Managing Small and Medium Sized Enterprises: A case for Verdant Leisures

Executive Summary

Small business play a major role in the economy of the United Kingdom. The sector forms 99% of all private businesses and has employed millions of people. However, these businesses are prone to myriads of challenges that cause failure of many entrepreneurs. Some of these challenges are caused by the business environment. The government policies, perception and support of financial institutions and internal arrangements are some of the key issues that have impacted on SMEs for decades. It is thus important to analyze these challenges in relation to a real and existing company so as to find out, first hand, the existing challenges and attendant measures to go about the problem. SMEs have exhibited the ability to succeed even further with the right conditions in place. Verdant Leisures is an example of a small business that has potential to become a business leader in the tourism sector. Therefore, issues lie both in the internal external aspects of the business for which can be managed by different measures and policies from different sectors.

Introduction

Verdant leisure is a holiday park company based in Scotland and the northern part of England. The company was launched in 2010 but was originally formed in 1998. It is a renowned company that owns and operates holiday parks including self-catering holidays and holiday home ownership solutions. Further, it offers amenities like accommodations, restaurants, saunas, fishing lakes, gyms and indoor heated pools. It boasts of an estimated annual turnover of £31 million for the 2018/2019 financial year (Bloomberg, 2019). The company has been able to stay ahead of other competitors though customer satisfaction and had a commendable customer service complaint ratio of 0.8% in 2018.

In order to accomplish this research, primary data collection methods will be applied in the course of the study. Specifically, interview will be the primary method of collecting data for the research. The aim of the research is to establish the challenges facing Small and Medium Enterprises (SMEs) and eventually design a growth strategy for the case study business.

Factors affecting SMEs

Inadequate Management Skills

According to the Department for Business, Energy and Industrial Strategy, 99.9% of all private sector businesses in the United Kingdom are small and medium sized businesses. Office for National Statistics (2011-2016) estimate that only 44.1% of businesses in the UK manage to survive for five or more years. Essentially, out of 415,000 new businesses, every year, 328,000 will go out of business (Close Brothers, 2016). The fact that 80% of UK businesses fail within their first year shows that the survival rate for new businesses is dismally low. Therefore for SMEs to go beyond five years like Verdant Leisure has done is no mean achievement.

Managerial skills has a big effect on the performance of a business. Many SMEs are thus being dragged behind as a result of poor managerial skills. A survey by Department for Business Innovation and Skills (BIS) conducted a survey in UK and found that despite the existence of over 5million SMEs, only a round 1.27million had any employees (Hayton, 2015). Instances of SMEs failing to employ best practices in management are rampant in the industry. It is a failure of entrepreneurship that is connected with an underdeveloped leadership and management skill. Professor Hayton in his research found that there is a link between leadership skills and the performance of an organization. A combination of leadership, entrepreneurship and management skills and a subsequent implementation has an overall effect on the performance of a business. Therefore, a focus has to shift to the Human Resource Management (HRM) aspect of the business (Hayton, 2015). The HRM department must be actively involved in the implementation of best practices including sharing of information, training, involvement in decision making and employee ownership.

However, small businesses have been experiencing challenges of implementing the above management best practices. The challenge arises from the cost of raising their management capabilities. Activities like training of employees so as to inculcate the culture of best management practices can be costly for small businesses struggling to make profits. In the Federation of Small Business (FSB) report it was noted that SMEs have inadequate management training (Pickernell et al., 2013). In that report, out of the 50% of businesses interviewed only 26% said they had never undertaken any form of management training. Actually, 43% of the businesses interviewed cited prohibitive costs as the major factor precluding them from up skilling staff.

Inadequate financial resources

SME financing has become a major challenge to growth of small businesses in the UK. A study conducted in November 2016 estimates that 46% of UK SMEs have faced barriers in their quest for financing (Close Brothers, 2016). This has inhibited the growth and expansion small businesses. This has been manifested by the attitude of financial institutions towards small businesses. Financial institutions engaging in lending activities tend to shun small businesses since they consider them as high risk (Stein, Ardic and Hommes, 2013). This is even made more difficult by the fact that young SMEs do not have adequate assets to be used as securities for loans from such institutions.

Although there are different sources of financing available to SMEs, these businesses still struggle to meet the requisite requirements. It has been subsequently noted that bank overdrafts are the most common source of external funding followed by credit cards at 13%. Moreover, it was only 7% of business in the study that confirmed that they were able to secure ban loans (BDRC, 2019). Small and medium businesses like Verdant Leisure are currently able to access overdraft and loan facilities from banks, however, they have had to build a profile over the years to reach that level. Simply, young and small business find it difficult to access financing options

Outsourcing as external support

For a long time the perception has been that outsourcing for external support was a preserve of big companies with huge financial muscles. Thanks to the advent of a Service Model, companies can now offer services to other entities to assist them become more efficient, and thereby enhance reduction in costs and a streamlined workflow. Research shows that as at 2014, 60% of UK SMEs had partly of fully outsourced their IT infrastructure. Outsourcing has the ultimate effect of lowering the business risk exposure, saves money, levels playing field with established entities and is expeditious

Given the nature of most SMEs, the employee count is low and sometimes none at all, and financial resources are limited. It means that it would require a lot for a business falling in that category undertake certain services on its own. Consequently, it would appear that employing an accountant or doing the accounts personally would be hectic, time consuming and expenses. A business can make a decision to outsourcing the accounting aspect of the business instead of retaining a permanent employee for that purpose (Scarborough, 2016). Therefore outsourcing presents the best possible solution in the circumstances given that the business has to comply with legal compliances relating to filing of taxes.

