leader’s Growth MindsetTM - that Second, SMEs are signiicant job more predictable, sustainable10 and explains how the leaders of High more inclusive11 forms of growth. Impact SMEs were operating. We This is a cross sector study which explain the common set of practices focuses on SMEs that have achieved and roles these leaders were applying sustainable growth and diversiication in their daily work to build high impact in the markets they serve. SMEs. Given the above, it is no wonder that The label – The Leader’s Growth SMEs continue to be at the heart of MindsetTM – infers the inherently academic, business and economic human nature of growth. This less than 500 employees, nine out of ten respondent organizations were expectedly ‘small’, being under 100 employees in size1. The central question that this inquiry sought to answer was: what are the factors that drive SME growth? Addressing this question is important for a number of studies have helped to surface some important issues, the indings of creators. Small irms employ 9 in every 10 private sector workers in Alberta3 and between 2005 and 2015 created the majority of all new jobs4. Indeed, Alberta has the 2nd highest density of SMEs in Canada5. At present, new start-ups are seen to be particularly sexy. Yet, the majority of start-ups fail and more established 6 What Drives SME Growth? more diversiied in the markets they research exposes growth to be a cognitive pursuit. The encouraging inding is that the Leader’s Growth MindsetTM is something that can be developed in each and every one of us. This study extends previous research by the author on SME growth that identiies the capabilities that an organization requires to achieve high growth14 by shining attention on the leader’s role. Ultimately, understanding the process of growth is essential if we, as leaders of SMEs, are to devise smarter strategies for growth. It is also essential for those of us developing policies and supporting SME growth, so that we can target the right issues for the right individuals and organizations. What Drives SME Growth? 7 1.1 implications For Business. For Policy. Develop a Leader’s Growth MindsetTM Build a Generation of High Impact Leaders. This study develops a new model - the Leader’s Growth This study identiies the importance of a growth mindset MindsetTM – to highlight a set of practices and roles that in driving SME growth, and hence growth of the economy each and every one of us can apply in our everyday pursuit as a whole. Support is required to build future High Impact of growth and success. Leaders to evolve their leadership role and take onboard this thinking. Be Aware, Inquisitive and Rounded Leaders of High Impact SMEs were ambitious for growth. Reward Reinvestment. Standing still was not an option, these SMEs were on the The majority of SMEs inance their businesses through move. Headway was made daily by looking up and out of organic growth. We should continue to ensure debt-based the business and applying a common set of practices that growth inancing is available and attractive to SMEs. we call ‘A-I-R’ – being Aware, Inquisitive and Rounded. ฀ Promote Common Language. Continually Identify Value, Shape Strategy and Craft This study inds innovation to be broader than technology Culture and commercialization. Innovations being made to Leaders of High Impact SMEs were performing three products and services, processes, organization and speciic roles to drive growth - ‘Value Identiiers’, ‘Strategy marketing. Agreeing a common, broader deinition for Shapers’ and ‘Culture Crafters’. How much time do you innovation could help us to identify and support a broader spend on a daily basis performing each of these roles? range of innovative activities across the economy. Evolve Your Leadership Role Encourage Institutions to Collaborate. Leaders of High Impact SMEs were actively navigating a There are many questions to address when it comes to leadership transition process, to enable them to work on, the growth of the economy, and SMEs. Finding ways to not just in the business. encourage collaboration at a provincial and national level on studies and programs that enable the creation of new knowledge and the sharing of good practice on SME growth would be valuable. 8 What Drives SME Growth? For Research. Include the Entire Business Continuum. To understand what differentiated high growth, low growth New start-ups are particularly sexy in today’s world. Yet, and declining SMEs we benchmarked the practices of research continues to demonstrate their high failure rates. close to 400 irms that accounted for $5.9b of trade At the same time, SMEs are maturing and the number of across Alberta. medium irms is reducing relative to the total population. We need further research on how irms transition from The summary on the next page attempts to capture the start-up to scale-up, and beyond. most important factors. Engage Our Brightest Minds. Should you like to read the full survey results please turn At present, some of our brightest minds in the province to page 23. whom study social sciences, (e.g., management and organizations) are focused on large irms and international research agendas. Finding ways to engage these individuals in research programs on smaller irms would help to accelerate our understanding of SME growth. Move beyond surface level observations. The lion’s share of research on SME growth takes a survey-driven approach to data collection. While surveys can answer ‘what’ and ‘how many’ type questions, they leave us guessing as to ‘how’ and ‘why’ phenomenon actually occur. Our methods need to get beneath the surface to develop results that hold greater explanatory power. What Drives SME Growth? 9 1.2 Summary Survey indings Half of all SMEs are ‘locked in’ to highly competitive local and provincial markets. Growing SMEs are more likely to develop and communicate strategy. Over half of SMEs are reliant on their local or provincial The presence of strategy was a strong predictor of growth market for the majority of their revenue. These irms are of SMEs, and those SMEs achieving growth are more likely exposed to higher levels of competition, are more likely to to share their strategy with all staff, rather than select experience plateaued growth or decline, and are likely to members of their workforce. High growth SMEs are more achieve only marginal growth gains, being reliant on the focused on factors of reputation, quality and knowledge. broader economy. Declining SMEs are more focused on price. SMEs competing on a national and international scale are more likely to grow. To extract value out of technology, integrate to your strategy. Half of all SMEs are actively diversifying their geographical The presence of technology was signiicantly related to market presence, and are more likely to achieve steady revenue and proit growth only when technology was an or high growth as a result. At present, the U.S. offers the integral part of strategy. That is, to make the best use of biggest opportunity for growth. Internationalization is not technology tools SMEs require technology considerations high on the agenda of those SMEs yet to nationalize or to be integrated to their strategic decision making. internationalize. Growth markets experience less competition. SMEs focusing on business development, skills and quality are more likely to grow. Growth markets have fewer competitors, while higher SMEs ambitious for high or steady revenue growth levels of competition can be found in declining markets. are focusing on strategies for creating new business SMEs with low aspirations for growth are more likely to opportunities while developing their skill base, and those be found competing in declining markets. Aspirations are SMEs ambitious for steady proit growth are focusing higher for those competing in growth markets. on creating new business opportunities while improving product and service quality. 10 What Drives SME Growth? The broader your innovation and training activities the better your performance. Growing SMEs develop strategic and technological leaders. The more SMEs innovate, the more likely they are to SMEs achieving growth are investing in people, training experience growth. SMEs with a broader portfolio of employees in leadership & management, IT software/ innovation activities were investing in a broader range of, hardware, problem solving and human resources. Low and spending more time on training. Serial entrepreneurs growth/declining SMEs are more likely not to train staff at are more likely to make broader investments in innovation. all. The older your irm, the less innovative you become. Growth requires a strong work ethic. As SMEs get older their growth slows and the narrower Employees working for SMEs achieving growth in revenues their innovation activities become. More established SMEs and proits work an average of 40-45 hours excluding are roughly half as innovative as younger irms. SMEs that overtime, and over 45 hours including overtime. Low grow quickly to a small and medium size are likely to be growth SMEs are more likely to work a 30-34 hour week. more innovative. To grow, SMEs need employees to invest more time than the average hours currently reported by Statistics Canada. Creating an equitable workplace supports growth. Growth is fuelled by external capital. SME achieving growth in revenues were more likely SMEs experiencing growth are more likely to use external to foster an equitable workplace using practices that emphasize harmonized terms and conditions, employee share options, clear grievance and disciplinary procedures and culture change. Declining SMEs were most likely to focus on recruitment and performance related pay. sources of inance (e.g., private equity, venture capital, business angels, grants). Plateauing and declining SMEs are more likely to leverage internal sources of inance or asset-based loans (e.g., mortgage). Growing SMEs maintain low debt to equity ratios. What Drives SME Growth? 11 2. The Leader’s Growth MindsetTM 2.0 Introducing the Leader’s Growth Mindset™ We provide handy prompts so you can follow where we Following the large survey, we interviewed 33 leaders relection. At each stage we report on the practices of High of High Impact SMEs. High Impact SMEs represent a particular type of SME. These are organizations that are achieving higher growth (in revenue, proits and employment), and disruptive. High Impact SMEs invest in a broader range of innovative activities, and are more diversiied in the markets they serve. They exemplify organizations that many of us aspire to create. are in relation to this model as we progress through this section. This section has been written to provoke Impact Leaders, and pose some questions to stimulate thinking. The label – The Leader’s Growth MindsetTM – infers the inherently human nature of growth. This research exposes growth to be a cognitive pursuit. The encouraging inding is that the Leader’s Growth Mindset is something that can be developed in each and every one of us. It is a set of We owe a huge debt and gratitude to the many passionate Presidents, Founders and CEOs of SMEs who sat with us for long periods of time. We thank them for their patience, time and enthusiasm for the research process, and for sharing their insights for the beneit of others. To respect conidentiality, a fulcrum of research ethics, we will not reveal their names. What we can reveal is how they were operating. What made them tick? How were they building high impact SMEs? This is the focus of this section. It became quickly apparent that leaders (i.e., CEOs, Founders and Presidents) of High Impact SMEs were applying a common set of practices and roles in their daily work. These practices and roles were generating superior levels of growth, innovation and market diversiication. We call these High Impact Leaders and the model that typiies their approach The Leader’s Growth MindsetTM. We explore this model in detail within this section. 12 What Drives SME Growth? practices and roles that we can each apply in our everyday quest for superior growth and performance. The Leader’s Growth MindsetTM Model We found that leaders of High Impact SMEs engage in 3 common practices on a daily basis, which we label ‘A-I-R’, and perform 3 common roles: Value Identiiers | Strategy Shapers | Culture Crafters Value Identifiers Culture Crafters Strategy Shapers A-I-R A - Aware I - Inquisitive R - Rounded A-I-R 13 What Drives SME Growth? iltered through investing in Purpose | Vision | Values | People 3 Common Practices and 3 Common Roles 3 Common Practices Deinition A - Aware Understand your obstacles Question • and enablers and take action I - Inquisitive Connect, pose questions, growth of you and your business? • challenge and seek answers R - Rounded Obtain and weigh multiple Are you truly aware of the factors promoting and enabling Do you constantly seek answers to your business growth questions? • Do you make decisions using all available information? perspectives Roles and practices connected via a ilter that ensured prioritization, alignment and balance. This was achieved by investing in purpose, values, vision and people Purpose Your organization’s fundamental reason for being; your guiding star. Vision A clear picture of what your organization wants to achieve within a deined period of time. Values The principles or standards that identify what is important in everyday organizational life. People The knowledge, skills and abilities your organization has and/or requires. 3 Common Roles Deinition Question Value Indentiiers Create and enable customer • value via the business model Is there clarity on what ‘value’ is, and how it is being created across the organization? • Are the investments you are making helping to create even greater levels of value? Strategy Shapers Deine, drive and evolve • Do you shape and evolve your strategy, drawing on tools like GAGE and the 3Cs? strategies for growth • Are you using technology to enable future development and growth? Culture Crafters Nurture a culture that • Are people put above everything else in your business? attracts, motivates and • Are you winning the talent RACE? …attracting and retains high quality staff retaining high quality people? What Drives SME Growth? 