Consolidation and growth

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The enterprise ladder – from social exclusion to market share

This document contains a fourth and completely new policy brief for the business creation theme of EQUAL on the subject of "building sustainable enterprises among disadvantaged groups".

This policy brief is part of a series of four on inclusive entrepreneurship:

  • culture and conditions
  • integrated business support
  • appropriate business finance
  • consolidation and growth

These categories are consistent with those used in the "tool for inclusive entrepreneurship" developed by the Community of Practice on Inclusive Entrepreneurship (CoPIE). On the basis of an analysis of good practice during the two rounds of EQUAL, the tool clusters the solutions tested into the four main categories above. The categories could be used in the next round of the Structural Funds to analyse the strengths and weaknesses of business support strategies at different levels and for helping the transfer of good practice.

This document has been prepared (October 2007) by an external expert (Paul Soto) and does not in any way engage the Commission.

Within EQUAL the process of starting up a business has been described as just one step on a ladder. If the ladder does not rest on the firm foundations of favourable attitudes and conditions for entrepreneurship then not enough people will even consider taking the first step to entre­preneurship. No amount of financial and business support will change the underlying situation. But similarly, if start-ups do not have access to markets and competitive technology the ladder will just lead entrepreneurs over the cliff into bankruptcy and debt In fact, the normal benchmark used at EU level is that around ten percent of businesses disappear each year[1]. This figure varies enormously among countries and improves with good business support but it remains dangerously high nearly everywhere.

The situation is far riskier among disadvantaged groups and within disadvantaged areas. For example:

  • Ethnic minorities tend to use their traditional knowledge and networks to set up businesses which trade within their own community. This can be a good way to start but, in the end, the market can become saturated with very similar restaurants, food shops and other such co-ethnic firms, crowding out new entrants.
  • Many women entrepreneurs also find it hard to break into male-dominated business networks which can be crucial for developing contacts and clients.
  • Entrepreneurs within deprived urban and rural areas often focus mainly on local markets. But purchasing power within these areas is low by definition, and the local economy is only capable of supporting a certain number of local service activities like hairdressers, mechanics, shops and restaurants.
  • Social enterprises are often considered the most appropriate solution for providing services which private firms find too risky or costly to provide. However, if they are limited exclusively to these areas it makes it very difficult for them to develop any substantial degree of independence from public funding.

In all these cases, business start-ups can find themselves trapped in low-margin, declining markets, competing among themselves for an ever-smaller share of the cake. In fact, the "displacement" or "substitution" effect of supporting start-ups in these kinds of markets – where every new firm supported simply takes away business from existing firms – has been one of the reasons for excluding some of these activities altogether from some business promotion schemes.

The challenge, therefore, is not just to help disadvantaged groups set up more businesses but to provide them with the tools which will allow them to access some of the more dynamic parts of an increasingly globalised economy.

Many initiatives – but potential gaps for entrepreneurs from under-represented groups

"Gearing entrepreneurs for growth and competitiveness" was one of the five strategic areas of the Entrepreneurship Action Plan"[2] which followed a wide public consultation on the Green Paper on Entrepreneurship[3] in 2004. This recommended three concrete actions – tailor-made support for ethnic minorities and women, facilitating business co-operation in the internal market, and fostering innovative clusters. The first action was dealt with in the EQUAL brief on "creating the culture and conditions for entrepreneurship" and has led to several studies, conferences and networking events. The other two actions focus mainly on innovative firms operating in international markets.

In the strategic area of "encouraging more people to become entrepreneurs" the Action Plan also deals with "facilitating the transfer of businesses" – which could equally be seen as a way of ensuring the continued viability of the activities of the old business.

The European Commission's Communication on "Implementing the Community Lisbon Programme – Modern SME Policy for Growth and Employment" sets the stage for EU enterprise policy during the next round of the Structural Funds. One of its five priorities is also "Improving SMEs' growth potential".[4] This makes reference to addressing "persistent and well-identified market gaps that limit SMEs' access to finance [dealt with in another brief], innovation and Information and Communication Technologies".

