The resilience factor

At a time of domestic political flux and geopolitical shifts, the growth and robustness of UK businesses is more critical than ever.

Paul Beach, Head of Executives and Entrepreneurs at Arbuthnot Latham explains that SMEs are increasingly important, demonstrating resilience in the face of adversity, boosting innovation, creating jobs and generating wealth.

While the uncertainty caused by ongoing Brexit negotiations has placed a spotlight on economic growth and the competitiveness of the UK as a business hub, UK SMEs have shown remarkable resilience. Through managing a challenging backdrop of rising operating costs and shifting consumer demand, SMEs have only grown stronger. This has forged a steep learning curve for nascent entrepreneurs and a challenging path for businesses both large and small, across the UK.

However, the UK has the unique advantage of pre-eminent financial services, the expertise from widespread technological innovation, paired with robust and sensible regulation. SMEs and entrepreneurs are at the centre of this, primed to capitalise on these resources and ripe for growth.

Globally, the UK has one of the highest densities of SMEs. In 2018, the National Federation of Self Employed & Small Businesses found that SMEs accounted for 60% of all private sector employment in the UK and generated a combined annual turnover of £2.0 trillion, or 52% of private sector turnover. That is massive contribution and the pipeline of exciting new businesses is growing increasingly stronger…

While London is undoubtedly a hub of innovation, talent and entrepreneurial spirit is found throughout the UK. Manchester, Bristol and Exeter, among many others, are home to ambitious businesses, disrupting sectors and bringing meaningful contributions to the local and national economy.

In spite of lacklustre consumer spending, the pipeline of newly emerging viable businesses remains strong. Many success stories such as the Exeter based but UK wide Crowdcube, BookingLive, Nested and Push Doctor serve as an example of the heights within an entrepreneur’s reach.

At Arbuthnot Latham, we value innovation and creativity. SMEs in their nascent stages have exponential potential to scale and develop across sectors and channels, able to disrupt and revolutionise new markets, resulting in cost savings and efficiencies.  This optimism however does not mean that the path to success for SMEs is easy. The resilience of entrepreneurs is a reaction to the highly competitive business landscape and the challenge in accessing suitable funding and expertise, in a crowded pool.

Standing out above the parapet, there are several key sectors bucking wider economic growth trends and driving growth. UK intellectual property intensive industries, in particular gaming and entertainment, are world leading and are remarkably insulated from wider economic trends, enjoying growth while more ‘traditional’ sectors see constriction.

Not to be underestimated, the creative industries constitute one of the fastest growing sectors of the UK economy. Similarly, e-commerce businesses capitalising on the ‘right here, right now’ culture of consumption, such as Deliveroo and Just Eat, have accelerated to success from much more humble beginnings.

Fintech is one of the biggest sectors for SME growth, boosted by government support for innovation through the 2018 Fintech Sector Strategy and the development of smart and sensible regulation for emerging sectors, such as the more esoteric blockchain and digital assets in addition to AI and Virtual Reality.

Investment in UK fintech business has more than doubled in the past three years; not only a boost to employment and wealth creation, these businesses are revolutionising industries and creating the opportunity for more traditional sectors to gain a competitive edge.

Once businesses are established and generating revenue, the emphasis shifts from innovation and disruption, to innovation, disruption and resilience. This may seem like a steep challenge for upcoming entrepreneurs, but businesses can deploy several strategies:

• Preparation is key – talent and innovation must be supported by an acute awareness of risks and exposures. This forms your safety net.
• The political and economic environment is always shifting and that can have implications on costs and margins. To insulate your business, it is helpful to consider a variable operating cost structure.
• No matter how successful or ‘expert’ you become, there is always room to learn and improve. Business leaders must be open to strategic adaptation and agility.
• Never get too comfortable! Watching out and adapting to new trends and client expectations, ensures that you stay relevant.
• Stay hungry! Always have appetite for disruption

To protect and promote innovation, we must support the UK’s entrepreneurs. My answer to anyone doubting the UK’s economy and productivity levels? Look out for our SMEs, with proven resilience they will continue to drive growth and create opportunities.

From data to diversification

Apple’s recent decision to launch a new credit card and streaming service has been interpreted as an attempt to strengthen its services business in the face of falling global iPhone sales.

But is the firm’s decision to diversify destined to succeed and should other businesses pursuing growth in maturing or shifting markets follow its example?

Apple is not new to diversification. The company has a track record of diversifying to improve its performance and drive shareholder value. Once a computer hardware manufacturer, Apple Computer became Apple Inc in 2007, marking its focus on consumer electronics. More recently the company has been seeking to re-educate shareholders that instead of tracking global iPhone sales, they should be focusing on the projected growth figures for its services business – as this is where it believes the real growth opportunity lies.

