Articles

The Future of Small Business

“the most useful knowledge we can have, is knowledge about the future”    
     
There are in excess of 1.2 million small businesses in  Australia, representing around 97% of all businesses and employing more than 3 ½ million people.

The top five industries to small businesses: 

1. Construction – 21% 
2. Retail trade – 15%  
3. Property and business services – 19%   
4. Health and community – 7%  
5. Manufacturing -  8% 
6. Other sectors - 30% 

  

While looking 20 years into the past can be amusing, looking 20 years into the future is seemingly too much to handle.    
     
By the year 2017, futurists predict, we will see the fruition of life changing trends. Medical technology may lead to a lifespan of 150 years; niche marketing may lead to each individual becoming his aura her own small business.     
     
It will be a totally different world, and small business will have no small part in it.  The large companies are gradually fading and the ones replacing them will never even come near the size of the IBM as of today.     
     
Mergers of large companies will eventually begin to recede as the market begins to reduced in size.     
     
Even with the current financial turmoil, we are seeing the greatest level of activity by soverign funds and private equity in history.       
     
Is the beginning of the end of big ?     
     
The Kennedy Space Centre, originally built a concrete runway along which a big tractor transported the space vehicles, the launchpad.       
     
But they only got the missiles a few feet before they realized the runway wouldn’t work as the missile studied to sway back and forth.  They had to tear out the concrete and put down a bit of pebbles instead.  To the tractor code goes a long and crushes all the pebbles, but the system is very stable.  That’s what our economy is like.       
     
The concrete runway is a lot like a collection of the Fortune 500 companies, a system that caused the stock market crash in 1929 and 1987 respectively.  In a similar vein, we are now witnessing the credit crunch around the world.     
     
The limb of the economy is on the backs of a whole series of small businesses and this will help mitigate current events.     
     
That small businesses will dominate the future seems a fairly firm prediction.       
     
Major issues include the maturing of the global market, the shrinking pool of qualified workers, and even the lengthening of life itself have become significant separations for small business or owners.     
     
Small business owners must now take seriously the notion of the long-term consequences of the 21st century trends.     
     
Only 60% of small-business owners have superannuation with a median total balance currently at $11,200.     
     
Many small-business owners believe their business is their super.  In Australia, only 5% of the 1.6 million small businesses have less than five employees and are predominantly family owned.     
     
This poses a big question:      
     
Is the rest the family involved in your business really prepared to fund your retirement ? 

Emerging issues

Employee Ownership 

The concept of share ownership has been firmly established around the world.  In recent times, the government set a target to double the proportion of employee owners in the extreme economy to 11% of the workforce by 2009.     
     
With the growing rate of better trained and a more flexible workforce, greater demands and job satisfaction and increase involvement in decision-making, profit-sharing schemes are becoming more widespread.     
     
In the United States, employee ownership has yielded long-term economic benefits, way beyond the usual job retention problems.  These benefits include:     

1. Employee owned firms invest in existing facilities at a higher rate than other firms
2. Employee owned firms reinvest in their human capital at higher rates 
3. Employee owned firms have a higher multiplier effect in the communities through higher levels of home ownership, purchases of consumer product and higher retirement benefits 
4. Succession planning 

CPA Australia has pointed out that the large number of retiring business owners coming onto the market in the next few years will face the problem of not being able to realise the true value of their assets.       

Without proper succession planning, the problem may escalate into major wealth depletion problems for local economies, with falling asset values, loss of retirement savings in income and inability to retain employment from many employees.     

We think at the future of small businesses looks bright, especially in the professional services sector.

Some of the factors pointing to a solid future to small businesses include: 

1. Better educated workforce
2. More emphasis on entrepreneurialship in schools
3. Global economy provides more opportunities 
4. Small businesses that specialize in professional services can provide tailored services to clients 
5. Inexpensive technology costs

People Business

It’s no secret that today’s business success, revolves largely around people and not capital.     
     
Many traditional manufacturers are now essentially service businesses.       
     
In the 21st century people costs are much higher than capital costs.

Consider some of the top people businesses in the world:

1. IBM - $42.6 billion - IT 
2. Hewlett-Packard – $12.3 billion  - IT 
3. Marriott– $8.7 billion - Hotels 
4. Halliburton - $ 16.3billion - Oil/Industrial

The old rules don’t apply: 

Typical airline employee costs are about 1 ½ times the amount of capital costs.     
     
The fact is that companies don’t own their employees as they do their capital assets.  It is this fact that methods of valuing human capital on balance sheets are so risky.       
     
Simply using profit and loss and balance sheet analysis will not cut it.     

Small-business owners, who identify this problem and find solutions will have a significant competitive advantage. 

Different way is for small business to innovate 

Large corporations are faced with slow growth in global competition.  As a result, CEOs view innovation as critical to corporate success.  The CEO of GE is pursuing, around 100 imagination breakthrough projects to drive growth through innovation.     
     
Steve Balmer, CEO of Microsoft stated recently that innovation is the only way that Microsoft can keep customers happy and competitors at bay.     
     
But innovation does not mean new product development or traditional are indeed.  Viewing innovation too narrowly blinds, companies to opportunities and leaves them vulnerable to competitors.     
     
Google has become a multibillion-dollar Goliath.  Not because it is the best search engine, but because it pioneered “paid search” - the powerful concept that vendors would be willing to pay Google to match consumers with their products and services as a byproduct of free searches by consumers.     
     
So what is business innovation?     
     
Innovation is simply something they create value for customers and for the business.  Creating new things, is not necessary sufficient for business innovation.  Customers are the ones to decide the worth of an innovation by voting with their wallets.     
     
Business innovation comes in many flavours.       
     
The hardware industry was fragmented and operated in a very traditional model for a hundred years.  That changed dramatically with Bunnings.

Some examples of business innovation:

• Disney –        used its current assets two produce animated movies.
• Starbucks -    promoted CD sales and cough the stores 
• Rent-A-Car-    opening stores in neighbourhoods, not airports  
 

Contact Us to discuss your business needs and determine if there are ways to innovate and prepare your business for the good and bad times.