Business marketing can be outsourced by an SME. The rationale for outsourcing is that while the business will spend more money, the return on investment is satisfying and far better than if the business did content creation on its own. To this effect, 42 percent of businesses in the UK have outsourced content creation (Scarborough, 2016). It means that businesses no longer have to bear the arduous task of marketing and instead, delegates the same to a specialized company so as to concentrate more on other key aspects of the business.

Technology has become an important aspect of business such that businesses that fail to embrace it find themselves out of date and irrelevant thus collapsing or performing poorly in the market. As a result, even SMEs have joined the bandwagon of technological adoption. Whereas this is good for business in this era of globalization, the same can present threat especially with a dawn of cyber-attacks. It is estimated that 43 percent of cyber-attacks are targeting small business (Hayton, 2015). Unfortunately, it is only 14 percent consider themselves well prepared to protect themselves from such attacks. Hence, outsourcing IT solutions takes away the responsibility from the business to a third party expert.

Purchasing power of a population is generally affected by the rate of inflation and strength of wage growth. The UK economy has been struggling since the decision was made to exit the European Union. Studies indicate that older people have become wealthier hence increased spending by virtue of many people retiring and becoming pensioners. In 2012, it was estimated that over 2million people aged 60 or over owned assets worth more than 1 million sterling pounds (Kingman, 2012). On the other hand, spending power of people under the age of 30 has reduced significantly. This decline has been associated with high unemployment resulting from recession. Also, high housing costs, wage freezes and payment of tuition fees have been considered to contribute to the reduced spending for the population in this young category.

The requirement of technology in businesses has become an indispensable practice. In fact, 71 percent of UK SMEs believe that small businesses should have affordable ways of adopting technology into their operations (BDRC, 2019). At this point, the government’s intervention is required through policies and initiatives to make it easier for small businesses to be capable of employing technology in their daily operations without incurring exorbitant costs. This is absolutely necessary given that these businesses do not have large capital bases to adequately support such activities thus the need for an elaborate digital infrastructure. If small businesses were to divert their resources into technological advancements, then priority areas would be hard hit and productivity levels would fall (Storey, 2011).. Currently, SMEs are focusing their advertisement media on majorly Facebook for social marketing, website work and direct email campaigns.

Lack of effectively skilled staff has an impact on the success of a business. Productivity levels will be lower where the workforce is made up of largely unskilled personnel. This has a direct effect on achievement of business goals and targets hence success will be compromised in the end. In 2015, British Insurance Brokers’ Association (BIBA) conducted a research on SMEs in the UK (BIBA, 2016). It found that 46 percent of SME owners considered lack of skilled workers as the key impediment to business growth. Additionally, the research found out that lack of skilled workforce was a major hindrance to growth of SMEs in the UK. Therefore, it goes without saying that skilled labour is a key element in driving growth of SMEs should be given top priority by the government. In this line Verdant Leisure has grappled with the process of finding the right people to work for them through elaborate recruitment processes.

In terms of digital transition of businesses worldwide, SMEs are still lagging behind compared to large business. A large number of small businesses have thus not benefited from the advancement in technology despite the huge benefits reaped by large size companies in the world. It has been established that the application of technology in enterprise resource planning and use of software application to manage business data flows is relatively higher in large size companies as opposed to small businesses (OECD, 2017). Digital technologies are useful in easing access to skills and talent for SMEs. Consequently, SMEs access to digital technologies is one way of enhancing their access to the global market that is majorly a preserve of large companies. Verdant leisure although currently present in both Scotland and England, has the potential to go global but only if opportunities like the one above are made available.

Strategic issues in SME Management

Small businesses have a wide range of strategies at their disposal to utilize in initiating and sustaining growth. Michael Porter’s Generic Strategies of differentiation, cost leadership and focus are therefore relevant in this regard.

Strategic focus

Businesses that use focus strategy place their concentration on a particular market niche. A proper market research is conducted to identify and understand the dynamics of that chosen market and the unique needs of consumers in that niche. The business then develops specific products for this particular section of the market or provides distinctively low cost products. The overall effect of this strategy, if successful, is that it creates brand loyalty among the customers within a market niche (Barkham, Gudgin, and Hart, 2012). Competitors will therefore find it difficult to enter such a market. Implementation of the strategy can take two forms; cost leadership and differentiation. While cost leadership is focused on no frills prices, differentiation focuses on providing high quality products and services at premium prices.

