The medium business segment is the growth engine of the UK economy and employs around 15% of the workforce. Yet its performance is curiously invisible, hidden as it is in the all-encompassing SME definition. The challenges facing medium-sized organisations are different in scope and degree from those facing small businesses.
The UK government wants to see Britain as the best place in the world to start and grow a business. Yet most of its attention is on policies and measures aimed at starting businesses. This research study from M Institute, and supported by the Institute of Chartered Accountants in England and Wales (ICAEW) and Microsoft, seeks to focus government attention on the challenges facing medium enterprise, and the actions government can take to support their continued economic growth performance.
2.1. Key themes of the report
Medium business is very different from small and large business
Medium business is different from both small and large businesses in a number of key areas. These differences mean that the challenges they face in the market are different from each other. In many ways, medium business is rather more like large business in its behaviour and characteristics, which makes it even more incongruous that medium business is compartmentalised with small business via the SME definition. The following tables summarises the key differences observed in this report:
|
Small business |
Medium business |
Large business |
|
Owner-managed |
Owners plus professionals in key leadership roles |
Professional management |
|
Micro-management of employees |
Empowerment of employees |
Freedom to act within corporate guidelines |
|
Informal processes |
Formal processes |
Formal structures and processes |
|
Short-term planning horizon |
Longer-term planning horizon |
Short-term results / long-term planning horizon |
|
Low external input |
External input from professionals |
Governance structure separate from management |
|
Equity held by founder / family |
Wider equity base |
Diversified equity base |
|
Small customer base |
Diversified customer base |
Diversified markets with diversified customers |
|
Limited personnel development opportunities |
Culture enables employee / management development |
Multiple career development paths |
|
Low borrowing requirement – government support possible |
Borrowing needed long-term / funding available shorter term |
Wide pool of funding sources |
Table 1: Behavioural differences by size of organisation, M Institute, 2006
Medium enterprise growth is held back by certain economic factors
Although medium enterprise is a powerful growth creator in the economy, it receives little support or consultation from the government. Neither does it seek or expect any help from anybody. Governmental intervention is not desirable in the marketplace, except in those conditions where the market mechanism is either weak or operating inappropriately. Often, medium organisations do not associate themselves as a grouping and therefore little work has been done to find out their needs.
However, research by M Institute has found that medium businesses do face obstacles to growth that are unique to them because of their scale of operation and due to market failure of some sort or the other. In certain instances, these obstacles can be addressed by government policy actions without compromising the working of the market. It is these obstacles that are listed below:
Access to capital
Growing a business needs capital. Not every medium organisation has difficulty in raising capital, particularly when the capital is needed for buildings and capital equipment. But capital is difficult to obtain when the driver for finance is growth. Banks have a short-term view on lending which does not support the longer-term requirements of medium business. M organisations believe that venture capitalists have moved up-market so that their need for a return is such that companies have either to deliver a spectacular growth performance or give the investors a higher share of the business than they would like to. Government schemes for finance are aimed at start-up businesses and are irrelevant to medium business.
M Institute recommends the following actions from policy-makers:
• Investigate why the longer-term financing model between banks and companies that exists on the Continent is not applied by UK banks
• Create a credit rating scheme for medium organisations. Currently, there are six major credit agencies that dominate the large enterprise segment of the market but with none playing in the medium business sector: clearly, there is an issue of scale involved. It may not be worthwhile for any one of the existing commercial credit rating agencies to push-start a scheme for medium organisations, but government could help remove the imperfect knowledge that currently exists between lenders / investors and borrowers.
• Investigate whether there is need in the UK for a funding agency that supports bank loans and other financing when the main use for the funding is to be innovative or enter new markets.
Regional investment
The fastest growing regions in the world attract high levels of foreign direct investment. In those regions local businesses, particularly medium businesses, offer skills, services and products that complement that inward investment. British businesses are largely unaware of the focus of inward investment in the regions they operate in, and three-quarters of medium businesses have never heard of the Regional Development Agency (RDA) operating in their region. Consequently, they are not able to take advantage of the growth opportunities available nor are they able to enhance the competitiveness of the region by offering complementary skills and services.
Regional development will really work for medium organisations if:
• RDAs are intentionally strategic in choosing the strengths of the region they will focus on, in their efforts to attract inward investment
• As RDAs are relatively unknown among British companies, they need to make a conscious effort to promote their regional strategies to organisations inside their region so that the latter can plug into their region’s competitive strategies.
Burden of regulation
Business carries the burden of much of the interchange between government and its citizens, whether administering the relationship between government and its citizens, paying for he policy cost of regulation on safety or consumer protection, or enduring the cost to the economy of ensuring compliance. While small businesses are often exempt from this burden, or outsource the relevant processes to third party specialists, medium businesses pay the price themselves. In certain industries, they report that their costs of compliance are very high because they have to meet the same regulations as large businesses. Such compliance is unrealistic in business terms.
M Institute recommends three actions in the area of challenge relating to regulation:
• Steady performance by government in reducing the regulatory burden, on the lines of the Dutch model, where new regulation is considered only in the context of old regulations that can be scrapped.
• Simplification of the regulatory environment for medium organisations in particular, as they usually have to deal with regulatory issues on their own without the added infrastructure and manpower that larger organisation can use to deal with such issues.
• Reconsideration of the overall burden of regulation in those industries where there is additional regulation from an industry watchdog, such as in travel and financial services.
