Could Covid-19 give SMEs strategic space to improve productivity?

For a long time, the UK has produced many firms that perform poorly yet manage to survive. Various descriptions of these firms have been used. In recent debates about productivity for example they have been referred to as ‘the long tail’ of underperforming businesses. Shortening the long tail has been identified as a policy priority because better business performance is a driver of Britain’s economic prosperity. Research has shown that underperforming firms fail to adopt the kinds of managerial practices that leading firms take for granted. Accordingly, encouraging lower performing firms to catch-up through adopting these managerial practices has become seen as a recipe for greater productivity growth in the UK. This underpins the approach embraced for example in the ‘Be the Business’ campaign, which aims to diffuse better management practices by ‘nudging’ firms to change their behaviour through enabling benchmarking against other businesses. When firms become aware of their relative performance, it is assumed they will take actions to improve it.

Previous research has found that when firms have increasing concerns they may turn to outside advice to help re-orientate the business (1). Firms also often need to turn to external business advice to help them introduce new management practices. Previous research has characterised the advice process as one which can create a ‘strategic space’, in which firm managers can reflect on their business (2).

Strategic space requires the investment of time and capabilities through an ordered process. In the current Covid situation, this may include the use of new knowledge developing or adapting the firm’s capabilities. Managers may be put into a position where they have the time to reflect and adapt to a changing financial context, or ask basic questions about whether the firm operates well, or whether customer relationships are strong enough to move online. Often the use of concepts new to the business can facilitate productive reflection (e.g. developing a growth strategy). Some managers will access and communicate with external advisers which can help crystalize reflections on the business.

Throughout the 2010’s the findings from the government-funded Longitudinal Small Business Survey (LSBS) pointed to a reduction in the proportion of SMEs taking external advice. It is possible now, however, that the Covid_19 crisis may reverse this decline, as more firms experience uncertainties and threats to their survival.

Trends from the 2008 recession provide some useful indications of likely developments. These showed dramatic increases in the demand for external advice during a period of economic turbulence. Various UK small business surveys show the numbers of advice-taking businesses jumped considerably. For SMEs this went from 27% in 2008[1] to 46% in 2009, and for medium-sized businesses this went from 34% to 68%. Researchers in The Netherlands too showed that greater dynamism in the market environment encourages SME managers to seek external assistance (3). ERC research has shown that external assistance can help to build resilience (4), providing support and an accountability mechanism. The accountability mechanism is invoked when SME managers have repeat visits from the same adviser and deadlines for action are naturally set, making for a developmental process.

The present Covid-19 crisis provides entrepreneurs and SME owners an opportunity to reflect upon their business operations and strategic options once the lock-down response to Covid-19 passes. To succeed though SME managers and/or their advisers require the capability to envisage and adapt to the post-Covid-19 economy to strategically position their business for future success.

SME managers must be willing to use the Covid_19 ‘strategic space’ to think, rethink, change and adapt. Not all managers will be able to facilitate their strategic space effectively. The administrative processes ensuring basic survival like business loans and furloughing staff need to be addressed before the awareness that advice would be useful. The enforced contextual change may trigger taking advice, often prompted by change and a lack of ability to deal with the issues that have arisen, sometimes referred to as a deficit in ‘information processing’, so if the business needs to spend a great deal of time on the nuts and bolts of ensuring survival this will crowd out any strategic space. Those firms that benefit the most from advice understand clearly what they want to achieve. The search for advice can then focus on finding persons with the appropriate expertise with whom a business can build a relationship using existing networks and word-of-mouth.

For policymakers there are three implications:

1. A need to enable businesses to meet the current short-term crisis before getting to the next step is paramount to give SME leaders the space to reflect.
2. A need to make provision for greater numbers of SME managers seeking advice, perhaps double the numbers of last year. Effective signposting will be necessary.
3. A need to have processes and approaches to help SME managers to realise their specific goals through diagnostic interviews and revised business models.

Consequently, as long as the firm can finance survival, (a big if) the Covid-19 lockdown can provide business managers with a breathing space in terms of their business activities and a chance to reflect, recover and develop their businesses.

Kevin Mole, ERC Research Associate and Associate Professor of Enterprise, Warwick Business School

Please note that the views expressed in this blog belong to the individual blogger and do not represent the official view of the 

Enterprise Research Centre, its Funders or Advisory Group

References

1. Mole K, North D, Baldock R. Which SMEs seek external support? Business characteristics, management behaviour and external influences in a contingency approach. Environment and Planning C: Politics and Space. 2017;35(3):475-99.

2. Jones O, MacPherson A, Thorpe R. Learning in owner-managed small firms: Mediating artefacts and strategic space. Entrepreneurship and Regional Development. 2010;22(7-8):649-73.

3. van Doorn S, Heyden ML, Volberda HW. Enhancing Entrepreneurial Orientation in Dynamic Environments: The Interplay between Top Management Team Advice-Seeking and Absorptive Capacity. Long Range Planning. 2016;50(2):134-44.

4. ERC. Building resilience in under-represented entrepreneurs: A European comparative study. Warwick and Aston ERC; 2020.

[1] The report was released in 2009 but was based on fieldwork in 2008