Scaling up a small UK business is an issue. Blog 2 / 4

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Scaling up an SME

Scaling up a small UK business is an issue. Blog 2 / 4

By comparison with US, UK struggles to grow small firms to medium sized ones

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Scaling up a small UK business is an issue. Many have referred to this. The chart shows it to be true. Growing a small business to be a medium one is difficult.

To address this, the UK has established the The Scale Up Institute. The mere establishment of this body lends weight to the problem and at the same time effectively downplays the importance of new business starts.  In a piece in the Financial Times, John Mullins, an Associate Professor at London Business School is quoted saying:

“A common mistake is to focus on simply increasing the number of start-ups. Policy should instead be directed towards “scale-up” companies, many of which will already be trading but need to change their business model to find a more growth-oriented niche. Encouraging start-ups, given the churn that will inevitably occur among them, is the wrong place for government support. A wiser course would be to support growth in companies that are ready to scale up”

To which I would say the following:

  1. There will be a smaller pool of ‘scale-ups’ without a pool of ‘start-ups’
  2. Business density is a vital driver of innovation and competition.
  3. Competition is a vital motivator for a business to ‘scale up’.
  4. The density of businesses in most areas of the UK outside London and the South East is very low. These places need more business starts.  This is particularly the case in Newcastle and the North East.

So, Professor Mullins, I don’t agree that this is an ‘either / or’ for Government policy. It’s both.

More than this, Professor Mullins, in arguing for us to direct support towards businesses that are ‘ready’ to scale up, leads us to picking winners. We first tried to pick winners for business support during Margaret Thatcher’s premiership.  The UK returns to this theme regularly without any evidence that it is possible. It is true that the Scale Up Institute is saying that it is using AI to ‘pick winners’ so things may have changed.  We will see.

All I would say is that in the USA, the most successful economy we seek to emulate, there are NO federal or State programmes that could be described as based on ‘picking winners’.

Therefore, start up and scale up are both important.  How might we address deficincies in both?

The skill of our entrepreneurs

The commentary around growing business is heavily focused on the failings of the firms themselves. Management is insufficiently skilled to grow the business.  To remedy this, we have training and development programmes to ‘scale up’ small firms to large ones.

Of course it is possible  that our entrepreneurs do lack the skills to grow businesses, although I am not sure how this could be established with certainty. However, the evidence does suggest that there is indeed an issue to do with ‘entrepreneurship education’ which I cover here.

The size of the UK market

There is an equally plausible explanation why the UK struggles to grow its small businesses by comparison with the US.  This explanation is based on two things that distinguish the US and UK. Firstly, the US market is around 5.5 times that of the UK.  This means not only that there are more people to sell to, but it also means that prices can be lower. The price advantage in the US market can be extended to overseas markets creating a highly virtuous circle.

The business-to-business market is similarly distinguished.

The chart above does not capture firms with zero employees. In the UK, there are 4.6 million businesses with no employees. In the US, there are 24.8 million. Again 5.5 times as many.  In total, (i.e. this number plus the numbers from the chart), there are 30.4 million businesses in the US; in the UK, there are 4.9 million.

This means that an SME developing nifty busines software has 30 million sales opportunities in the US and only 6 million in the UK. Pursuit of 0.1% of the business market in the US = 30,000 targets; in the UK = 6,000 targets. And so on.

This is a big deal.  Speaking as someone who springs from a company that develops business software, I know that the US dominates almost every niche with products that are cheaper than our home grown examples. Having said that, I am intrigued that Australia and New Zealand seem to punch above their weight. Xero and Atlassian are examples.

Customers don’t speak English

Our membership of the EU should have addressed the market size issue. The EU market is even larger than that of the US. However, our 40 year membership of the EU has not obviously addressed the issue.  This suggests the second of my speculative guesses about why the UK does not grow its small businesses. This is the British (losing) struggle with foreign languages. Not only does the US have 30 million business to business sales targets, those targets also all speak English.  Selling to 0.1% of them in the US, delivers a financial platform to develop foreign language versions of whatever it is being sold. Yet another virtuous circle.

While I recognise that our membership of the EU single market may not have impacted the chart above, it is surely the case that exiting the single market will not help.

But for the moment, we have three possible explanations why the UK does not grow its small businesses: our entrepreneurs are not skilled enough, the UK market is not big enough and we expect our customers to speak English more than we should.

The first of these explanations, that our entrepreneurs are insufficiently skilled, is supported by the findings of the Global Entrpreneuship Monitor. They are particularly pertinent to Newcastle and the North East.  This is discussed here.

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