14 2.1 Exuding the A‘-I-R’ of Conidence scanning for new intelligence that could build greater protection to current revenues and identify new growth All High Impact Leaders (herein ‘HILs’) were ambitious for opportunities. To enable this, HILs were actively building growth, far more so that the average survey respondent. their network. This network supported the development The view was “if we’re not growing, we’re dying”. Standing of their own skills and that of others in the organization, still was not an option, these SMEs were on the move. assisted with generating and qualifying leads, provided Headway was made by looking up and out of the business. access to intelligence, and was part of a reciprocal Three common practices enabled progress on a daily process of continual building and renewing their network, basis. We label these practices ‘A-I-R’. personal and organizational. Inquisitive A - Aware. HILs were acutely aware of the barriers that stood between their organization and growth, and were running towards these hurdles, not away. Complacency was not • Are you actively networking with other HILs? • Do you constantly question the way you do things? • Do you actively seek out new knowledge and intelligence and consider how this impacts growth? an option. The difference revealed itself when contrast with the survey results. Where many survey respondents were looking to the business environment “the economy”, R - Rounded. HILs were looking within themselves. They held an unwavering belief that the “buck stops with me” and HILs were systems thinkers. They were continuously that reasoning could not be attributed to other parties or seeking to understand how their organization interacted external conditions. This approach typiies individuals who with the environment it operated in. This approach helped have an internal locus of control. Those with an internal them to identify the developments required in their locus of control believe that they can take action to organization now, and in the future. They looked to spread impact their future, and that of their organizations. Those their investments across a broader range of innovative with an external locus of control believe they are inferior activities and markets and used a more rounded set of to external factors “the business will perk up when the data upon which to base strategic decision making. These economy comes back”. measures helped to pinpoint the improvements required to organizational processes that lead to growth. “You need to widen your thinking…there are lots of things that you shouldn’t accept as being true that you have to investigate and make sure you have a plan around what it could look like and how you would react” - Professional, Scientiic & Technical Services Rounded • Do you track how others are evolving in your industry, and consider what this means for your operations? Aware • Do you believe in your ability to drive the growth of your business? • Are you aware of what is inhibiting and enabling growth? • Are you actively seeking to eradicate inhibitors and support • Do you make bets in a broad range of innovation and market activities? • Do you have a clear set of measures that drive the right growthfocused behaviors? enablers? I - Inquisitive. HILs were continuously connecting, posing questions, challenging and seeking answers. They were constantly “We draw on a combination of people’s views, from those who are really close to the problm to others who can help us to indentify and navigate opportunities - Transportation & Logistics What Drives SME Growth? 15 Figure 2.1: Ways of Filtering A-I-R 2.2 Filtering A-I-R: Investing In Purpose, Vision, Values and People Values A-I-R - the three common practices depicted above – that HILs engaged with on a daily basis did not automatically lead to this intelligence being introduced to the organizational system. HILs were adept at iltering Vision this data and information with others in the organization, People before transforming this into new knowledge and intelligence upon which to take action. To achieve this, HILs invested in four key areas – Purpose, Vision, Values Purpose and People. HILs had developed a clear purpose for why their organization existed. Purpose can be described as a north star, something that guides our actions and we Filtering AIR continuously strive to attain. Purpose was bigger than the individual HIL or revenue generation per se, it focused on value creation and building community. It was capable of igniting passion within others, and was aspirational in nature, something worthy of reaching for. In the driving seat of purpose was Vision, Values and People. HILs had created a vision for growth, capable of engaging individuals within the business, and often beyond, with a shorter term horizon (e.g., 3 years) that • Are you clear why you/your organization exists? Is your organization distinct in its value creation and community role? • Have you translated your purpose into a vision that others understand and ind compelling? • Do you have a set of well-deined values that drive the right behaviours? • Do you involve employees in the strategic decision making, and invest in them beyond the technical requirements of their jobs? made sense to their own roles. HILs were constantly living and reinforcing a set of growth oriented values, in every decision they made and every action they took. These values reinforced and encouraged the right behaviors that would lead to the achievement of purpose. Values were not limiting, not designed to capture the current status quo, but were future focused and aspirational. HILs were continuously looking for ways to invest in their “[Our purpose is to] create jobs through bringing ideas to market that can deliver sustainable agriculture…we interact with the whole community. We’re providing nutritious food and education” - Agriculture people and help them to achieve personal, and contribute to organizational success. HILs were supporting the 2.3 Evolve Your Role As leader development of staff beyond the requirements of their immediate role, and encouraging them to contribute to An essential condition that enabled HILs to successfully organizational thinking and decision making. create and ilter AIR was the role they performed in the Vision, values and the way HILs worked with people were business. HILs had navigated a role transition from a all focused towards attaining the higher purpose. technical specialist to High Impact Leader, depicted in What Drives SME Growth? 16 Figure 2.2 as moving from stage-0 to stage-3. This enabled Evolve Your Role As Leader HILs to work on, not just in the business. Figure 2.2: The Evolving Role of the Leader • Which stage are you currently at? • Do you feel that the time you spend in the business is helping to take it to where it ultimately needs to be? Stage 0. ‘Busy fool’ Syndrome Most leaders start here, performing many roles, and can remain here as a ‘busy fool’. • What practices have you developed to protect you from being pulled back into the day-to-day? Stage 1. Functional Specialist Hand off functional specialisms (e.g., inance, sales, marketing, HR etc.). Stage 2. Manager Build a reliable team to manage the ‘day-to-day’ operations. Stage 3. High Impact Leader Step up and out. Find more time to create and ilter AIR, and focus on value, strategy and culture. The role transition and development process of HILs was promoted either out of need, for instance the business “I think small business is so ‘under the hood’ usually. You don’t get the chance to look over [the hood] …you’re tinkering away to get your formula right. We have to invest to [look up and beyond]…in smaller businesses the founders and leaders have to build a platform of management” - Finance grew and an active response was required, or was informed through prior leadership experiences. The latter approach resulted in HILs accelerating towards Stage-3: High Impact Leader. This is because these leaders had 2.4 The Leader’s Growth MindsetTM Mechanism recognized how important this transition was for future organizational growth and sustainability. HILs consistently displayed three common roles that they performed to drive their High Impact SMEs. We have HILs had to remain steadfast in their delivery of their labelled these roles – ‘Value Identiiers’, ‘Strategy Shapers’ stage-3 role. Many HILs spoke how, in the early days, they and ‘Culture Crafters’. Each role is distinct, yet inluenced found it easy to become sucked back up into a stage-2 by and inluencing the others. The best way to present ‘operational vacuum’. In becoming a High Impact Leader them is as a mechanism, a system of parts working these Indivduals required close allies in the irm to help together to create a whole. The way the HILs performed them generate value, execute strategy and develop these roles was shaped by what we have explored to this culture. These allies offered different perspectives, and point - the way they were iltering A-I-R and transitioning to challenged the way HILs were building the business. become a strategic leader. “[The CEO’s] mind is going a mile a minute. I have to say “Stop! Let’s think about that…Let’s put some data into things, analyze it. He’s the big picture and I’m the detail”. - Professional, Scientiic & Technical Services 2.41 Value Identiiers In the role of Value Identiier the HIL is depicted as a golden eagle soaring high up in the sky. The landscape the HIL is surveying is the organization’s Business Model Canvas (BMC)15. The BMC is composed of the various 17 What Drives SME Growth? activities that an organization needs to effectively perform Through new products and services, High Impact SMEs to generate superior value and proits. were able to differentiate themselves from the pack, thereby improving their ability to compete and capture HILs were always lying high, surveying their business more of the market and spread risk/hedge in certain areas. model. HILs were constantly searching out areas worthy Investments in products and services were not always of investigation. HILs were deliberate in their targets and easy to translate into revenue generation. actions. They showed great Awareness, Inquisition, while remaining Rounded in their approach (you will remember A minority of HILs had focused their investment in the we explored ‘A-I-R’ earlier). HILs were constantly bringing development of one large product/service or market. The new thinking to their High Impact SMEs by monitoring bet they had taken was too big and put the business at trends in the market, through targeted learning activities risk. This approach led to the bankruptcy of one of the (such as best practices via clubs/forums or learning High Impact SMEs during the period of investigation. This programs) or via relationships and partnerships with ‘bet the farm’ stance was essentially a big gamble. others. A high level term that HILs use to describe their The majority of HILs however took a broader approach top target was ‘business development’. For HILs business to innovation, making reference to “shooting bullets, not development related to anything within the conines of the cannonballs”. They were deliberate, yet lexible about the business model. investments being made. They were essentially hedging, keeping options open, doubling down on their investments In addition to business development, other growth when promise was shown of future returns. promoters were essential for High Impact SMEs. Each of these elements were catalyzed as a consequence of the multiple tweaks being made to enhance an organization’s business model. At time of investigation, HILs were actively focusing on three main areas – product/service development, people, and market diversiication. Figure “Innovation is an interesting one because a lot of people think technology, right? Let’s ind the technology and then let’s build a service and market around the technology. We’re thinking differently to this. We’re thinking, what is the value proposition to the customer, and can we layer in technology to make that better? …whether we make it faster, more mobile, more private, more accessible…” - Healthcare 2.3 aligns these areas with the corresponding terms used in the BMC, along with typical questions HILs were As we explored in the introduction to this report, the term appraising. ‘innovation’ can often be reduced to the application of technology, however what became apparent with High Figure 2.3: Business Model Focus Impact SMEs was that innovations tended to be low tech solutions that were new to Canadian or provincial markets. • Product and service development (akin to ‘key activities’) • which activities do we need to perform to deliver our value proposition(s), delight customers and generate revenues? Evidence was found of world irst innovations within oil which new activities do we need to invest in? developing world irst innovations tended to experience and gas, agriculture and software development, but these were not the norm. Indeed, those High Impact SMEs uneven performance from these investments as a consequence of the degree of market acceptance. • People (akin to ‘key resources’) what resources and relationships does our value proposition(s) require? • what skills do we need to recruit and retain? Market diversiication (akin to ‘customer segments’) • • for whom are we creating value? which are our most important customer • segments? which other markets can we target? HILs were actively pursuing improvements to products & services, processes, organization and marketing. These broad innovation areas were signiicantly contributing to growth. It was typical to observe 10% to 20% of total revenues coming as a result of product and service innovations, and examples of between 50% and 90% of total revenues were not uncommon. The contribution of What Drives SME Growth? 