June 09, 2016

We need SME advisers on the ground to boost SME productivity

Writing about web page http://dx.doi.org/10.1080/01442872.2013.875145

We need SME advisers on the ground to boost SME productivity. Being referred boosts the likelihood of taking advice that builds SME capacity by 29 per cent so Moving Information Online can Diminish Change: Advisory Services to SMEs

How to support SMEs effectively has occupied policymakers for decades. Previous work suggests weak competition as a cause of ‘the problem’. Therefore, the means of delivering support matters little. Accordingly, the government moved support online rather than be delivered in face-to-face exchanges between advisers and clients. However, we suggest that firms considering to adopt internal management practices to build capabilities does require face-to-face contact, so practices diffuse in a pattern like an ‘epidemic’. In support a multinomial logit model of 1334 cases of advice found those SMEs that took advice to enhance internal management practices were more likely to be referred by other firms.

This research compared how firms seek advice that builds capability such as IS and best practice interventions (BPI), and how they seek capability-using advice such as marketing advice. The paper argues that advice to small businesses that builds internal capability is risky for the adopting firm, placing greater requirements on the reliability of information surrounding these practices. To ensure that their information is reliable, we found firms to seek word-of-mouth referrals before taking internal, capability-enhancing advice. While governments shifted advice onto the web, this was linked with less intensive advice that failed to build capabilities. In this case, communicating via the web reduced the changes envisaged by the firm.

The models are reported in the table (Table 3 in the full paper). There are two columns for each model representing the estimate for those taking advice that builds capability only (field=1) and those taking advice that both builds capabilities and advice that uses extant capabilities (field=2). Models 1 and 2 use the sample of 1,337 firms, -more models are available where the ongoing advice is taken in the full paper (Mole, Hart and Roper 2014). All the models are significant.

Being referred boosted the likelihood of taking both sets of advice by 29 per cent.
As expected the role of referrals was significant to explain the taking of internal advice that built capability; however, it was actually more significant and influential when linked to both sorts of advice (field=2). There are three significant variables in the baseline equation (field=1): firm size, legal status, and business plans. These are consistently significant throughout the four models. The first is firm size, with smaller firms more likely to take advice. Next was the absence of limited liability which was linked to taking advice. Finally, the absence of a business plan was connected to the advice. This suggests that less capable firms are taking capabilities building advice. For those taking both types of advice (field=2) being in manufacturing had a positive effect. There are significant age effects with a u-shaped relationship, and a similar but weaker relationship with limited liability status. These patterns are repeated across the sub-sample and are robust to including the independent variables.

Multinomial Logit Estimation
Builds capacity Builds and Uses capacities
BLreferred 0.533** 0.877***
(0.249) (0.174)
BLmailshot -0.193 0.139
(0.326) (0.261)
BLwebsite -0.432** -0.0369
(0.193) (0.143)
Firm size -0.299*** -0.0309
(0.115) (0.0759)
Plan -0.607*** 0.0814
(0.182) (0.134)
Limited liability -0.829** -0.300*
(0.193) (0.146)
Three-four yrs old 0.0798 0.663***
(0.328) (0.226)
Ten-twenty yrs old -0.298 0.380**
(0.291) (0.187)
Twenty yrs plus old 0.293 0.516***
(0.231) (0.166)
Manunfacturing -0.0180 0.465***
(0.263) (0.169)
Constant 0.417 -0.846**
(0.404) (0.337)
Observations 1,337 1,337
Log likelihood -1219
Chi-squared 140.4
Degrees of freedom 32
Pseudo r2 0.0544
Standard errors in parentheses * p<0.01, ** p<0.05, * p<0.1

Some of the other control variables were intriguing. The relationship between internal advice, firm size, planning and limited liability status suggested that Business Link was building capacity in less well-organised firms that had fewer management practices: the ‘long tail’ of underperforming small companies (Bloom and Van Reenen 2010). This long-tail of underperforming companies is not new; indeed, it was part of the Commission on Public Policy and British Business in 1997 (Voss et al. 1995, Commission et al. 1997). The commission recommended that SME networks be strengthened; thus, they pinned their hopes on peer-to-peer learning as opposed to what they saw as standardised practices (Commission et al. 1997). However, most networks, and founding teams, are characterised by homophily (McPherson, Smith-Lovin and Cook 2001). Thus, poorly performing firms identified by researchers (Bloom and Van Reenen 2010, Voss et al. 1995, Commission et al. 1997) network with other poorly performing firms; so, networks reinforce differences rather than ameliorate them (McPherson et al. 2001). In other words, poorly performing businesses may be overembedded (Uzzi 1997). To break out of overembeddedness requires an intervention, either from the market through increased competition or through an agency such as the Business Link studied here.

Policy Implications

Several policy implications flow from this study. First, agencies need to focus on word-of-mouth marketing (Reichheld 2003). How customers react to business support services is critical in the business of capability enhancing and transforming businesses but perhaps less so in capability using advice (Branzei and Vertinsky 2006). Since policymakers value building capacity then the reputation of sources of advice is paramount; consequently, it might be wise to take steps that protect the repute of advice and advisers (Mole and Bramley 2006).

The policy implications from the study also relate to the different groups of firms that are receiving different types of advice – market segmentation. Direct mail campaigns are likely to be more effective for advice that uses extant capabilities, such as marketing or sales. In addition, firm characteristics are linked to different sort of advice within this category. Although a model of advice over time it is perhaps going too far, firms receiving training advice, for example, are much older than those who receive marketing advice.

The original paper (Mole et al. 2014) can be found here

Mole, K. F., M. Hart & S. Roper (2014) When moving information online diminishes change: advisory services to SMEs. Policy Studies, 35, 172-191.


Bloom, N. & J. Van Reenen (2010) Why Do Management Practices Differ across Firms and Countries? Journal of Economic Perspectives, 24, 203-224.
Branzei, O. & I. Vertinsky (2006) Strategic Pathways to Product Innovation Capabilities in SMEs. Journal of Business Venturing, 21, 75-105.
Commission, on, Public, Policy, and, British & Business. 1997. Promoting Prosperity: A Business Agenda for Britain. London: Vintage.
McPherson, M., L. Smith-Lovin & J. M. Cook (2001) Birds of a Feather: Homophily in Social Networks. Annual Review of Sociology, 27, 415-444.
Mole, K. F. & G. Bramley (2006) Making Policy Choices in Nonfinancial Business Support: An International Comparison. Environment and Planning C-Government and Policy, 24, 885-908.
Mole, K. F., M. Hart & S. Roper (2014) When moving information online diminishes change: advisory services to SMEs. Policy Studies, 35, 172-191.
Reichheld, F. F. (2003) The One Number You Need to Grow. Harvard Business Review, 81, 46-54.
Uzzi, B. (1997) Social Structure and Competition in Interfirm Networks: The Paradox of Embeddedness. Administrative Science Quarterly, 42, 35-67.
Voss, C., K. Blackmon, P. Hanson & B. Oak (1995) The Competitiveness of European Manufacturing – A Four Country Study Business Strategy Review, 6, 1-25.

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