Transformation Triangle for SME Productivity and Growth

Yoruk, Deniz E. and Gilman, M. (2022) Transformation Triangle for SME Productivity and Growth. In: ISBE Conference 2022, 28th - 29th October 2021, York, UK.

Preview

Text ISBE 2022 Paper_Deniz E. Yoruk and Mark Gilman.pdf - Accepted Version Download (641kB)

Abstract

In the aftermath of the Covid-19 pandemic, Brexit and an economic trajectory of soaring energy prices, supply chain problems, labour shortages, increasing inflation and interest rates there is great urgency in focussing on how we can help SMEs to build their productivity and growth. In other words, in an era of limited resources, how can we design/reshape business support mechanisms (in the form of strategies, practices, new areas of supports) that are relevant to the changing economic, social and environmental context of SMEs? While enacting business support is a comprehensive activity that involves several agents within the economy, the starting point is to develop a sound business support policy which fully understands growth. Such a policy can be devised in the light of a conceptual framework which is developed not only through academic expertise but also through combining practitioner insights and experiences.

In this paper, we develop a comprehensive growth framework for SMEs called the ‘Transformation Triangle’ that aims to bridge the gap between empirical evidence and practice. To do so, we build on our extensive empirical research combined with our own engaged scholarship activities with SMEs.

Our empirical evidence derives from our extensive analysis of the West Midlands SMEs. Firstly, we conducted a secondary data analysis of the West Midlands economy in the last twenty years. Secondly, we analysed primary data collected through our Promoting Sustainable Performance (PSP) project - a comprehensive business diagnostic survey which was completed by 291 West Midlands SMEs prior to March 2020. Throughout the same period, one of our authors was involved directly with the SMEs in terms of a facilitated diagnostic and one-to-one interventions to develop a business strategy which aimed to address the main/idiosyncratic problems of the issues identified through our PSP diagnostic tool. Our engaged scholarship activity shed light into the emerging issues in the SME environment prior to and throughout the Covid pandemic. Insights are integrated into the development of our framework of the ‘Transformation Triangle’.

The extensive analysis of key economic data on SMEs in West Midlands helped us identify a paradox that was happening in the West Midlands economy up until the start of the Covid-19 pandemic: We call it the ‘SME drag effect’ on the burgeoning West Midlands’ economic growth since 2012.[1] We showed that while the West Midlands is among the few regions in England (with London and East England) to successfully surpass the adverse economic impact of 2008 Global Financial Crisis (GFC), it has nonetheless continued to suffer productivity problems due to an unhealthy balance between positive but small size industry-mix effects on productivity and large and negative effects of firm-level productivity (ONS 2018).[2] Our findings indicated that the shift from production to services sector in the last twenty years might have contributed to improving the West Midlands’ economy, but in terms of productivity, the outcome is not so conclusive. Our findings also established the link between low firm productivity in the West Midlands and the SME economy (i.e. the latter being less productive than it could have been), which called for an exploration of the shortcomings within the SME sector that might cause this drag effect.

We distinguished the underlying reasons behind the SME drag effect in the West Midlands by analysing our primary data through bivariate and econometric analysis of four groups of SMEs, namely high growth, low growth, static and declining, against a wide range of indicators that emerge out of multiple academic disciplines and, hence, range from management and strategy, external relations, innovation and technology, human resource and knowledge management.[3]

Our findings largely indicate that:
1. the differences in the way SME managers perceive and influence the business operations and strategies not only affect their level of growth but also leave no room for change,
2. the fact that most businesses do not have a full understanding of strategy becomes an obstacle for successful organisational transformation that could pave the way for an increase in efficiency and productivity,
3. under-investment in technology and a lack of understanding how to implement new digital technologies holds back the majority of SMEs from becoming higher growth SMEs that will otherwise help to improve business productivity and growth in the SME sector.

