UK SMALL BUSINESSES IN RECESSIONUK SMALL BUSINESSES IN RECESSION

David SmallboneProfessor of Small Business andProfessor of Small Business and

Entrepreneurship

Small Business Research CentreKingston Universityg y

THE CONTEXTTHE CONTEXT 2008-9 was the deepest recession facing the world economy

since the 1930s (World Bank 2009) affecting both demand &since the 1930s (World Bank, 2009), affecting both demand & the availability of credit

UK economy is one of the worst affected: GDP declined by 5.9% across 6 consecutive quarters from Q2 2008• Role of financial services• Role of financial services

• Level of indebtedness

Crisis has impacted on companies of all sizes

Conventional wisdom is that SMEs are particularly vulnerable

Compulsory liquidations in E&W 23% up in 2009 and Compulsory liquidations in E&W 23% up in 2009 and individual insolvencies increased 26%

KEY QUESTIONSKEY QUESTIONS

How has the economic crisis impacted on How has the economic crisis impacted on small firms?

How have firms responded?

Business Strategy & Management Literature: little literature directly related to strategic adaptation 

under recession conditions:id li i d i i l• wider literatures on strategic adaptation to environmental 

jolts/shocks, endgame strategies in declining industries & business turnaround

3 broad types of strategic adaptation:• retrenchment• investment• ‘ambidextrous’

retrenchment probably most common approach…… but also evidence of investment & ambidextrous 

happroaches

some evidence of strategic change across the businesssome evidence of strategic change across the business cycle

B i Si I flBusiness Size as an Influence

small firms’ limited resources affects ability to scan, analyse & respond to environmental shocks ( l bilit h th i )(vulnerability hypothesis)

b i bl fl ibl h i i but size may enable a flexible approach – permitting rapid adjustment of resource inputs, processes, prices & products (resilience hypothesis)& products (resilience hypothesis)

size not the only influence – hence likely variability in size not the only influence – hence likely variability in performance

longer‐term consequences of short‐term responses

SOME EMPIRICAL EVIDENCE FROM THE UK

Aims:Aims: • investigate impact of recession on a diverse sample of UK small 

businesses & their responses

Methods and Data• 2 stage design – online/mail survey of 343 small businesses (March‐

August 2009) + in‐depth interviews with 26 firms (June‐August 2009)2009)

• tenants of a major industrial and commercial property provider in London 

Online/Mail Survey and Interview Samples: Employment and Main Activity 

Online/mail survey(% of sample)

Micro (< 10 employees) 76Small (10‐49 employees) 20Medium (50+ employees) 4

Manufacturing 11Construction 4Wholesale & retail 15Information & communication 15Business, finance & professional services 41Healthcare & education 4Other services 9

N 343

Note: column percentages may not sum to 100 due to rounding.

Business Performance Changes Between Q1, 2008 and Q1, 2009 

Value of sales(%)

Profit margins(%)(%) (%)

Significantly higher 11% 6%

Slightly higher 16% 14%Slightly higher 16% 14%

About the same 19% 27%

Slightly lower 28% 29%

Significantly lower 24% 20%

Missing data 2% 3%

N 334 343Note: column totals may not add to 100% due to rounding

Negative Effects: Finance-related

34

24

Credit periods and/or credit terms from suppliers

Availability of bank loans/overdrafts

49Level of cash at bank

64

55

Late payment by customers

Bad debt or uncertainty over customer payments

0 10 20 30 40 50 60 70

Selected Recession‐Related Effects 

PositiveEffect(%)

No Effect(%)

NegativeEffect(%)

Types of Effect

Cost of supplies 8 44 48Falling value of sterling 14 43 43Transport costs 7 51 42Energy costs 5 55 40Energy costs 5 55 40Staff motivation/effort 19 56 26Ease of staff recruitment 29 62 9

Notes: Respondents were asked ‘Since the start of 2008, to what extent has your business been affected by the following ...?’ Rowpercentages do not sum to 100 due to rounding. Ns vary due to exclusion of cases with missing data.

Actions Taken to Increase or Maintain Performance Since the Start of 2008

Actions Taken % of sample

(a) Changes in sales and marketing: 83Increased sales effort ** 56R d d lli i h ld i i b l 27Reduced selling prices, or held price rises belowinflation **

27

Increased advertising & promotional expenditure 25Reduced advertising & promotional expenditure 14Reduced advertising & promotional expenditure 14

(b) Changes in markets: 77Selling to new types of customer 48Selling to new types of customer 48Selling more to existing customers 40Selling in new geographic markets 27

( ) Ch i l t 73(c) Changes in employment: 73Reduced numbers employed ** 31Introduced wage/salary freeze ** 20Introduced new working practices ** 19Increased use of external labour (e.g. sub-contractors,freelancers agency temps casuals etc)

18freelancers, agency temps, casuals etc)

Increased numbers employed ** 18Taken greater care in recruitment of staff 15Increased employee training 14Increased use of unpaid family labour 5Increased use of unpaid family labour 5Reduced employee training 4

(d) Changes in products and/or services offered 64Introduced new or improved products or services 58Reduced the range of products/services offered * 9Increased use of intellectual property (e.g. patents,registered design, registered trademarks, copyright) *

5

(e) Changes in Finance: 64Renegotiated the cost of supplies 29Invested personal savings * 19Shortened payment periods from customers/creditors 16Reduced debt to external sources 14Extended payment periods to suppliers 13

*Reduced investment expenditure * 12Increased debt financing 7

(f) Ch i O /M B h i 63(f) Changes in Owner/Manager Behaviour: 63Personally worked longer hours * 58Cancelled personal holidays ** 23S ld l t t t f b i 5Sold personal assets to compensate for poor businessperformance