Even with a strong list of partners, the company’s decision to become a content curator is not without risk. It will take time and money to develop a catalogue of high-quality news programmes, drama series, documentaries and films that will appeal to its global customer base.

In the meantime, established players such as Netflix and Amazon Prime Video are competing for consumers’ eyeballs and already offering user-friendly, competitively-priced services. However, with record revenue generated by Apple’s services business in Q2 2019, it is clear that the potential rewards are considerable.

The key to de-risking any move to diversify lies in good quality data and knowing how to use it. In Apple’s case, the business has a ready-made market for its credit card and streaming service and through a process of consumer market testing by profile, content type, territory and device, it can predict demand for its diversified offering with some degree of certainty. This data can be used to plot a roll-out plan that is geared to optimising returns while mitigating financial risk and protecting enterprise value.

Not all businesses opt to diversify for the same reason. Some are seeking growth in a market that is maturing rapidly or where regulations or other restrictions are limiting the company’s growth potential. Others want to de-risk their business model by investing in a variety of products or services, rather than just one. Whatever the motivation, a structured, data-driven process will improve their chances of success.

Research by Harvard Business School indicates that 95% of all new consumer products fail to achieve their commercial objectives. Many are dropped before reaching the market and others shortly after market entry. The later the decision to draw a line under the new product development (NPD) process, the more collateral damage is likely to have been done to the company’s financial performance and enterprise value. With the odds stacked against them, what can businesses do to de-risk their plans to diversify?

Move to an ‘adjacent square’

Rather than taking a leap into the unknown, the decision to diversify should be a calculated step into an ‘adjacent square’ where the business can leverage its existing expertise or tap into a known market. Achieving the right balance of proximity and stretch will enable the business to leverage its scope and scale to the fullest extent, while driving performance and controlling risks. For example, Amazon’s decision to launch its own fashion lines, instead of simply providing a platform for third-party sellers, was an example of vertical integration – a step designed to seize more margin and increase control. Alternatively, a horizontal step could take a business into an unknown market where it could apply some existing expertise or know-how.

Test the market

To mitigate risk when pursuing diversification, the business must be certain about whether there is market demand for any new product or service development. Just because a competitor is making strong profits from a specific activity doesn’t automatically mean that launching a rival product or service would achieve the same success. A detailed and analytical approach to market testing is required to ensure there is market demand to support the business case for diversification.

Get data-ready to diversify

Before deciding to diversify, a business should make sure it fully understands where value lies in its existing business model and where it will come from in the future. Such insights are critical when deciding how to leverage the scope and scale of the business. When preparing a business case for diversification, it is important to have a clear understanding of what success and failure might look like in terms of financial data at key points in the roll-out plan. Before making any move, it may be necessary to take a step back and ensure the business is data-ready to diversify, with access to reliable centralised data.

Roy Williams, co-founder and managing partner at management consultancy, Vendigital.

East Anglian SMEs move from mainstream banks to alternative funding

Growth Street, who are transforming the business overdraft, are currently providing just under £7.5m of overdraft-style credit lines for growing businesses in East Anglia.

It bucks the national trend which, since the financial crash in 2008, has seen the banks dial back the amount they lend to SMEs in overdrafts by 50%. Yet, in that same time, the number of UK SMEs has risen 30%.

Across the East of England, Growth Street has identified a funding gap of over £1.5bn due to the banks’ increasing reluctance to extend overdrafts to small firms.

To help plug that gap, the overdraft-style provider has committed to channelling £75m to East Anglian SMEs, and they are already 10% of the way there.

One of the SMEs to have benefited from the firm’s new take on the overdraft is Cambridgeshire’s own Lunchtime Company, who found themselves with a squeeze on their cash flow that the banks weren’t willing to support them with.

As a provider of school lunches, the Lunchtime Company unsurprisingly experiences a lull in their cash flow over the summer break. However, it’s during this slowdown in demand for their meals that the business also looks to invest to be ready for the new academic year.

To fill the hole, the firm initially applied for an overdraft from the bank. They are a strong business, with long periods of six-figure payments throughout the year, a sound balance sheet and a profitable trading history. However, due to the seasonal nature of their trade, the bank was still unwilling to extend them the money they needed.

Andy Phillips, Growth Street’s East Anglia representative said, “To have already agreed just under £7.5m of funding lines for East Anglian SMEs is a great start, but there’s still a long way to go to plug the gap left by the banks”

“As someone who has been supporting SMEs in East of England since the late 1970s, I’ve seen first-hand how the banks have stopped offering overdrafts of any great value. When I started out in business finance, the banks would have been more than happy to extend a good business-like Lunchtime with a big overdraft, but that’s not how things are anymore.”