18 innovation to total revenue generation was dependent on example, running executive seminars and roundtables the degree of reinvention. on topics that added value to their own development, which would enable closer working relationships with key Some High Impact SMEs had employed expertise to decision makers and a more nuanced understanding of support innovation activities. These individuals took their clients’ needs. different roles, operating in advisory roles on the boards Are you a Value Identiier? of director, as internal experts, or as part of an internal innovation team. This innovation expertise directly impacted the irm’s strategy and operations. • High Impact SMEs, at time of investigation, were more • likely to focus on innovations to support processes, over methods of production and logistics and delivery. Existing, Do you view your business from 10,000 ft to ensure you are seeing all aspects of the business model? Are product/service development, people development and market expansion core priorities? • Are you hedging your innovation investments? proven technology was being leveraged across support processes. For example, the streamlining of handover 2.42 Strategy Shapers processes between functions, along with the use of speciic tools including project planning and tracking, While it may seem an obvious role, there is more to the project level communications (e.g., Slack), job tracking, Strategy Shaper than initially meets the eye. For High accounting and inance (e.g., invoicing). The type of Impact SMEs, strategy was not only a plan, strategy was a improvements to production methods and logistics & process. Here we will discuss what was particularly unique delivery processes were more dependent on what was about this process. deemed a priority for the business (e.g., safety, cost, quality etc.). A starting point for HILs, whether conscious or unconscious, related to the depth and breadth of their High Impact SMEs were making signiicant ongoing organization’s offer. Those HILs focused on delivering developments to their organization, including business depth were deliberately investing in the design of practices, work responsibilities and external relationships. proprietary knowledge to achieve higher quality outcomes At time of investigation, HILs were more likely to focus than currently available on the market. Those HILs focused attention on modifying business practices and/or work on building breadth were deliberately investing in broader responsibilities, over external relationships. offers that would cover more of the client’s needs, often powered through supply/value chain integration. Common Finally, when appraising marketing innovation High was the unwavering commitment to delivering value to the Impact SMEs were more likely to be implementing design customer and consumer. (i.e., brand) or placement (i.e., channel) changes over packaging and pricing. HILs were more likely to instigate price increases or tweak their business model to deliver lower costs, than lower prices. This indicates that High “85% of our revenue was basically buying and selling…we were a distributor [at heart]…we decided to sell the distribution business [to focus on] the custom manufacturing business” - Manufacturing Impact SMEs predominantly took a higher quality/price road. The contrasting approaches of depth and breadth are reminiscent of the essay The Hedgehog and the Fox by High Impact SMEs operating in production sectors were Isaiah Berlin16. Essentially, Berlin provided a dichotomous twice as likely to make changes to product placement and classiication for different types of thinkers. ‘Hedgehogs’ sales channels (e.g., identifying new channels and ways view the world through the lens of a single deining idea to sell). There was an increasing trend for High Impact (akin to becoming an expert in a speciic ield), while SMEs to turn their sales attention to ‘insight selling’. For ‘Foxes’ draw on a variety of experiences in the belief that 19 What Drives SME Growth? the world cannot be boiled down to a single idea. The articulated how they will meet their originally stated goals. important take away here is that the way we are oriented Through this strategy deinition process HILs were will guide the way we build our businesses. aware of the need to be proactive and pivot in order to continuously review and reform strategy. HILs recognized that strategies, the way growth is achieved and the way a plan is executed, will need to evolve and lex. This approach created a greater degree of resilience and “In some cases we sell our products to customers, and in others we’ll package something up that does not have our equipment in it. Where we really shine is where we combine those two models” - Wholesale anticipatory capacity in their organizational systems. A written strategic plan was evident in 3 in every 5 High Impact SMEs. Those indicating presence of an unwritten From this starting point, HILs took a common approach strategy were most likely to report that a written strategy to deining and driving strategy. HILs deined strategy in a was “in progress”, or was unwritten due to a tight knit way that allowed for a continual process of evaluation and leadership group, the need to retain lexibility or the stage evolution, which we label ‘GAGE’. of growth of the irm. Figure 2.4: Using GAGE to Deine Strategy Goals Address Execute Growth “The reason is that [in our business] technology is changing so much that you can’t keep up with it [in a written form], so it is important to retain flexibility” - Information & Culture First, HILs were setting ambitious and aspirational Goals as targets on the horizon at which to aim. Second, HILs were Addressing key questions these goals raised. These HILs followed a common process to drive strategy questions were essentially hypotheses or propositions execution. This 3C’s process ensured that everybody was to be tested though the analysis of data on markets, on the same page. HILs were Creating alignment between people and technology. Third, HILs were attending to growth goals and the daily actions of individuals. HILs Growth, ensuring that their goals and their key questions were Catalyzing good practice, helping others to abandon were focused on the delivery of growth (personally and the ways of the past to take onboard new practice and organizationally). This growth compass is a key difference new ways of working more able to deliver on future to what is found in low performing SMEs. Forth, HILs were growth. HILs were ensuring that there was a continued Executing through a well-deined roadmap that clearly focus on the Core of what the business did, staying true What Drives SME Growth? 20 to purpose, values, vision and people (all elements we A closer appraisal of strategic decision making revealed explored earlier). that High Impact SMEs displayed a tight relationship between strategy and inance, which often presented itself How did technology it into this? Technology was as a close working relationship between the HIL and the marshalled in areas that warranted its use. Technology Chief Financial Oicer (or their equivalent). The prevalence was not put before people, it was part of a broader and interaction between strategy and inance resulted in a strategic solution. In particular, technology was used for more inancially prudent and responsible approach in High trend monitoring, for eiciency improvement and for data Impact SMEs. and process management. 3 in 5 High Impact SMEs were competing nationally or The implementation of technology was not without its internationally. The drive for internationalization came as challenges. These challenges deined the speed and a result of a unique combination of push factors (e.g., our success of technology implementation within High local market is less attractive) and pull factors (e.g., there Impact SMEs. First, success was determined by the are new opportunities in other markets). Underpinning implementation process itself, and the degree of buy-in the assessment of push and pull factors was the achieved across the organization. Second, awareness HILs perspective on whether growth would come as a and capacity of staff was essential to successful consequence of diversiication. It was not diversiication implementation, having the skills and time to effectively at any cost. learn and utilize the new systems. Third, the expectations placed on technology were high and would often shift Internationalization was either opportunistic, by chance, throughout a project, making it challenging for technology or through a degree of evaluation. It is hard to say which to fulil a shifting mandate. approach was more/less successful. Internationalization was most likely achieved through alliances with It is important to recognize the way in which strategy organizations that held a local presence in the target informed inancial management and investment decisions, market. Few High Impact SMEs employed a speciic and market diversiication. The most popular approach individual to drive internationalization activity. Those HILs to inancing the business was for High Impact SMEs to who had decided to withdraw from international activities ‘bootstrap’, using internally generated capital to fund explained this was a result of risk exposure and the need future development. Often referred to as ‘organic growth’, to irst demonstrate a scalable product/service in their bootstrapping was typically combined with bank inancing, home market. HILs also spoke of the stigma attached such as a loan or line of credit. This bank inancing to Canadian companies trading in the U.S. U.S. trading tended to be focused on discrete one-off asset-based necessitated the setting up of local operations, requiring investments. signiicant investment. Overall, internationalization required commitment and adequate resourcing. Are you a Strategy Shaper? • Are you continually evaluating and evolving your strategy? • Are people and practices aligned with strategy? Is everybody on the same page? • “Communication is everything. We [the CFO and I] communicate on a daily basis, not only on how a particular project is progressing but how everything is going on around us” - Construction 21 What Drives SME Growth? Is technology integrated to your strategic thinking and execution? 2.43 Culture Crafters High Impact SMEs were continually investing in people. HILs were focused on crafting a performance culture. The person was at the heart of crafting culture. Indeed, people were the #1 priority in High Impact SMEs. HILs believed “people are the business” and the most important asset in Opportunities for training and development were lagged up through appraisal practices that emphasized development as a core part, and often came as a consequence of the organization undergoing signiicant change. driving growth. Culture took account of people, products and processes, with technology seen as a support to, not HILs reported that capacity limited further development replacement for people. potential. Capacity was a function of cost and time. Taking time out of the workplace has a signiicant impact “I came to recognize that you have all the right pieces of software without the right people driving them, with the right attitude around them. I now understand that people are way more important [than technology]” - Retail on irm performance and productivity in SMEs. Finding ways that staff can learn from the latest practices and embed this learning to the workplace in a cost and time effective manner is a key challenge to be fully embraced by provincial learning providers. High Impact SMEs were more than twice as likely to have a dedicated resource to attract and retain people, when Are you a Culture Crafter? compared to average survey respondents. This meant that Human Resource (HR) issues were “on the agenda” • Are people a central part of your strategic decisions? and “at the table”. Not only did HR support strategic • Do you dedicate time to crafting the essential cultural conditions? decisions, support was also provided to the execution of • Do you support others to develop and grow beyond their immediate practices and policies at a line management level. High job requirements? Impact SMEs whom were yet to employ dedicated HR incompany expertise felt that they were too nascent in their growth stage or had developed structures (e.g., employee ownership models) that reduced demand for a centralised HR resource. In these cases, HR was led by line managers in partnership with the HIL and was strategic in nature. Culture Crafters focused on the levers that attracted and retained ambitious, high quality staff. To achieve this, HILs truly understood what made people tick. HILs built a culture focused on four essential conditions that enabled High Impact SMEs to win the talent RACE, there are outlined in Figure 2.5. Figure 2.5: The Talent RACE Respect Recognize a job well done. Autonomy Provide a degree of independence Connect Work together as a team to reach a shared goal. Share information and communicate regularly. Educate Afford an opportunity to learn and grow. “We hired an employee to help us articulate our culture. He says to people we hire “Read this, can you live with this?” The people we hire have to think along the same lines. It’s a part of strategy. It can’t be a tick box…you have to live it”. - Mining, Quarrying and Oil and Gas Extraction What Drives SME Growth? 