5

Other changes in owner-manager behaviour 6

(g) Changes in production/business processes: 53(g) Changes in production/business processes: 53Used new suppliers 35Invested in new equipment 26

(h) Changes in business organisation: 39Made changes in managerial roles/functions 32g gMade changes in the management team 16

(i) Changes in premises: 29(i) Changes in premises: 29Relocated the business to cheaper premises 16Opened new branches or outlets * 7Cl d b h tl t * 5Closed branches or outlets * 5Negotiated a change in the duration of the lease 3

N 343

Notes: respondents were asked to report actions from a prompt list, and could indicate all, some or none from the list.Italicised figures refer to those reporting any of the actions within each of the nine categories.* Indicates significant difference (0.05 level) between firms identifying recession effect and other firms. ** (0.01 level)

Changes in the Use of Different Types of Finance by Firms 2008‐9

Increased Use(%)

No Change(%)

Decreased Use(%)

Never Used(%)

Bank overdraft 17 28 5 50Bank loans 4 13 4 7Business credit cards 12 50 6 32Personal credit cards 11 40 8 41Leasing or HP 7 31 6 57Trade credit 11 46 2 42Factoring etc 3 15 1 81Grants or subsidised loans 3 9 1 88Informal equity finance (i.e. 7 13 1 80family & friends)Formal equity finance &business angels

3 11 2 85

l iPersonal savings 22 24 3 50Other types of finance 83 n/a 16.7 n/a

Changing Patterns of FinanceChanging Patterns of Finance

‘credit crunch’ might lead to changes in supply of, anddemand for, finance

limited change in financing since start‐2008:• for 8/10 external finance sources, the most common response 

was ‘never used’

• 4/5 never had a bank loan 1/2 never used an overdraft• 4/5 never had a bank loan, 1/2 never used an overdraft

• higher use of personal savings & overdraft – linked to lower levels of performance (sales & profit margin change)  & the 5 ‘fi l d’ i‘finance‐related’ impacts

aversion to debt – reliance on business profit & personal wealthwealth

Direct impact of ‘credit crunch’ less than anticipated

UNSUCCESSFUL FINANCE SEEKING

‘credit crunch’ might lead to (a) declining success in li i f fi d/ (b) di li iapplications for finance and/or (b) discourage application

limited evidence of unsuccessful application:• 3/10 reported an unsuccessful/partly successful application, 

especially for overdrafts – but: similar to other UK survey dataespecially for overdrafts  but: similar to other UK survey data

• mostly reported by firms experiencing ‘finance‐related’ impacts

• no correlation with performance or business size – suggests real supply‐side constraints for a minority of sample

limited evidence of discouraged borrowing:• non‐applicants mostly report no need for external finance, esp 

high‐performing firmshigh‐performing firms

BUSINESS RESPONSES: SURVEY DATABUSINESS RESPONSES: SURVEY DATA  Business responses are highly variable:

• introduced new product/service, working longer hours, increased sales effort (more than 50%)

• closed branches/outlets reduced training (5% or fewer)closed branches/outlets, reduced training (5% or fewer)

Mean 8.1 actions (from a prompt list of 39) since start-2008:• firms reported 0-20 actions (6% reported no action)• most combined revenue-generating and cost-cutting action

Actions taken correlated with:• performance (sales & profit margin change)performance (sales & profit margin change)• business size (sales, employment)• reported experience of recession-related effects

BUSINESS RESPONSES: INTERVIEW DATABUSINESS RESPONSES: INTERVIEW DATA

importance of business responses in mediating l d ff frecession‐related effects on performance

types of effect: types of effect:• ‘severe shock’• ‘limited impact’

‘ i d i t’ ( l ‘ t i h th ff t d’)• ‘no perceived impact’ (plus ‘uncertain whether affected’)

variable link between effects/response/performance:variable link between effects/response/performance:• firms choose how to respond to particular effects• contingent on resources & actions of others over whom the firm 

has no controlhas no control

BUSINESS OPPORTUNITIES IN RECESSIONBUSINESS OPPORTUNITIES IN RECESSION

Investment in staff, premises and product development thatInvestment in staff, premises and product development that would otherwise be perceived as uneconomic may become worthwhile because inputs can be obtained at prices that facilitate profitable production and supplyfacilitate profitable production and supply.

Intensified competition stimulates firms to seek innovative solutions to revenue generation and cutting costs.

Purchasers may switch to new suppliers on cost grounds Purchasers may switch to new suppliers on cost grounds

Declining demand may lead some businesses to exit the g ymarket, leaving surviving firms to compete to secure the ‘vacant’ market share

CONCLUSIONS: VULNERABLE OR RESILIENT?CONCLUSIONS: VULNERABLE OR RESILIENT?

Recession generates diverse effects, business responsesRecession generates diverse effects, business responses & performance outcomes

So no single recession effect

Responses linked to wider business & market context but also to small business owner agency – motivation & use of resourcesuse of resources

Vulnerability not a given characteristic of small firms ‐y gsome small businesses do appear to be beating the recession

CONCLUSIONS (cont)CONCLUSIONS (cont) 

‘credit crunch’ generates diverse effects, businesscredit crunch  generates diverse effects, business responses & performance outcomes so far• limited direct impact – only a minority of sample affected

‘f l d’ l h h• ‘finance‐related’ responses – less important than other actions• applications for finance no more likely to be unsuccessful/

partly successful than pre‐recessionp y p• no great discouragement of borrowing – due more to limited 

demand

responses linked to wider business & market context but also to small business owner agency:g y• aversion to debt• boot‐strapping & sustainability