Verdant Leisures has managed to adopt this strategy successfully by creating a niche for lovers of holiday parks. On one hand, they provide holiday parks for clients who wish to travel and relax for a period of time at affordable prices, and on the other they provide customers with opportunity to buy holiday park homes for ownership purposes. This strategy has worked well for the business so far. Again they have specialised in knowledge of customer needs such that their offers include accommodation for dogs, especially for the dog owners. This kind of approach makes the customer feel valued hence creating customer loyalty.

External and Internal changes

Small businesses are victims of external and internal changes. They have to adopt strategic management practices that can adequately deal with such situations. In the tourism industry like in this case study, weather patterns and climate change are key factors that upset the nature of businesses. Depending on the weather conditions, people will either prefer to stay indoors or decide to look around for holiday parks to relax away from home. Additionally, the fact that the UK’s elderly population has been increasingly spending is a positive factor for Verdant Leisures (BDRC, 2019). This is positive because it has been established that people over the age of 65 have adequate disposable income trickling in from pension and due to retirement, a lot of time is available for them to travel and get away from home in leisure activities.

Consequently, this is an external factor that affects the business positively. Conversely, the younger generation falling below the age of 30 have shown a tendency to decrease their spending wing to factors like high unemployment rate. It means that an age bracket like this will not form a suitable niche for the business. In their advertisement, the business has taken this into account and evidence can be seen with nature of pictures appearing in their website.

Current growth and development strategies adopted by SMEs

The most common strategy employed by small businesses to expand operations is market penetration. Under this strategy, a business has anticipated that there are no new products to be produced and no new markets to sell enter (Burns, 2016). Hence, the business concentrates on the product and market it already has to market the existing products with intent of increasing its market share. Whereas this strategy can increase a business’s revenue, it can also result in market saturation. Entry into an existing market with the same goods can thus be executed by initiating improvements on the existing products, expanding distribution channels, increasing promotions of products and services and decreasing the prices of products and services.

Sale of new products to new markets can also be used to expedite growth and development of a business. This can be done through related or unrelated diversification. It is a risky strategy because customer feedback may be negative or there could be product or service failure (Burns, 2016). However, it is a way of spreading risk in the business so that focus is not in one sector only. For the case of Verdant Leisures, the company can apply concentric diversification by venturing into something like catering services which is still within the area of tourism albeit different from its core business.

Mergers and acquisitions entails the purchase of one entity by another or combination of two or more companies. Even though SMEs have small capital and may find it difficult to acquire other companies, there is still opportunities for two small companies to merge and consolidate resources for more competitive power (Bridge and O'Neill, 2012). In fact Verdant Leisure is a product of a merger that was initiated between 2007 and 2010, which necessitated rebranding. Since then it has been able to purchase a total of 8 holiday parks as at 2017. Acquisitions are beneficial to small businesses since it enables access to larger market share, more revenue, establishment of dominant position in the market and ability to break into new geographical boundaries.

Conclusion

In a nutshell, SMEs have made a huge contribution to the economy of UK. Through employment opportunities and taxes small businesses have played a major role in the growth of UK economy and social growth as well. However, the survival rate of these business is high and requires an improvement in the SME framework through policy review. Verdant Leisure is an example of such companies that has struggled over the years to reach where it is today. Despite such success, it still grapples with issues like inadequate financing, lack of skilled personnel, poor digital infrastructure and fluctuating purchasing power. In the end, policy makers need to develop SME friendly policies for growth and small businesses should adopt best international practices to forge ahead.

Recommendations

• Policy review should be undertaken to enhance SME’s access to financing from banks (Hayton, 2015). The rules can be liberalized while the government can cushion entrepreneurs in terms of security.
• Apart from this, SMEs should adopt alternative financing models like Angel Investment where a third party investor injects capital into the business in exchange for a stake in it.
• Another way of securing capital for expansion is mergers and acquisitions. This is a cost effective means especially if two small companies merger (Burns, 2016). A bigger consolidated business has larger market share and can compete effectively against large established companies.
• More effort and finance should be placed in customer satisfaction in the business (Chen, 2013). In business customers are the most important aspect since without them there is no business. This can successfully be done by outsourcing customer service.
• Enhanced access to global markets and networks through a strong foundation in digital infrastructure, access to business information and financial resources as mentioned earlier.
• SMEs should invest in training of personnel to ensure that their human resource is up to date and uniquely qualified for the current tasks. Investment in trainings is a way of ensuring the business stays relevant with the changing business environment and in return receive income from the same (Frankish et al., 2012). Improving the skills of employees is both beneficial to the businesses and individual employees.
• Through investment in latest technologies, a business will stay ahead of the rest. In order to do so, it needs to undertake market research as well as have a robust research and development team that is abreast with customer needs (Hayton, 2015).

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