22 3. what drives sme growth? This section provides key insights to what drives the this industry. Overall, the operations of one in ten (10.9%) growth of SMEs in Alberta. These results are based on SMEs was associated with the oil and gas sector. a comparative analysis of responses provided by nearly 400 SMEs to the Promoting Sustainable Performance Figure 3.1: Sector Representation survey (See ‘Method’ for futher information). You will ind a Oil & Gas Extraction summary of these indings on page-10. Construction Manufacturing 3.0 Demographics Wholesale Trade Retail Trade This double-page spread provides an insight to the Real Estate demographics (i.e., background) of survey respondents. Finance & Insurance Professional & Technical 3.01 Organization Admin and Waste Accomodation & Food Size - Under 100 Employees and $20m in Revenue The majority of SMEs were between 5 and 29 employees A supplementary analysis was also conducted on the Real (63.6%), with a good representation (12.9%) of SMEs Estate sector. This analysis highlighted that a further 8.4% between 50 and 99 employees. These statistics reveal of SMEs were supplying products and/or services to this that close to nine out of ten (85.6%) SMEs are under 100 industry. These support sectors were largely related to employees in size. Over three quarters (78.1%) of SMEs Construction, Professional, Scientiic & Technical Services, had revenues of CDN$20m and under. Few SMEs had and Finance & Insurance. The operations of just over revenues of over CDN$50m. In total, the survey accounted one in every ten SMEs is associated with the Real Estate for SMEs delivering CDN$5.95b17 of Albertan revenues. sector. Few SMEs were found to be offering products and/or services in the Cleantech space. Sector - Well Diversiied, Professional, Scientiic and Technical Services Predominate Age - SMEs are Maturing, Less Micro Firms are Transitioning to Become Small or Medium The survey sample was broadly representative of the SME population of Alberta. Figure-3.1 highlights the sectors The majority of SMEs were founded between 1997 and that predominated survey responses18. When compared to 2006, 10 to 19 years ago, with the average age of an SME Statistics Canada19, the survey data was underrepresented being 21 years. There was a greater likelihood that SMEs in the Retail sector, and over represented in the were founded over 20 years ago than in the last 10 years. Manufacturing sector and the Professional, Scientiic & Three quarters (76.8%) of SMEs were founded as new Technical Services Sector. startups, with a small (13.1%) but important proportion forming as a spinoff from an existing organization. Few Given the considerable debate as to the relative SMEs were formed through management buyout or importance of the oil and gas sector a supplementary through mergers or acquisitions. An inverse relationship analysis was performed on this sector. A further 7.3% of was found between revenue and proit growth and SMEs were found to supply products and/or services to organizational age, that is; as organizations get older their 23 What Drives SME Growth? growth slows. Taken together with the size demographics and development of the organization, and the nature of the above, these results highlight the maturing of the SME irm’s management practices. population and the importance of understanding how we can better support organizations to move from start-up to scale-up, and beyond . 20 Ownership - Many SMEs are Family Businesses, and the Involvement of Family Decreases Over Time Gender - Men Predominate Leadership Roles, with a Greater Gender Balance in Managerial Roles Over three quarters (77.3%) of respondents were male. On closer examination, four out of every ive (71.9%) SMEs were owned and/or led by men. The ratio of women to men Of those SMEs that considered themselves to be a family improved when considering general management roles, business (77.5%), ive out of ten (53.7%) were in the irst with women accounting for over half (52.1%) of such roles generation, three out of ten (34.5%) were in the second. in an SME. Few SMEs were found to be in the third (7.4%) or fourth (4.2%) generation. SMEs that initially did not deine a Age - Over 40 Years of Age level of ownership or management by the family later indicated, when relecting on generational involvement, The average age of respondents was 48.7 years with a having an association with the term “family business”. median of 50.5 years. Nearly half (48.3%) of respondents This indicates the need for greater deinitional clarity as to were within 15 years of retirement24, with one in every ive what constitutes a family business. business leaders/owners within ive years of retirement (12.1%) or having already eclipsed retirement age (7.0%). Location - Calgary and Edmonton Dominate, with Rural Regions Making an Important Contribution Less than one in ive (16.6%) respondents were under 40 years of age. These indings provide further insights to the increasing number of baby boomers that will be looking to On analyzing the operating location of SMEs the 21 exit their businesses in the coming years25. majority of respondents were found to be based in Calgary (47.7%) or Edmonton (28.0%), indings that are broadly representative of the Alberta SME population22. The Figure 3.2: Age of Entrepreneurs remaining quarter (24.3%) of survey respondents were found across a wide geographical area encompassing 11 Regional Economic Development Alliances (REDAs)23, of which Central (encompassing Red Deer County) and South 20 - 29 Central (encompassing Lethbridge County) were the most 30 - 39 prevalent. 40 - 49 50 - 59 3.02 Individual Job - Roles President, CEO and Founder Were the Most Likely Role Titles of Survey Respondents Those competing the survey were most likely to be fulilling a role as the business leader (73.0%), a functional 60 -64 65+ Experience Equal Likelihood of Being a First Time Entrepreneur or a Serial Entrepreneur lead (14.9%) or general manager (10.9%). Business leaders were most likely to have the job title of President, CEO or Half of all (51.1%) respondents were serial entrepreneurs, Founder. These indings conirm that those completing having set up at least one previous venture. A third the survey were well positioned to report on the growth (32.7%) of respondents had set up three or more ventures. What Drives SME Growth? 24 These indings support those of others that once one growth over the past 3 years with future growth aspiration, becomes an entrepreneur, you are likely to remain as an SMEs are most likely to demonstrate a desire to continue entrepreneur . on the growth path they experienced in the past. This 26 inding highlights the challenge of jolting no or low growth Qualiications - Well Educated, Degree Awarding Education Prevalent SMEs onto an alternative growth path. Figure 3.3: Historical Growth Trend - Past 3 Years whether at an undergraduate (31.7%) or postgraduate (23.0%) level. A quarter (25.2%) of respondents had exited education following high school/college. Over one in six (15.8%) respondents had achieved some form of professional designation or professional development. % of SMEs Over half (54.7%) of respondents had attended University, 100% Rapid decline Steady decline 50% Platueaed Steady growth 0% Reventue Profit High growth Employment These results align with provincial statistics, with Alberta found to have a well-educated workforce27. Historical Promoters and Inhibitors Respondents were asked the factors that had promoted 3.1 Growth and inhibited growth over the past three years, the results of which are displayed in Figure-3.4. SMEs reported 26 possible inhibitors and 32 promoters. ‘The economy’ was Trends & Ambitions the number one reported inhibitor of growth. On describing their growth trend over the past three years (Figure-3.3), fewer than 1 in 5 SMEs were found to have experienced a sustained period of decline in revenues, proits or employment. SMEs were more likely to have experienced high or steady growth 28 in revenues (60%) than proits (48%) or employees (43%). This may indicate Figure 3.4: Promoters and Inhibitors - Past 3 Years Inhibitors Promoters #1 The economy #1 Market Presence Resources capital & people Staying relevant that margins are being squeezed by more cost conscious customer or leaders of SMEs attach greater signiicance to revenue growth, than proit or employment growth. When looking ahead to the next three to ive years, SMEs were most likely to report ambitions for steady expansion (66%). 1 in 5 SMEs were seeking high growth Insuicient sales and marketing Business cost Delivering quality People Financial prudence (20%). Few SMEs anticipated remaining the same size (7%) or reducing in size (4%). When seeking a forecast on employment growth, SMEs were equally likely to report a desire to remain the same size (45%) as grow (42%), with 1 in 10 (13%) reporting a likelihood of having less staff. The top growth promoter focused on developing an When contrasting these results, greater than 4 in 10 (45%) organization’s presence in the market29, comprised of of SMEs see the number of employees growing, while business development (34%) with reputation (18%), nearly 9 in 10 (87%) aspire for steady or high growth. relationships (10%) and advocacy (8%) revealing a broader picture than merely ‘sales’. This is important inding These results highlight that SMEs are more likely to given that ‘sales and customer acquisition’ were recently grow revenues before employees, indicating a focus on identiied by entrepreneurs as the most diicult issue in increased capacity utilization and sales. When contrasting business30. The experience of many organizations is of 25 What Drives SME Growth? a necessary transition from keeping up with demand to with the development of products and services (16%) having to identify and create demand. Staying relevant to also surfaced. When taken together, the capacity of one’s market was also considered a key growth promoter, people was high on the growth agenda, with respondents with SMEs developing their products/services (24%). identifying employee skills development (14%), employee The delivery of quality products and services (27%) recruitment and retention (14%) and people in general would seem to support the above picture, with delivery (9%) as essential support pillars for growth. Finally, systems playing a key role through: processes, systems respondents were also looking to diversify and expand and structures (13%). People were found to be central to into new markets (13%), improve internal operations enabling growth when considered together, with the right (13%) and felt that Government would be able to assist employee skills (21%), recruiting and retaining the right growth (10%). Of note here was that few respondents saw staff (11%), and “people” in general (7%) all considered internationalization (2%) as central to their future growth important. When taken together, taking a inancially plans. This provides important insights to the market prudent approach through inancial management (10%), diversiication and expansion process, the dynamics of pricing strategy (5%) and suppliers/sourcing (5%) were which we will explore in the next section. seen important. When looking beyond the irm, the economy was also reported to have promoted growth over the past 3 years. Respondents were less likely to report Figure 3.5: Promoters and Inhibitors - Next 3 Years that raising funds (7%), Government (6%), R&D (4%) or geographic diversiication via internationalization (1%) had enabled growth. The top growth inhibitor was the economy (35%) which combined with commodity prices (15%), reduced demand (13%) and currency exchange (4.6%). Beyond demand, the availability of resources were also key inhibitors including capital (32%) and labor (26%)31. Beyond these issues, insuicient sales and marketing (21%), increased costs Promoters #1 Business development Growing economy Inhibitors #1 The economy Availability of capital People Government Rasing capital Business cost Market divrsiication of doing business (20%) and government (15%)32 were all seen as inhibitors of growth. When taken together, staff skills/development (17%), the capacity of people (10%) and the lack of vision and strategy (11%) were also noticeable. Those factors less likely to have inhibited growth included technology (0.3%) or succession issues When asked about the factors that would limit growth (2%). These indings reinforce the indings of others that over the next three years (Figure-3.5), nearly a half of all people capacity and ability is a key growth challenge33. respondents identiied the economy (47%) as the biggest issue. This result is even stronger when combined with Future Promoters and Inhibitors those respondents who identiied commodity prices (20%), increased competition (18%) and currency exchange (4%) When asked about the factors that would promote growth as key restraints on growth. The availability of capital over the next three years (Figure-3.5), a third of SMEs (21%), the increased costs of doing business (15%) and stated that business development (31%) would be most the need for cost control (10%) were prevalent, indicating important. When combined, a growing economy (23%) and the lower resources that respondent organizations would improved commodity prices (11%) were also important have to invest in future development. Government (18%) to assist organizational growth. 1 in 5 respondents was raised by nearly 1 in 5 respondent organizations as a (20%) felt that raising capital would facilitate growth, growth inhibitor. What Drives SME Growth? 26 When investigating the association between those factors 3.2 Markets reported as promoting growth and historical growth trends (see Figures 3.6 & 3.7), key drivers of growth emerged. Respondents were asked, for their last 12-months, the proportion of their sales that were achieved across ive % of SMEs Figure 3.6: Revenue Trend and Factors Promoting Growth market locations – local, provincial, national, U.S. and 40% international. The results of this analysis are outlined 30% in Figure-3.8. All SMEs delivered an element of their 20% products or services to their local market. Indeed, over 10% half (54%) of all SMEs were reliant on their local market 0% High growth Steady growth Plateaued Steady decline Rapid decline for over 75% of their revenues. When looking beyond the province, 3 in 5 (61%) SMEs supplied national markets, and Business development Economic growth 1 in 5 (20%) supplied international markets, twice as many Raising Funds Product/service development SMEs than identiied by other recent studies35. The U.S. Employee skills was separated out in the analysis, with a third (32%) of all Figure 3.7: Proit Trend and Factors Promoting Growth SMEs being found to hold an export relationship with the U.S. 40% % of SMEs 30% Figure 3.8: Market Penetration 20% % Revenue 10% International 100% 0% High growth Steady growth Plateaued Steady decline Rapid decline Business development Economic growth Raising Funds Product/service development Employee skills Product/service quality US 75 - 99% National 50 - 74% 25 - 49% Provincial 0 - 24% Local Business development was four times more likely to be associated with revenue and proit growth than economic 0% 0% 20% 40% 60% 80% 100% growth and raising funds. Product and service quality and employee skills were important factors associated with These results reveal that half of Alberta SMEs are locally proit growth. These indings shed new light on how SMEs ‘locked in’, being focused solely on local and provincial are achieving revenue and proit growth34. markets. The indings also highlight that half of Alberta SMEs have, or are in the process of actively diversifying Business development, product and service development into national, U.S. or international markets. and employee skills were most likely associated with high and steady growth in revenues and high growth in proits. When analyzing the relationship between market Business development and product