“That’s why I joined Growth Street: to deliver the time-tested, overdraft-style facility that SMEs need, but with modern tech to bring it into the 21st century.”

Key ingredients a business needs for growth

Venturing out to start your dream business can be exciting and daunting at the same time. Every day is different and brings new challenges.

So how do you ensure your business doesn’t run out of steam and is successful?

Henrietta Morrison, Founder, Executive Chair and Global Brand Director of Lily’s Kitchen first began her business 10-years ago from her kitchen table selling proper food for pets to a handful of independent pet shops. Today, the business is the largest premium natural pet brand in the UK and a growing international business, currently exporting to over 10 countries across Europe including France, Italy and Spain.

Learning many lessons along the way, she believes the following points are essential for building a successful business:

Inspiration and innovation

There is a saying that inspiration can strike in the most unlikely of places. It’s the lightbulb moment, how you interpret it and how you bring it to life in an exciting, new way that can separate your business from the rest.

For Lily’s Kitchen, it began with my (then) 3-year-old border terrier, Lily, falling sick and refusing to eat. Desperate for results, I started cooking meals for her with fresh lamb, lentils, vegetables, botanical herbs and even fruits like blueberries. After ten days she made a full recovery and I was left wondering what had I been feeding her up to that point that made her so ill. I quickly realised there was an urgent need for proper food for pets in the market and that’s how Lily’s Kitchen was born.

Lily’s Kitchen broke norms within the pet food industry by using real, fresh ingredients like meat – something that wasn’t common 10 years ago – because we believe that pets are valuable members of the family and deserve to eat proper food full of goodness, just like humans. It was that mindset that inspired new and healthy occasion recipes like English Garden Party, Great British Breakfast, Sunday Lunch and Birthday Surprise, offering customers healthy meals for pets that also create special moments they can share with them.

Innovation is critical to be able to stand out from what has now become quite a crowded market – lots of pet food companies have launched since we started in 2008. We are always thinking of how we can make things better and more fun for our fellow pet parents.

Broaden talent diversity

Diverse companies often outperform non-diverse companies. Why? When people from different backgrounds come together, they bring different insights, perspectives and information. This mix results in new and innovating ideas, a more productive team, and ultimately a more profitable business.

We believe that talent isn’t assigned to a gender, culture or orientation, therefore the company strives to create opportunities for all and continually expands its recruitment to more diverse sources of talent. Over 40 per cent of our board of directors are women.

Provide transparency

Being transparent with both your customers and employees helps build important brand trust and loyalty that is crucial for business growth.

At Lily’s Kitchen, the entire team receives regular updates on new business practices, successes and challenges to make sure they feel part of the business. We also use Feefo, a reviews platform that collects feedback from real people. It’s an independent way to leave honest, transparent reviews for a brand after buying something and is entirely optional. The information gathered helps others to know what they might expect from the company.

Business has moved far beyond just offering a product to consumers. It’s important to look at the bigger picture so you can create deep and meaningful connections with both your employees and customers who have the power to drive your business forward.

Create a happy workplace

Employee work-related stress can impact your business in a highly negative way, causing fatigue, loss of motivation and poor employee retention. It’s vital organisations listen to the needs of their employees and create supportive environments that allow them to thrive. The result will be higher performing employees and ultimately a higher performing company.

For obvious reasons, Lily’s Kitchen encourages employees to bring their dogs to work. They are an incredible source of inspiration, help reduce stress and increase productivity by encouraging employees to step away from their computer screens and go for energising walks. We even encourage team members to go on walking meetings and host brainstorms in nearby Hampstead Heath.

A flexi-time policy is also a great way to empower team members to manage their working hours in a productive way. Organisations need to understand that employees have many priorities outside of the office, including family, fitness and friends, and a flexible schedule gives team members the opportunity to get their work done to the best possible standard whilst maintaining a good work-life balance.

Have a purpose

A company’s purpose is the soul of a brand and is the foundation that the business was built on. It should motivate your employees, separate you from your competitors and connect your audience to your business.

Lily’s Kitchen creates proper food for pets and believes in using business as a force for good. We are proud to be a founding member of B Corp in the UK and consider the impact our decisions have on our workers, customers, suppliers, community, and the environment. As part of this, Lily’s Kitchen empowers its employees to champion causes they’re passionate about. This includes offering team members paid volunteer days and encouraging staff to set up purpose-led annual goals such as establishing an office recycling program.