A second priority action is dedicated to "Improving SMEs' access to markets" which, among other things, mentions a series of measures to improve access to public procurement by simplifying award procedures and fostering e-procurement, reducing the obstacles to entering international markets and encouraging business co-operation and matchmaking events. All these priorities are reflected in a number of projects covered by the Enterprise DG's €3.5 billion Competitiveness and Innovation Framework Programme for 2007-13.[5]

The Integrated Guidelines for Growth and Jobs[6] and the Regulation for the European Regional Development Fund[7] both mention a number of actions which could contribute to the growth and consolidation of SMEs. The ERDF Regulation refers to themes like technology transfer, links between SMEs, universities and research institutes, business networks, clusters, group technology and so on. However, once again, there is a strong risk that the actions financed under these priorities will be pitched too high for micro and small enterprises set up by disadvantaged groups and that they will not become significant beneficiaries.

Under the new Social Fund Regulation[8] most actions to increase the sustainability of enterprises among disadvantaged groups would probably fall under the priority for "increasing the adaptability of workers, enterprises and entrepreneurs". This opens up the possibility of targeting some of the more vulnerable groups, areas and firms but leaves open the question of how this could be done.

Ensuring the first steps towards viability

The analysis of EQUAL partnerships shows that most projects have, in fact, focussed on improving business support for the start-up phase and increasing access to finance. However, over the past five years, a number of partnerships have also been exploring methods for increasing the sustainability of small and newly created enterprises. They provide valuable lessons for the next round of the Structural Funds. In this brief we describe five of the most common:

Providing the right kind of business support after start-up

It is quite common for potential entrepreneurs to face a wide and sometimes confusing range of agencies offering business support when they are thinking about setting up a business, but then to find that they are suddenly left "on their own" immediately afterwards. One of the explanations for this situation is that it is far easier to justify providing pre-start business support. There is usually a measurable short-term increase in employment and economic activity. It is also clear that free or subsidised business support cannot continue for ever – particularly when the end results can be much more nebulous.

However, this situation can lead to an unnecessary number of bankruptcies that wipe out the value of all the careful support that has been provided beforehand, and leave the entrepreneurs worse off than before – not only out of work but also in debt. As a result, EQUAL projects have explored various methods for providing post-start-up support to vulnerable groups. During workshops held on the subject they recommended that under-represented groups should have access to good quality support during the first three most risky years of the business. Usually, the support they require is far less intense than in the pre-start-up period; it often tapers off as the entrepreneur becomes more confident and experienced; and there is frequently a cut-off point to focus the mind.

Some projects have used the idea of a time bank, which allows entrepreneurs a certain number of hours of advice after start-up which they can call upon when they most need it. At this stage, some projects have explored referral procedures which pass entrepreneurs on from specialist to more mainstream support services.

Other projects stress the importance of regular and systematic monitoring to provide "early warning" of things that are going wrong. One approach to overcoming the cost and distance problems associated with post-start-up advice has been to create internet-based scorecards which entrepreneurs can fill in themselves to check their activities and results against their objectives in a number of key areas. For example, Netmentor [1] is an ICT tool created by EQUAL partnerships in Portugal, Spain, France and the UK which allows entrepreneurs and mentors to monitor developments in three key areas – human resources, production and markets. The advantage of systems like these is that they also allow business advisors and mentors to compare and build up their experience of different sectors and types of business.

Handing on the business – to those that need it

According to a recent EU report[10] around one-third of EU entrepreneurs will retire from the labour market in the next 10 years including significant numbers of those running family enterprises. This will affect some 610,000 companies and 2.4 million jobs every year. Yet experience shows that the chance of survival of a business that is transferred in whole or in part to a new entrepreneur is higher than that of a totally new start-up. As we have seen, this led DG Enterprise to regard "facilitating the transfer of existing business" as a priority in its Entrepreneurship Action Plan.