These findings shed light on the pre-pandemic situation of the SME sector, and when combined with the unprecedented disruption that the pandemic imposed on to the businesses, they point to a clear necessity for a new approach to supporting SMEs that encapsulates both (i) the need for a change at various levels (i.e. entrepreneur, owner/manager, employee and/or organisational) that were already starting to emerge before the pandemic (e.g. in relation to strategy development, growth aspirations, approach to human resources, etc.) and (ii) the new business environment the pandemic has enforced on the businesses (e.g. integration of digital technologies into business operations, responding to calls for sustainability, circular economy in their businesses). Therefore, we build a transformation approach to SME productivity and growth on the inference from the pre-Covid data on SMEs and link it to the imminent developments of the Covid-19 pandemic.

The framework we generate in this paper sets out to address this need in order to overcome the SME drag effect by focussing on the transformational effect of three areas, which are mindset transformation, strategic transformation and digital transformation. The interdependent but dynamic relationships between these three areas are framed through what we call a ‘Transformation Triangle’ to achieve and sustain SME productivity and growth. The triangle is composed of

1. transformation of business strategy development, as strategy is at the core of firm growth,
2. transformation of mindsets to enable the ability to overcome barriers and transition to different stages of innovation and growth
3. the adoption of digital technologies, which constitute the technological paradigm of a new industrial revolution that cannot be ignored by any size of business.

The third process in this framework is a fluid one, as it will be replaced with new paradigms as they emerge. For instance, once digital transformation is successfully achieved, SMEs can address green transformation with net-zero economy goals. While these emerging paradigms seem be at their infancy and rather far away goals at the moment, businesses can soon find themselves as laggards if they do not initiate a timely planning and gradual implementation process for it.

Our framework aims at not only balancing the trade-off between short term and long term approaches to strategic management but also accentuating/calling attention to the covert aspects of SME growth that are pertinent to endorsing strategic management but largely overlooked. It is, however, not a temporary response to the Covid crisis, rather it provides a systematic approach to organisational transformation that forward-looking SMEs can adopt not only to survive but also to emerge out of the Covid crisis ready to grow. A successful implementation of ‘Transformation Triangle’ by the SMEs supported by the targeted SME policies in these areas by the local and national governments promises creating higher productivity and sustainable regional and national economies. Therefore, we believe it will be evermore useful to SMEs and policymakers as a new tool in the aftermath of Covid-19 pandemic.

This paper will explain each node of the Transformation Triangle in detail and show how SMEs, policymakers and practitioners can utilise our framework for building increased productivity and growth in the 21st century.

[1] For the detailed analysis of the origins and the conceptualisation of the drag effect of SMEs in the West Midlands, see Yoruk, D.E. and Gilman, M., (2021a). “The SME Drag Effect in the West Midlands Economy”, Birmingham City Business School, Centre for Enterprise, Innovation and Growth, CEIG Report No.1/2021.

[2] Office for National Statistics (2018), ‘The regional firm-level productivity analysis for the non-financial business economy, Great Britain, April 2018’. While Scotland presents a similar trend, as opposed to Scotland, in the West Midlands the rising productivity level due to the changing industry structure is not sufficient to reverse the drag effect created by the low firm-level productivity.

[3] Yoruk, D.E. and M. Gilman (2021b), “Understanding the SME Drag Effect in the West Midlands Economy – Findings of PSP Growth Diagnostic (Survey)”, Birmingham City Business School, Centre for Enterprise, Innovation and Growth, CEIG Report No.2/2021.

Item Type:	Conference or Workshop Item (Paper)
Dates:	Date Event 13 October 2022 Accepted 31 October 2022 Published
Subjects:	CAH17 - business and management > CAH17-01 - business and management > CAH17-01-01 - business and management (non-specific) CAH17 - business and management > CAH17-01 - business and management > CAH17-01-02 - business studies CAH17 - business and management > CAH17-01 - business and management > CAH17-01-04 - management studies CAH17 - business and management > CAH17-01 - business and management > CAH17-01-05 - human resource management
Divisions:	Faculty of Business, Law and Social Sciences > Birmingham City Business School
Depositing User:	Deniz Yoruk
Date Deposited:	22 Mar 2023 13:57
Last Modified:	22 Mar 2023 13:57
URI:	https://www.open-access.bcu.ac.uk/id/eprint/14269

Actions (login required)

View Item