Making small businesses big

An academic has carried out one of the most thorough studies into what makes small businesses in Scotland tick.

Professor Gavin Reid, of the University of St Andrews, has completed a fifteen-year study of the performance of 150 small firms across the country.

The researcher revisited a range of small businesses (‘micro-firms’ with less than 10 employees) he tracked throughout the 1990’s to assess their performance over the years.  By going back to reassess those firms, he was able to build up a complete picture looking at how they started up, how they matured and whether they ultimately failed or were a success.

In terms of survival rates of small businesses in Scotland, Professor Reid found that there has been a 5.1% rise in business survivors between 1995 and 2002, but about 30% of Scottish businesses which started in 2002, had closed by 2005.   However, only about 5% of firms closed under ‘financial distress’ (e.g. insolvency or bankruptcy).

Professor Reid, of the University’s School of Economics & Finance, said, “What we are finding is a common misclassification of many firms that go out of business as ‘failures’ – such firms can find a niche, exploit it rapidly, then wind up the business and start another one elsewhere.  This isn’t a bad thing – it should be viewed as good for both individuals and the economy – you put in the effort where it counts, then move to better opportunities, with no waste.”

According to Professor Reid, the biggest challenge at start up is two-fold; building a customer base and controlling debt and the wage bill.  He found that the biggest mistake made by new small businesses is unwillingness to accept small profit for a while, while the commonest mistake was not using new technology.

He said, “The key tip to any new small business starting up is to embrace technology and to do it at launch. The key ‘innovative event’ should be the start up itself.  I’d say the challenge for new small firms in 2007 is thinking smart and going trans-national – there are huge overseas market opportunities emerging in Eastern Europe; if it sells in Edinburgh, why not see if it can sell in Prague?”

Professor Reid’s research examined elements such as hierarchy, strategies and capital structure to innovation and information systems.  His main assessment for the guaranteed success of any small business starting up is simple: being `business like’.

“It’s not a hobby or life style, it’s a competition to be the best you can be, against tough-minded rivals,” he said.

He found that most small businesses were service-based and that survival or good performance wasn’t dependent on the sector.  Established areas in and around Stirling, for example, had a particularly encouraging entrepreneurial culture, whilst areas like Dalmarnock in Glasgow are now targeted for urban renewal, as they have struggled to foster entrepreneurship.

In terms of maturity, Professor Reid describes small businesses as having a ‘life cycle’ much like humans or trees in a forest, with the ‘mature phase’ typically corresponding to the maturity of the owner.  He found that the best balance of experience and vitality is most likely to be achieved when owner managers are in their forties and fifties. After that, winding down the business before retiring, or looking for family succession (an increasingly problematic quest) kicks in.

“My research tracked and analysed the evolution of firms from their early years through to maturity.  The findings have shown that, on the whole, Scotland has recaptured the entrepreneurial spirit – small businesses are very much in it for the long haul,” he said.

Professor Reid is Founder/Director of the Centre for Research into Industry, Enterprise, Finance and the Firm (CRIEFF).  His new book ‘The Foundations of Small Business Enterprise’ is published by Routledge (Taylor & Francis).

ENDS

NOTE TO EDITORS:

PROFESSOR REID IS AVAILABLE FOR INTERVIEW ON 01334 462431, [email protected]

Issued by Press Office, University of St Andrews

Contact Gayle Cook, Press Officer on 01334 467227 / 462529, mobile 07900 050 103, or email [email protected]

Ref:  Small businesses 180607

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