service quality were penetration and revenue growth (see Figure-3.8), SMEs more likely associated with steady growth in proits. These with a greater exposure to national, U.S. or international indings reveal that SMEs ambitious for high or steady markets are more likely to be experiencing growth, and revenue growth are focusing on strategies for creating SMEs with a greater exposure to local or provincial new business opportunities while developing their skill markets are more likely to be experiencing declining base, and those SMEs ambitious for steady proit growth revenues. Further analysis revealed that the greatest are focusing on creating new business opportunities while growth opportunity exists in the U.S. market. An important improving product and service quality. Further research subset of SMEs (7.6%) were found to be competing is required to understand the true meaning of ‘business in national markets for over three quarters of their development’. revenues. These SMEs warrant further attention36. Overall, 27 What Drives SME Growth? this evidence supports other research that the more Figure 3.10: Nature of Market geographically dispersed a irm’s markets are, the more likely irms are to grow37. Figure 3.9: Market Penetration & Revenue Growth % Revenue exposure in market 50 40 30 20 10 Growing Declining 0 Stable Inconsistent -20% +/-5% +20% Revenue Growth declining markets. Respondents were experiencing higher competition in declining markets. This inding reveals the beneits of locating growth markets. Local Provincial Canada U.S International Earlier we identiied that 9 in 10 (87%) of SMEs aspire Over half (55%) of SMEs that had internationalized, comprising 20% of all SMEs, had entered international markets in the past ten years. The longer an SME had been competing in international markets, the weaker their revenue and proit growth. This may reveal that the energy placed into developing the market or the beneits from international markets accrue early on and reduce over to grow, however these results reveal that less than half of SMEs are reportedly in growth markets. Additionally, business development was identiied as a top promoter of growth. Combining these observations would suggest that the ‘locked in’ SMEs are highly likely to experience increased competition within the province. This would suggest that SMEs competing solely in local or provincial time. This insight would beneit from further research. markets will only experience marginal growth gains unless A third (36%) of SMEs were found to be competing in provincial economy picks up as a whole. growth markets, with a quarter found to be competing in either stable (27%) or declining markets (22%) (See they actively develop and challenge the market or until the 3.3 Competitive strategy Figure-3.9). Markets had an impact on the aspirations of respondents. Those respondents in declining markets Strategy Formation and Execution were more likely to have low aspirations for growth. Those respondents in growth markets were more likely to have high aspirations for growth. These indings has Examining the strategic approach of SMEs is essential if we are to better understand the choices SMEs are implications for choice of market. making. It is typical when studying smaller irms to look SMEs competing in local or provincial markets were however overlooks more informal approaches to strategic experiencing higher levels of competition for their products only for a formal presence of strategy. This approach thinking and decision making. When one inds a lack of and services, when compared to those SMEs competing formal strategic planning in SMEs the conclusion tends nationally or internationally. Growth markets were found to be that SMEs are somehow lacking. To move beyond to have fewer competitors, when set against stable of this perspective of SMEs this study chose to examine not only the formal presence, but also informal presence What Drives SME Growth? 28 of strategy, the way in which strategy is formed and a greater degree of involvement in strategy post-formation, communicated and strategic priorities. Attention was also during latter communication stages. Separating the afforded to identifying the essence of the competitive formation of strategy from its execution has been reported advantage and the factors that lead to competitive to hamper the quality and impact of strategy38, and these success. results reveal the need for SMEs to involve employees in strategy development and execution. When examining the presence of strategy in SMEs (Figure-3.11), half (50%) of all SMEs reported having a Strategic Priorities formal written strategic plan. A third (36%) of respondents reported the presence of strategy, although not formalized. When asked about the focus of their strategic decision Taken together, nearly 9 in 10 SMEs (86%) engage in a making (Figure-3.12), SMEs were most likely to report a degree of strategic planning and thinking, while 1 in 10 focus on developing new markets, product and service SMEs do not. It is not possible from the survey data to development or innovation, inance, process improvement, determine the quality of strategy and strategic decision product or service quality, human resources or technology. making. Overall, strategy held a strong signiicant SMEs were less likely to report, succession or recovery relationship with growth performance. and continuity planning as key priorities. These indings offer further insight to the meaning of business development as a promoter of growth, indicating that the Figure 3.11: Presence of Strategy concept is broader than sales and marketing. Figure 3.12: Strategic Priorities 100 % of SMEs 80 60 40 20 0 Yes, written Yes, written Yes, unwritten Yes, unwritten No No Strategy was mostly likely formed with other managers in the irm (51%). 1 in 5 SMEs involved ‘some staff’ (20%), and few involved ‘all staff’ (12%) in strategy formation. Strategy was predominately communicated to ‘all staff’ (57%) or ‘some staff’ (25%), with few SMEs retaining strategic information solely at a managerial level (17%) or only in the hands of the Founder, President of CEO (2%). SMEs achieving growth were more likely to communicate strategy than those experiencing a decline. These results reveal that strategy formation in SMEs is typically reserved for the executive team, and that there is 29 What Drives SME Growth? Figure 3.13: Factors of Competitive Success organization had a competitive advantage. Respondents 25 were most likely to report that their competitive advantage 20 % of SMEs SMEs were asked whether they believed that their consisted of one (47%) or two (32%) dimensions. To have 15 three or more dimensions (12%) was quite rare. 10 As igure-3.14 highlights, product/service quality was 2.5 5 times more important than any other factor. Operating 0 in a particular niche, having particular people expertise and/or knowledge and being a recognized brand were also seen to provide SMEs with a competitive advantage. Given the human nature of quality and brand, people were Achieving Competitive Advantage and Success at the heart of competitive advantage. The importance Respondents were asked to rank the three key factors that key factor of competitive success. Interestingly, one in 13 are most important to the competitive success of their product or service offer, the results of which are displayed in Figure-3.14). The majority of respondents identiied product and service quality, personal attention and responsiveness to client needs or having an established reputation as key to their competitive success to date. High growth SMEs were more focused on reputation, quality and knowledge, while declining SMEs were more focused on price. of brand reinforces the earlier inding that reputation is a organizations could not state a competitive advantage and organizations were 12 times less likely to report new product/market development (1.6%) as a competitive advantage, when compared to product/service quality. This may indicate a lack of conidence or experience in delivering new product/market developments, with irms preferring to focus on investing in increasing the quality of established products and services. Respondents were asked to report the proportion of Figure 3.14 Achieving Competitive Advantage revenue that was achieved through applying Michael Porter’s generic strategies (Figure-3.15). The strategies Quality Niche of lower cost, high quality or differentiated product/ service are seen as a cornerstone in the way in which organizations seek to achieve competitive advantage. Expertise Those SMEs pursuing a differentiated or higher quality Brand offer should be able to command a higher price. Responsiveness Technology Figure 3.15: SME Generic Strategies Culture Low cost, high quality & differentiated While slightly fewer SMEs reported reputation overall, this was the most likely factor that SMEs were to identify with irst when completing the survey. Respondents were less likely to see lair and creativity (5.3%) or cost advantages (6.1%) as important inluencers of competition success. These results reveal that SMEs largely focus on relationship-based factors (reputation, attention to needs) to achieve competitive success. High quality & differentiated Low cost & differentiated Low cost & high quality Differentiated High quality Low cost 0 10 20 30 40 50 % of SMEs What Drives SME Growth? 30 Respondents were most likely to give preference to high innovation, SMEs were most likely to have introduced quality, with over a half (54%) of all SMEs indicating this new or signiicantly improved their supporting processes as a focus for their strategic approach. The remaining (74%), such as maintenance systems or operation of SMEs were either likely to be pursuing a strategy focused purchasing, accounting or computing. Only 2 in 5 SMEs on offering a differentiated product/service (17%) or had implemented new or signiicantly improved methods lower cost (14%). Interestingly, 1 in 12 organizations were of manufacturing or producing goods and services (43%), pursuing a combined strategy of offering a differentiated with just under a half (48%) of all respondents indicating product/service in conjunction with a higher quality/ logistics, delivery and distribution as an area of innovation. niche; a result that may indicate a lack of focus from these These indings reveal higher innovation activities amongst organizations and/or the operation of different divisions. SMEs than those reported at a national level40. Figure 3.16: Innovation Types Performance Measurement and Tracking Product Process On average, SMEs reported the use of 6-7 key performance indicators. High growth SMEs were drawing on 5-6 growth were using either too few or too many performance metrics. On further examination, respondents indicated their reliance on inancial measures, such as total costs (90%) and proits/ROI (84%). Data on productivity (58%), % of SMEs performance metrics to inform decision making, while low 60 40 20 0 Goods Services Production Delivery Support process process processes unit labor costs (57%), quality (55%), customer satisfaction (55%), training/development (54%) and web performance Innovation Portfolio and Performance (49%) were collected by around half of all SMEs. SMEs were less likely to collect data on absenteeism (42%), To understand innovation further, an analysis was continuous improvement activities (38%) or labor turnover conducted between innovation breadth and a range of (37%). Few SMEs collected data on employee diversity contextual factors including training investments, revenue (14%). A small minority of SMEs (2%) used no performance and proit growth, organizational age and size, and prior measures. venture experience. Innovation breadth was calculated to represent a company’s portfolio of innovation activities. 3.4 Innovation That is, the greater the number of innovations an SME was progressing, the broader their innovation breadth/portfolio. Innovation Types On analysis of innovation breadth and growth Within this study, different types of innovation activities performance, a greater proportion of high growth SMEs were captured . Data was collected on product (i.e., goods were found to have a portfolio that included at least four or services) and process innovation (i.e.., production, out of the ive types of innovation outlined earlier. Growth distribution or supporting activity). Further detail on performance tapered off for those SMEs covering all ive these innovations was collected at the interview stage innovation types, but was still superior to investing in including other types of innovation such as organizational less than four types of innovation. These results held for innovation (i.e., new business practices) and marketing both revenue and proit growth. The more SMEs innovate innovation (i.e., new marketing concepts or strategies). therefore, the more likely they are to experience growth in 39 revenues and proits. At the survey stage (Figure-3.16), SMEs were most likely to have innovated in their service(s) (74%) when compared An analysis was conducted on training investments and with their products/goods (51%). When it came to process innovation. Training investments were conceptualized 31 What Drives SME Growth? both as a training breadth measure to represent a intuitive sense as larger SMEs are likely to have more company’s portfolio of training activities, along with the resources than smaller SMEs. When taken together with number of days per annum staff are trained. A curvilinear the indings on organizational age, those SMEs that grow relationship was observed between innovation breadth quickly to a small and medium size are likely to be more and training breadth. That is, SMEs with a broader innovative. portfolios of innovation activities were investing in a broader range of training activities. These indings hold Finally, an analysis was progressed on innovation breadth true up to eight types of training activities, at which point and prior venture experience (PVE). PVE equated to the the effect tapers off. number of ventures the Founder, CEO or President had started during their career. The analysis reveals that serial Figure 3.17 Innovation Breadth and Training Breadth entrepreneurs are more likely to make broader investments in innovation. These indings reveal the importance of serial entrepreneurs sharing their experiences with irst 5.00 time entrepreneurs. Innovation Breadth 4.00 Barriers to Innovation 3.00 Over the previous three years SMEs indicated that high 2.00 price competition, lack of qualiied personnel and lack of inancial capital served as the key obstacles in meeting 1.00 their innovation goals. Respondents were less weary 00 00 2.00 4.00 6.00 8.00 10.00 12.00 Training Breadth of their competitors or the regulations and costs of government regulations. Figure 3.18: Barriers to Innovation A non-linear relationship was found between innovation 70% breadth and the number of days, on average, staff are 60% trained each year. These results reveal that investments days of training per staff member, with ive days and over offering marginal gains in innovation performance. We will later explore the dynamics of training further in the % of SMEs in training provide clear innovation returns for up to four 50% 40% 30% 20% 10% 0% ‘People’ section. High An inverse relationship was observed between innovation Medium breadth and organizational age. This inding indicate that the breadth of innovation activities are likely to decrease as irms get older. Extrapolation of these results reveal that older SMEs are roughly half as innovative as younger SMEs. These results highlight that more established SMEs require a greater degree of emphasis, and potentially support to catalyze innovation activities. A linear relationship was found between innovation breadth and organizational size; the larger the SME, the broader their innovation portfolio. These indings make Low 3.5 Technology Entrepreneurs are increasingly reporting the disruptive role that technology is playing in changing the way business is conducted41. Within this study, SMEs were asked the degree to which they had adopted technology tools across the organization. Respondents were most likely to have technology-enabled sales and marketing (81%), or support processes including IT (64%), inance (55%), What Drives SME Growth? 