A number of EQUAL projects in countries like France and the UK have taken up this issue in the latter part of the EQUAL programme. One of their distinctive contributions is to try to link the retirement of older managers and owners with specific target groups – most obviously young people but also women. For example, the Maillages Project in France[11] actively seeks older entrepreneurs who could be looking for a successor to take over their company. It then identifies younger people with the skills or potential to run the business and encourages a partnership between the two aimed at the younger one becoming sufficiently trained and confident to take over the running of the business. The project actively identifies older and younger unemployed people who could support each other's skills and experiences to try to build a successful new business together. It then supports them in developing a business around their different contributions.

Tools for spreading success

Buying into a franchise is also less risky than starting a standalone small business. For example, in the UK nearly 90% of franchises are still trading after three years. This is one of the reasons the franchise sector is becoming increasingly important in most EU countries. To return to the UK, in 2004, there were 720 franchise networks employing around 330,000 people. Nearly all of these networks had vacancies and problems with finding suitable franchisees[12]. However, there are still significant barriers to overcome. For example, only a third of franchisees are women[13] and the cost of buying into a franchise is a major barrier to many potential franchisees.

This is why several EQUAL projects have been exploring methods for extending the use of franchising to groups like women and people with disabilities as well as to sectors like the social economy. For example, the CREATE EQUAL partnership[14] makes information and support on creating a franchise available to groups who face discrimination in the labour market through direct advice, training workshops and a website The project also provides training and a series of web-based tools, and has developed nationally recognised standards for business advisors. Finally CREATE works directly with existing business owners and social enterprises that are considering using a 'structured business format' (SBF) as a way of growing their business.[15]

In the Basque Country, Spain, the ARIADNA EQUAL partnership has also being exploring methods for spreading the ideas of successful co-operatives without the use of formal franchises. Under their approach, an established and experienced co-operative takes out a share in a new start-up, together with the promoters of the new venture and the business support agency itself. After a period of advice and mentoring, the owner-workers of the start-up increase their share of the business, while the parent firm reduces its and the business support agency pulls out altogether. The advantage for the parent company is that it gains a stake in a new market for a lower cost while, at the same time, the new entrepreneurs are able to acquire the experience of the parent company with far less risk.

Opening up public markets to all

According to the Enterprise DG, public procurement contracts amount to more than €1.5 trillion a year, or 16% of the EU's GDP. The sheer size of this market makes it extremely attractive to large and frequently multinational companies, and the rules governing it are both complex and fiercely fought over. In this context, the EU Public Procurement Directive and EU competition policy are concerned to ensure that that there is a "level playing field" and that procedures are as transparent as possible. However, there is concern from many quarters that local SMEs and social enterprises may be excluded by the sheer weight and complexity of tendering processes and their inability to deal with new e-procurement systems.

European procurement law allows local authorities to insert certain social clauses in their procurement procedures (although they are not allowed to discriminate geographically) and the Commission supports what it has called "green" procurement, Recently local administrations have taken at least two different approaches to using their considerable spending power to make the most of this situation and create local jobs. The first favours ordinary private contractors who agree to employ a certain number of unemployed local people, while the second favours social enterprises that not only employ local people but provide certain verifiable social benefits.

A number of EQUAL projects in both the UK and Italy[16] have been active in tackling the barriers local SMEs and social enterprises face in accessing public markets and making the most of these opportunities. They have shown that it is important to become involved as early as possible in the tendering process and to work in parallel on two fronts: firstly, on the procedures with the contracting officers to ensure that they are really accessible to local firms; secondly, to train and build up the capacity of the local entrepreneurs.

Building competitive local supply chains

Terms like supply chains and clusters are generally reserved for the "champions' league" of the knowledge economy. However, there are many niche markets and areas of emerging social and environmental needs which provide important opportunities for entrepreneurship and job creation among disadvantaged groups. EQUAL partnerships have shown that taking a collective and trade-sector-based approach to these opportunities can have considerable advantages over random support for individual entrepreneurs.