32 organizing management information (55%), or purchasing Management (47%). SMEs were less likely to have implemented tools for strategic thinking (22%), distribution and logistics Few Founders, CEOs or Presidents ran their business on (28%), production (33%) or managing people (35%). These their own, with the majority of leaders managing their results reveal that input functions such as advertising, irm with others. Only one in ive SMEs had a role in the marketing and sales, and output functions like inance, business that was solely focused on people (e.g., HRM are where technology is most pervasive in SMEs. The Manager). The majority of SMEs were either relying on processes of translating inputs to outputs is less likely to an individual with partial responsibility for HRM or no be technology-enabled. focused role at all. These indings indicate the limited centralization of the HR function, and the likely resolution Further analysis was conducted on technology and of HR issues at a line management level or directly with growth, in revenues and proits. Akin to the innovation external advisors. When considering the management of analysis, a irm was conceived of investing in a portfolio of the organization and of the HR function together, these technology tools. This supplementary analysis therefore results indicate the prevalence of the owner-manager examined the relationship that a portfolio of technology in the top team and their heavy inluence on people applications held with growth. The results revealed that management throughout the irm. technology tools were signiicantly related to revenue and proit growth only when technology was an integral part of strategy. That is, to make the best use of technology tools, Figure 3.20: Managing the Organization SMEs require technology considerations to be integrated to their strategic decision making. % of SMEs Figure 3.19: Technology Enabled Functions 90 80 70 60 50 40 30 20 10 0 On own On own With others With Others By others By Others Business funcion Work Practices 3.6 People SMEs achieving growth (in revenues and proits) were more likely to be using practices that emphasized an People were identiied earlier to be at the heart of the equitable and transparent workplace, including the growth of SMEs, being a key growth promoter (e.g., harmonization of terms and conditions, employee share experience and skills) and inhibitor (e.g., availability of options, clear grievance and disciplinary procedures and labour) . Understanding more about the dynamics of culture change programs. Low growth and declining SMEs people and the management of the human resource were placing a greater focus on recruitment practices and function in SMEs is therefore essential. performance related pay. 42 33 What Drives SME Growth? When considering communication practices, SMEs of the Human Resource component, which includes achieving growth (in revenues and proits) were more likely recruitment and selection testing, developmental aspects to emphasize two-way forms of communication, including of appraisals, the effectiveness of training systems, and attitude surveys, suggestions schemes, social media and the extent of cross training, job rotation and/or lexible company intranet. Declining SMEs were more likely to work assignments. Finally, employees are incentivized communicate via newsletters, notice boards, or not at all. through the reward and commitment component that When it came to training, SMEs achieving growth (in comprises performance-linked appraisals, appropriate revenues and proits) were more likely to be training staff systems of pay and incentives (e.g. performance/ to become strategic and technological leaders, focusing proit related pay, employee share options), promotion on training staff in leadership and management, IT opportunities, minimum status differentials, and job software/hardware, problem solving, and HRM practices. security. The management of human resources was further Figure 3.22: The Frequency of HPWS examined through the lens of a High Performance Work System (HPWS) framework43. A HPWS is a unique combination of work practice that can help to attract, motivate and retain employees. Conversely, a poorly constituted HPWS can also demotivate and increase labour turnover. It is suggested that the appreciation of the HPWS can provide a useful lens through which to examine work practices in SMEs. No one universal model exists, however practices typically occur across three bundles, and these are outlined in Figure-3.21. Figure 3.21: High Performance Work System IP IP Involvement & Particpation HR HR RC RC When applying the HPWS to SMEs within the sample, the most popular practices were contained with the human resources and reward and commitment bundles. SMEs were therefore more likely overall to focus on practices Reward & Commitment Human Resources that recruit, develop and reward employees. SMEs were less likely to implement practices that support involvement and participation in the workplace. These results are displayed in Figure-3.22. The HPWS bundles within this analysis include a variety The involvement and participation component includes of work practices that are strategic in nature (strat), practices that encourage opportunities for employees acknowledge how work is organized (org), the way to participate more readily in the workplace through information is communicated (comms), how people communication and information sharing, group problem are recruited into the irm (HR), and the focus of skill solving and decentralized decision making44. Employee development activities (skill). We will now explore each skills and abilities are developed through the activities one of these bundles outline in Figure-3.21. What Drives SME Growth? 34 abilities (Figure-3.24). The most popular approach to Involvement and Participation developing people capacity was through staff appraisals, This HPWS bundle includes work practices that support with 3 in 5 (62%) SMEs utilizing this practice. Managing & involvement and participation in organizational decision developing human people (60%) was high on the strategic making and development (Figure-3.23). By far the most agenda. Given the importance placed on quality as a popular approach to involving employees in the workplace promoter of growth, as outlined earlier, it was surprising is through team brieings (74%) and organizing work into to ind only 2 in 5 (39%) SMEs having implemented formal teams (68%). The work of these teams appears to be quality control practices and less than a third (29%) with a connected strategically to the organization, supporting quality management system. Only a quarter of SMEs see innovations and improvement to products/services (72%) it important to formally test (22%) staff during selection and processes (62%). This connection is most likely to be and orient (28%) once joined. Skills development was downward forms of communication, as we found earlier most likely focused on leadership and management that strategy formation is mainly reserved for senior (49%) development and the operation of new equipment leadership levels. (50%). It is likely that the former is focused towards the senior leadership levels in SMEs, with the latter towards the rest of staff at the irm. This approach towards skill Figure 3.23: Involement and Particpation Practice Bundle development, allied with the limited evidence of staing Product/service innovation (strat) orientation, may hamper the ability for staff to contribute Process innovation (strat) Culture Change Program (strat) towards strategic decision making and capitalizing on Teamwork (org) growth opportunities. Problem solving groups (org) Team briefings (comms) Consultative committees (comms) Suggestion scheme (comms) Atttitude surveys (comms) Figure 3.24: Human Resources Practice Bundle Newsletter (comms) Intranet (comms) Notice board (comms) Social media (comms) Communication (skill) Teamwork (skill) Problem solving (skill) 0% 10% 20% 30% 40% 50% 60% 70% 80% % of SMEs Communication practices beyond team brieings usually included within this bundle received little attention Manage & develop HR (strat) Improving quality (strat) Customer satisfaction records (strat) Multiskill or cross-train (org) QMS e.g., ISO9001 (org) Formal recruit & select (HR) Selection testing (HR) Staff orientation (HR) Staff appraisal (HR) Equipment operations (skill) Quaity control (skill) Leadership & mgt. (skill) Mentoring & coaching (skill) Workforce diversity (skill) 0% in SMEs. On studying communication arrangements 10% 20% 30% 40% 50% 60% 70% % of SMEs that would not be considered high performance work practice per se, it became evident that many SMEs rely on Reward and Commitment ‘communication via email’ (64%) or ‘through managers’. This approach exempliies informality in the workplace This HPWS bundle contains work practices that reward and the proximity of key decision makers with the wider employees and engender their commitment to the irm workforce. Around 2 in 5 SMEs train their employees in (Figure-3.25). By far the most popular approach in SMEs communication skills (43%) and problem solving skills is to reward inancially via proit (60%) or performance (38%). related pay (56%), with 3 in 5 SMEs implementing a formal practice. Despite this air of formality, when taken together Human Resources with pay being more likely ‘decided on a personal basis’ (60%), and the minority of SMEs with harmonized terms This HPWS bundle includes work practices that support and conditions (9%), the picture of pay appears more the recruitment and development of employee skills and informal across and within SMEs. This approach to pay, 35 What Drives SME Growth? and broader working practices, may hamper the scaling data raises questions as to the true levels of productivity of SMEs due to time it may take to unwind precedents achieved in Alberta, and the extent to which working hours that have been set in the past. On 2 in 5 SMEs capture have declined in recent years. data on labour turnover (37%) or absenteeism (42%). This might indicate high levels of employee satisfaction with Figure 3.26: Working Hours in SMEs working conditions, or that leaders of SMEs do not believe 45 it important to track this data. 40 Figure 3.25: Reward and Commitment Practice Bundle Av. weekly hours incl. OT 35 Absenteeism records (strat) Labour turnover records (strat) Employee satisf. records (strat) Formal pay system (pay) Performance related pay (pay) Profit related pay (pay) Employee Share Options (pay) Internal promotion (commit) 30 25 20 15 10 Job security (commit) 5 Harmonized T&Cs (commit) 0% 10% 20% 30% 40% 50% 60% 70% 0 % of SMEs This study Working Hours Statistics Canada 3.7 Finance To add further context to the work environment SMEs were asked for the average hours of working, including and Data was collected to understand how SMEs were funding excluding overtime, for an average employee. The results growth, the outputs of which are reported in Figure-3.27. of this analysis are displayed in Figure-3.26. This study The majority of SMEs inance growth through internal identiied the average working week excluding overtime in capital (73%)46 or a bank overdraft/loan (56.4%). SMEs are an SME to be 38.2 hours. Half (52%) of all SMEs reported twice more likely to draw on their own private equity (13%) a length of working week of 40 hours, excluding overtime. or grants (13%) than use venture capital (5%) or business Three quarters (74%) of SMEs reported working overtime angels (5%). hours. The average working week including overtime was 42.6 hours. 3 in 10 10 SMEs reported a working week of SMEs achieving growth in revenues were more likely between 41 and 59 hours, including overtime. to use external sources of inance (e.g., private equity, business angels, venture capital, and grants) when When compared to the average weekly hours including compared to low growth and declining SMEs. Low growth overtime of paid employees in Alberta, reported at 31.3 SMEs were more likely to leverage internal sources of hours , these results indicate higher than average working inance or asset-based loans (e.g., mortgages). 45 hours among SMEs. Employees working for growing SMEs (by revenue and proit) were working an average of 40-45 Taken together, these indings indicate the desire for hours excluding overtime and over 45 hours including Founders, Presidents and CEOs of SMEs to retain control overtime. Employees working for SMEs experiencing low over the way growth is inanced, turning irst to internally growth were more likely to be working a shorter working generated capital to fuel growth. This stance towards week. Either existing statistics underestimate working inancial management beneits from tax policies that hours, private sector SMEs have higher than average reward the retaining of earnings for reinvestment in the working hours when compared to other organizational business. forms, or respondents miss-reported their data. This What Drives SME Growth? 36 Figure 3.27: Sources of Growth Finance Figure 3.28: Investing in People and Technology None 60 Factoring or Invoice discounting Business angel 50 Source of finance Venture capital Other 40 As and when Private equity Grants 30 Equity investment Mortgage Part of a long term plan 20 Credit card finance Family, bus. partner, director loan Integrated to other areas 10 Bank overdraft/loan Internal capital 0 0 10 20 30 40 50 60 70 Human Resources Technology % of SMEs Debt to Equity Ratios 3.8 Advisory Services and Networks To understand the inancing of SMEs further data was Understanding the sources of advice and the networks also collected on debt to equity ratios. The debt to equity upon which Founders, Presidents and CEOs of SMEs ratio measures how much debt a business carries when draw can provide some unique insights to the type of compared to the amount invested by its shareholders . information they turn to when making key strategic These indings revealed that 1 in 5 SMEs have no debt decisions. To obtain these insights, this study examined (19%) and two thirds of SMEs maintain a debt to equity the organizations that SMEs retain membership to, ratio less than 1.00. A ratio less than 1.00 is considered the type and source of advice, and the nature of their advantageous. These indings reveal that many SMEs networks. 47 have the capacity to fund future growth, should they choose to. Membership Organizations SMEs experiencing growth in revenues and proits were This study collected data on the membership of SMEs more likely to have a debt to equity ratio under 1.00, while (Figure-3.29). SMEs were most likely to hold membership low growth and declining SMEs were more likely to have to a trade or industry association, with two thirds of SMEs a ratio of 1.01 to 1.99. This reveals that SMEs that grow, (65%) retaining membership. 2 in 5 SMEs were members hold less debt. of their local Chamber of Commerce, and a quarter of SMEs were ailiates of member-only organizations Approach to Investment (e.g., Entrepreneur’s Organization, TEC Canada), and the Canadian Federation of Independent Business (CFIB). To further understand the nature of the inance function in SMEs, respondents were asked how investments were made in people and technology. The results are outlined in Figure 3.29: Membership Organizations Figure-3.28. % of SMEs 0 These indings reveal that the majority of SMEs make investments in people (56%) and technology (49%) ‘as and when the need arises’. Only 1 in 10 SMEs integrate their investments in people and IT to other areas within the irm. SMEs are more likely to integrate technology considerations to their long term plan, than people investments. 37 What Drives SME Growth? Trade association Chamber of Commerce Member organizations CFIB Employers' association ICD, CCCE Other None 10 20 30 40 50 60 70 Few SMEs held membership to employer associations (7%) or director’s networks (e.g., Institute of Directors, Canadian Council of Chief Executives). These results indicate the high degree of engagement that SMEs have with their industry and trade bodies and that these organizations offer a powerful network and important way of communicating between organizations across Alberta. Figure 3.31: Sources of Advice External accountants External lawyers Other business owners Family & friends Management consultants Bank manager Government of Canada Provincial Gov. Other professional bodies Hiring agency Trade or employers association University Information and Advice Other learning provider Other None Respondents were asked about the information and advice they had accessed over the past three years, the results Head office Unions Fed. Mediation & Conciliation 0 10 of which are displayed in Figure-3.30. The most popular form of advice sought was tax and inancial support (64%), 20 30 40 50 60 70 80 90 % of SMEs Networks followed by business strategy (57%), IT software and hardware, and marketing (49%). 2 in 5 SMEs had procured Finally, data was collected on the networks, clubs and advice on leadership and management development forums that SMEs belong to. SMEs were most likely to (43%), new technology (43%) and sales (39%). Surprisingly belong to one network (27.0%) or three or more (23.0%) few irms, only 1 in 5, had accessed support for innovation. networks. These results reveal that some SMEs are Depending on how innovation is deined, this may focused while others take a broader approach to their underestimate the degree of support on innovative irm networking. 1 in 7 (14%) SMEs did not reportedly belong activities. A minority of SMEs (5%) had chosen not to to a network. For those who were members of a network, access support. These results provide interesting insights club or forum only 3 in 5 (60%) reported that the network to the functions and degree to which SMEs are open to had assisted them in some way. This leaves a large taking onboard new ideas. minority (46%) that retain membership while not extracting the value that meets with their expectations. Figure 3.30: Forms of Advice 70 3.9 Supply chain % of SMEs 60 50 40 An organization’s supply chain contains a range of actors 30 that are crucial to the delivery of customer and consumer 20 value. This study appraised the supply chain of SMEs. 10 0 In particular data was collected on the collaborative relationships between SMEs and others. The survey then focused on the quantity and quality of customer and supplier relationships. Collaboration The most prevalent source of advice was external accountants (78.1%), external lawyers (70.2%) and other Over the last three years, 3 in 5 (57%) SMEs had business owners (66.3%). SMEs were at least twice established a collaborative partnership. On closer as likely to access these sources for support when inspection, these collaborative partnerships were most compared to their bank manager, a government agency or department. Only 1 in 7 SMEs accessed a University for likely to be with suppliers (35%) followed by customers (27%) and ‘others’ (26%). support. What Drives SME Growth? 38 Figure 3.32: Collaborative Relationships to be maintaining relationships with between 20 and 49 customers. When asked the proportion of customers that were ‘key’ customers, SMEs reported 30% or less customers in their current portfolio were ‘key’. The 80:20 rule applied to half of all SMEs. A ‘key’ customer was deined as one whom provides an SME with essential cashlow to sustain the business and offers the potential for long term sales growth SMEs were less likely to deine a ‘key’ customer as one with a signiicant share of the market they served, or offering the potential for increasing or providing them with above average proit margins. Customers Suppliers Suppliers Education establishments Other The majority of SMEs were sourcing supplies from between 10 and 49 suppliers, with 1 in 5 SMEs servicing between 20 and 49 suppliers. Of these suppliers, between Given the high return of ‘other’ responses, these were later 1 and 10 were deemed to be ‘key’. As a ratio, close to three thematically coded. Figure-3.33 reports the results of this quarters (71%) of SMEs indicated that between 10% and supplementary analysis. Alliances were best represented 40% of their supplier portfolio was deemed ‘key’. When here, with a third (32%) of SMEs having some form of asked what a ‘key’ supplier offers their organization, the alliance. Beyond this, co-opetition (the act of working in majority of SMEs reported the provision of goods and/ collaboration or partnership with your competitors) was or services that are critical to their business and those favored by 1 in 7 (14%), being of similar importance to whom “go the extra mile”. 1 in 5 SMEs placed a value on sales agents. SMEs were less likely to have developed those suppliers that provided goods and/or services that relationships with community partners (7%), inancial are hard to ind, made investments in supporting their bodies (7%), First Nations (6%), Government (2%), or business, or supported the development of new products educational institutions (1%). or services (21.7%). Whereas 2 in 5 SMEs valued suppliers that helped them to reduces costs or improve quality. Figure 3.33: ‘Other’ Collaborative Partners 35 Sustainability Practices % of SMEs 30 25 Finally we were keen to explore the voluntary efforts that 20 SMEs are making to operate in an environmentally, socially 15 and economically responsible manner. When asked which 10 5 0 corporate social responsibility initiatives (CSR) SMEs had implemented, or considered implementing, respondents were most likely to have taken action, or were considering taking action in their community. SMEs were less likely to have championed CSR initiatives in their marketplace or in the general environment. Customers Because CSR can be seen as a narrow concept we also The majority of SMEs were servicing relationships with investigated broader sustainability practices in SMEs, between 20 and 500 customers, with SMEs most likely the results of which are outlined in Figure-3.34. SMEs 39 What Drives SME Growth? achieving growth were more likely to focus on business the majority of SMEs (57%) do not believe that promoting proitability and then layer in social and environmental their organization as environmentally friendly will impact practices. SMEs were most likely to turn to social irm growth. sustainability practices over environmental practices. This may reveal that leaders of growing SMEs perceive Figure 3.35: Impact on SME Growth of Supporting the Environment social practices add greater value to their business model or provide a competitive advantage over environmental practices. Figure 3.34: Sustainability Practices Negative effect 80 70 No effect 60 % of SMEs Postitive effect 50 40 30 20 10 0 Environment Social Economic From a social perspective, SMEs were keen on supporting good practice in recruitment and development of employees and supporting their local community. The environmental focus of SMEs was predominantly on producing less waste, which included recycling. Few SMEs were championing the use of renwable energy. Interestingly, 2 in 5 SMEs identiied business owner succession planning as a key sustainability practice that had been implemented, slightly higher than those SMEs who had integrated succession to their business strategy. These statistics align with other studies48. The presence of a succession plan increases steeply when a leader is between 60 and 64 years of age; being twice as likely than 40-49 years of age. The greater focus on economic and social sustainability is not surprising given the result of asking SMEs whether promoting their organizations as environmentally friendly would affect future growth. The results of this analysis can be viewed in Figure-3.35. These indings highlight that What Drives SME Growth? 40 Method The Promoting Sustainable Performance (PSP) The Promoting Sustainable Project (PSP) does just methodology relies on business owners, entrepreneurs this. Data is rigorously collected from SMEs via three and leaders of SMEs sharing their objective and honest cumulative data collection stages depicted opposite: the insights on how and why their organizations achieve survey, the interview, and the organizational case study. growth and enhanced levels of performance. SMEs can choose to take part in all three stages, and at a minimum are invited to complete the survey. This The majority of research in the ield of management and approach (labeled ‘mixed methods’ in the academic world) organizations tests theories using quantitative data via allows researchers to start with observations of a broad impressive statistical approaches and tends to focus on population and then focus on understanding a particular one disciplinary area at a time (e.g., inance, marketing, subset of this population, in this case – High Impact etc.). This approach can tell us what variables are related, SMEs. but not how or why. Where theory is less developed, which is the case for the growth of SMEs, this type of approach At each stage, data is collected on a broad range of is inadequate. issues at the heart of entrepreneurial and SME growth and performance. Instead, researchers need to explain how or why the effects we observe occur. To do this they need to include a The PSP program is expanding. Research teams in other wider set of variables in their analyses that can inluence geographical contexts are adopting the PSP method and growth. Adopting broader research models that take research instruments to collect data on SME growth. account of multiple disciplines affords researchers the Our longer term vision in Canada is for PSP to be run in ability to unlock the organizational ‘black box’. This is each province, offering local and comparative insights on important so we can better understand the process by how and why SMEs achieve growth. We believe this will which inputs are transformed into outputs and build new offer huge value in unlocking future Canadian economic theories in management and organizations. productivity and performance. Figure 3.1: PSP Method survey Interview Case Study What drives SME Growth? 