Within both the business creation and social economy themes of EQUAL there are very interesting examples of projects taking a trade-sector-based approach in fields like design (Belgium), the environment (Spain), recycling (EU-wide), sports (Greece), culture and the media (UK and Belgium), tourism (France), homecare (UK) and social services in rural areas (Portugal).[17]

One of the key lessons to emerge from these projects is that the emerging opportunities do not translate automatically into new firms and jobs for disadvantaged groups and areas. It is necessary to take an entrepreneurial approach to the entire supply chain and design an integrated sequence of actions which fits each context. This can involve: actions to identify growth areas and niche markets, training to add business awareness to specific sectoral skills (e.g. in culture, design, etc.), training to reinforce and update these sectoral skills, targeted investments in certain strategic areas (often led initially by the public sector), the design of new differentiated products and services, and professional marketing. All of this requires time to bear fruit. It is also much easier if entrepreneurs are themselves organised into networks.

Policy recommendations

In order to build more sustainable enterprises among disadvantaged groups, Member States and regions should consider the following measures:

  • Providing access to high-quality post-start-up business support during the most vulnerable first three years of a business's life. Using IT to create systematic "early warning systems" and to build up the knowledge and experience of both entrepreneurs and mentors in particular sectors.
  • Identifying owner-managers who are considering retirement and establishing methods for "marrying" their skills with the enthusiasm of young people, women and other target groups interested in becoming entrepreneurs.
  • Reducing the barriers to franchising and increasing its accessibility to all social groups and types of firm. Encouraging links between existing experienced businesses and new start-ups.
  • Ensuring that public procurement contracts are genuinely accessible to the small local firms set up by entrepreneurs from under-represented groups and to social enterprises. This involves getting involved as early as possible in the tendering procedures and acting simultaneously to open up procedures and to train and build the capacity of local firms.
  • Encouraging entrepreneurship in emerging markets and sectors. This requires designing an integrated sequence of actions which is adapted to local circumstances and improves the overall performance of local supply chains. It requires time and is easier if local entrepreneurs develop their own networks.

Notes

[1]Eurostat

[2] European Commission, The Action Plan: The European Agenda for Entrepreneurship, COM(2004) 70, p3 - Report on Implementation of Action Plan

[3] European Commission, Green Paper Entrepreneurship in Europe, document based on COM(2003) 27 final

[4] Implementing the Community Lisbon Programme. Modern SME Policy for Growth and Employment, COM(2005) 551 final.

[5] Decision No 1639/2006/EC of the European Parliament and of the Council of 24 October 2006 establishing a Competitiveness and Innovation Framework Programme.

[6] Communication to the Spring European Council. Working together for growth and jobs. Integrated Guidelines for Growth and Jobs 2005-2008. Guideline 15 on Promoting a more entrepreneurial culture and creating a supportive environment for SMEs.

[7] Regulation (EC) No 1080/2006 of the European Parliament and of the Council of 5 July 2006. Both Convergence and Competitiveness and Employment Objectives

[8] Regulation (EC) No 1081/2006 of the European Parliament and of the Council of 5 July 2006.

[10] European Commission: Final report of the expert group on the transfer of small and medium-sized enterprises, Brussels, 2002

[11] Maillages, France, FR-NAT-2004-43921

[12] NatWest/BFA Survey 2002

[13] DP research

[14] CREATE, UKgb-96

[15] Interesting examples of social franchising are the Le Mat chain of hotels employing mentally ill people, CAP Märkte – a group of 40 medium-sized supermarkets employing people with disabilities, CASA – a group of companies providing home care services and Vägen ut! (Way Out) – seven co-operatives employing ex-addicts and prisoners.

[16] UKgb-71 Strengthening the Social Economy, UKgb-51 Social Enterprise East Midlands, TCA 687 SQUARES, TCA 4124 Social Economy Exchange Network (SEEN)

[17]

  • Design: Maison du Design, BEfr-51, Belgium
  • The environment: Factoria de Empresas ES-ES20040524, Spain
  • Recycling: RREUSE network, EU http://rreuse.org
  • Sports: Sports Business Partnership GR-232275, Greece
  • Culture and the media: Celebrating Enterprise, UKgb-112, Audivisual Partnership, UKgb-143 UK and Maison des Musiques Emergentes, BEfr-76 Belgium
  • Tourism: Initiatives de Femmes, FR-LGR-2001-11321 France
  • Homecare: Care & Share Associates (CASA), UK
  • Social services in rural areas: ADERE, PT-2001-106 Portugal