41 What Drives SME Growth? Sample & Data Collection A primary set of selection criteria were applied to the Survey be: SMEs included in the sample were headquartered in • survey sample. To pass this selection stage SMEs had to take part in the next research stage Alberta, privately owned independently operated for-proit organizations. The sample was representative of the broader Alberta business population, by NAICS industry • • A total of 507 individuals responded to the survey, of • closed, multiple choice and open question formats. Data diversifying in their markets, reporting a proportion of revenues generated from working outside the province The survey was made available online and in hardcopy. The survey included 72 questions, with a mixture of strategic, reporting an informal or formal presence of strategy which 396 were SMEs. Navigate to page-23 to understand more on the demographics of the sample. ambitious, reporting a willingness to rapidly or steadily growth their enterprise sector and employee size. The Canadian deinition for what constitutes an SME was adopted49, 50. open to further research, reporting a willingness to • innovating in their products/services and processes, was collected across 15 sections, including: background; reporting investments in innovation across ive main markets and competitions; supply chain; growth; innovation areas52 strategy and management; innovation; corporate social responsibility; technology; human resource management; The rationale for applying the above criteria came from the training and development; inance and funding; sources desire to identify organizations more actively investing in of information, advice and networks; demographics; and, their own development and growth. When applied to the further comments and next steps. survey sample, just over a quarter (26.5%) of surveyed The survey presented over 1,000 possible variables for A secondary set of selection criteria where then applied. analysis. Data was analyzed using SPSS version 24. Data To pass this selection stage SMEs had to be achieving SMEs were found to be exhibiting these characteristics. analysis began with descriptive univariate analysis and high growth, reporting 20%+ growth in employment, was followed by more complex analysis. revenue or proit for the past 3 years. When applied to Interviews above, just over half (56.2%) of the interview sample and the SME sample that passed the primary criteria outlined 1.5 SMEs out of every 10 (14.8%) of the full survey sample, Interviews focused on a sub-set of High Impact SMEs 51 met this criteria. identiied from the survey sample. Figure 3.2: Identifying High Impact SMEs 1. SMEs Investing in growth 2. SMEs experiencing growth 3. SMEs characterizing difference Interview Smaple What Drives SME Growth? 42 To ensure that those SMEs studied were representative of the general SME population a tertiary set of selection criteria were applied. The belief was that a heterogeneous sample would allow the indings of the study to be Research Impact Impact of the Survey generalisable to the broader SME population, rather than At the beginning of the survey respondents were focusing on any one type of SME. To achieve this, the asked whether they were clear on the challenges their criteria adopted the technique of ‘maximal variation’. organizations faced in achieving future growth and/or Essentially, SMEs identiied for interview had to represent: performance. Respondents were then asked at the end of the survey whether they had gained greater clarity on the • all sectors, all major NAICS sector codes to two digits; challenges their organization faces in future growth and/ or performance. • all sizes, including small and medium SMEs; • all genders, including equal likelihood of male or Figure 3.3: Impact of the Survey female leadership; • all ownership forms, including family, private and employee ownership models; and, • All locations, including SMES from the main REDA areas. This resulted in 33 organizations being contacted and secured for interview. Interviews include 76 questions, including a combination of multiple choice and open questions. Interviews took on average two hours, with Access to new info a degree of post-interview follow-up. The majority of Opportunity for relection interviews were conducted in-person at the interviewees Call to action business premises. The interview followed the same Identiied a speciic need section structure as the survey and probed deeper into each survey area. General comments All interviews were recorded and transcribed verbatim. 9 out of 10 (90.6%) respondents initially stated they were Data was analyzed via NVivo version 11 qualitative clear on the challenges they faced. By the end of the analysis software. Interviews were thematically coded and survey a third (34.6%) of respondents had gained greater comparatively analyzed within the section and question clarity on their challenges; and were subsequently asked structure. the reasons for this through an open qualitative space. Case Studies Two in ive respondents (39.5%) revealed that the survey Data is currently being collected and processed on a had provided an opportunity for relection, including subset of case study organizations. These case studies take time as they involve multiple in-depth interviews with employees across the irm. The indings from these case studies will be published in the coming year and we will notify you of them when they become available. 43 What Drives SME Growth? examples like “I am not spending as much time as I should working on the business”, “it [the survey] caused me to pause and think, to create a focus”, and “you asked some questions I should have been able to better answer!” A quarter (25.9%) stating that they were to take action following the survey, with examples including: “highlighted areas for improvement”, “stimulated ideas, burning questions to discuss with staff/team”, and “encouraged/ inspired me to push forward!” Impact of the Interview Respondents were asked at the end of their interview whether they would do anything differently as a result of the interview. The majority (88%) of interviewees reported that they would, and that the interview had helped them to relect on their current approach and operations, had catalyzed action or was of general interest to them. Figure 3.4: Impact of the Interview Drives intospection Catalyzed action Interesting “[The interview] made me more aware of some of the decisions I’ve made, and we discussed some of the new areas I’d like to pursue. It’s been really positive”. - Forestry & Fishing What Drives SME Growth? 44 Endnotes 1. Findings that align with oficial government statistics that ind 97.9% 18. Sectors under 3% in representation are excluded from Figure-3.1. of organizations to be sized between 1 and 99 employees. See: Statistics These sectors include: Agriculture, Forestry, Fishing and Hunting (1.3%); Canada (2016) Key Small Business Statistics, Retrieved from: www.ic.gc.ca. Transportation & Warehousing (1.0%); Information & Cultural Industries 2. For example: ABCTech, ATB, BDC, Ernst and Young. (1.5%); Management of Companies & Enterprises (0.5%); Educational Services 3. Ibid. (2.3%); Health Care and Social Assistance (2.3%); Arts, Entertainment 4. Ibid. and Recreation (1.3%); Other Services (2.0%). The Utilities Sector was not 5. Ibid. Alberta has 50 SMEs per 1,000 employees, while the Canadian average represented within the survey. is 39.2. 19. Key Small Business Statistics, retrieved from www.ic.gc.ca. 6. Acs, Z. J., Parsons, W. and Tracy, S. (2008) High-Impact Firms: Gazelles 20. These indings lend further weight to those found by BDC in their 2016 Revisited, unpublished manuscript prepared for the United States Small research publication “The Scale-up Challenge: How are Canadian Companies Business Administration. Performing”. Within this report BDC researchers identify that the average 7. Savine, K. (2015) Canada’s Innovation Performance: A Scorecard, Centre for age of businesses continues to rise, despite the number of new start-ups Digital Entrepreneurship and Economic Performance. increasing, and that few businesses grow beyond 100 employees. 8. For a good discussion see: Parent, L-M. and Poitevin, E. (2016) Beyond 21. Company name was used to track location, and where this was the Big Idea: Re-Thinking the Innovation Agenda, Canadian Federation of unavailable IP address was used as an approximate. Independent Businesses, October Research Insight. 22. Government of Alberta (2013) The Number of Businesses in Alberta is 9. Debates began in the early 1900s, and their veracity heightens during Gaining Momentum, Economic Commentary, March. ‘bust’ periods. See: Brisbois, J. (2010) Economic Diversiication: Alberta Style, 23. Alberta has developed a network of ‘Regional Economic Development presentation to ABCTech AGM, June 34th, Western Centre for Economic Alliances’, or ‘REDAs’ for short that aim to “stimulate long-term economic Research, University of Alberta. development and growth strategies in Alberta’s rural and urban 10. Ibid. communities”. See: http://economic.alberta.ca/redas. 11. Advisory Council on Economic Growth (2017) Unlocking Innovation to 24. The indicative retirement age in Canada is presently set at 65 years, with Drive Scale and Growth, Government of Canada, February 6, 2017. Retrieved labour laws stipulating that individuals cannot be forced to retire. from: www.budget.gc.ca. 25. PwC. 2014. Securing the future: family business survey 2014, Canadian 12. For an example see: Government of Alberta (2014) Building on our supplement. Entrepreneurial Spirit: A Small Business Strategy for Alberta, October 2014. 26. ATB Business Beat (2016) What is the DNA of an Alberta Entrepreneur? Retrieved from http://smallbusiness.alberta.ca. Volume 14, July edition. 13. Robinson, N. R. (2016) To Promote Growth, Canada Needs to Fixate on 27. Government of Alberta (2017) Highlights of the Alberta Economy 2017, Data Before Credentials, Report on Business, The Globe and Mail. Retrieved Retrieved from: www.albertacanada. from: www.theglobeandmail.com. 28. High growth in this study drew on the OECD deinition of high growth, 14. ilman, M., Raby, S. and Turpin, J. (2012) The BIG Ten: The Ten which equates to 20%+ annualized over a three-year period. Steady growth Characteristics of Successful Growth. ISBN: 978-1-902671-76-5. was recorded as between 0 and 20%. www.oecd.org. 15. For a simple depiction of a business model I would recommend locating 29. Business development in this study shares some commonality to the ‘Business Model Canvas’ at www.strategyzer.com. factors supporting growth identiied within other provincial studies 16. Berlin, I. (1963) The Hedgehog and the Fox: An Essay on Tolstoy’s View of including ‘marketing’ in ABCTech’s 2014 report “The Missing ‘M’ in SMEs” History, Weidenfeld and Nicolson. and ‘attracting new customers’ in the Calgary Chamber of Commerce’s 2014 17. Figure extrapolated as an overall average from those survey respondents report “Small Business in Calgary: Challenges and Opportunities”. that provided their revenue level for the last inancial year. 30. ATB (2016) What Keeps Alberta Business Owners Up at Night? ATB 45 What Drives SME Growth? Business Beat, April. 49. Ibid. 31. ‘Labour’ and ‘inance’ were also found to be key growth challenges 50. Size calculations included full time, part time, seasonal and in BDC’s 2015 report “High-Impact Firms: Accelerating Canadian subcontracted labor. Competitiveness”. 51. BDC referred to the term ‘high impact’ when referring to SMEs that 32. While of lesser importance in this study, these issues are surfaced as the disproportionately contribute to job creation. main growth challenges in the Calgary Chamber of Commerce’s 2014 report 52. OECD (2005) Proposed Guidelines for Collecting and Interpreting “Small Business in Calgary: Challenges and Opportunities”. Technological Innovation Data, Retrieved from: www.oecd.org. 33. Ibid. 34. These factors are in contrast to BDC’s 2016 report “Entrepreneur’s Challenges and Needs”. Within their study, BDC identify ‘human resource challenges’, ‘quality challenges’ and ‘process issues’ to be associated with ‘high growth’. ‘Management’ and ‘personal planning’ are found to be associated with low growth SMEs. 35. Ibid. 36. It would be valuable to understand whether these SMEs were ‘born national’; examples of irms that compete on a national scale from startup. 37. Ibid. 38. Martin, R.L. (2015) Stop Distinguishing Between Execution and Strategy, Harvard Business Review, March Edition. 39. Ibid. 40. Statistics Canada 2015 report “Summary of the Survey on Financing and Growth” reported that only 42% of SMEs had introduced at least one type of innovation. 41. ATB (2017) Are Alberta Business Using Technology to Transform Their Businesses? ATB Business Beat, July. 42. Ibid. After sales and customer acquisition, attracting and retaining the right people appears to be the biggest (persistent) issue keeping business owners up at night. 43. See: Raby, S. (2013) Explaining the Role of Human Resource Management in the Performance of Small and Medium-sized Enterprises, PhD Thesis. 44. For example, see: See: Gilman, M., Raby, S. and Pyman, A. 2015. The Contours of Employee Voice in SMEs: The Importance of Context, Human Resource Management Journal, 25(4): 563-579. 45. Average weekly hours (including overtime) for employees paid by the hour, by province and territory. Retrieved from www.statscan.gc.ca. 46. Ibid. These indings re in contrast to those of Statistics Canada that over half (53.4%) of SMEs seek external inance. 47. To calculate your debt to equity ratio navigate to: www.bdc.ca/en/articlestools/entrepreneur-toolkit/ratio-calculators/pages/debt-to-equity-ratio 48. Bruce, D. and Wong, Q. (2012) Passing on the Business to the Next Generation: Survey Results on Small Business Succession Planning, Canadian Federation of Small Business, Research. What Drives SME Growth? 46 Thank you to our Sponsors 47 What Drives SME Growth? MTROYAL.CA/businessgrowth NEXT! The DNA of Sales and Business Development This research, in addition to a series of industry roundtables has highlighted the need for businesses to build capacity, and graduates to be educated in the fundamentals of sales and business development. Despite the terms of ‘sales’ and ‘business development’ being used frequently within organizations, a close appraisal of the literature reveals a lack of consensus on how they are differentiated. The aim of this upcoming review will be to dedicate attention to sales and business development disciplines, to examine how these disciplines have emerged over time, and the skills and functions that individuals require when working in these ields. The outcome is the development of a competency-based framework for sales and business development that offers further clarity on these ields and how they interact, helping to inform curricula development and further research in the ield. In partnership with: The Institute for Innovation & Entrepreneurship, Mount Royal University Expected release date: Winter 2017