Small Business Success Index

This research is based on a holistic approach to gauging the health of small businesses, as captured in the Small Business Success Framework (see Figure 2). At the heart of the framework is “competitiveness,” a multi-faceted construct that is measured with the Small Business Success Index (SBSI). The framework goes beyond the SBSI to also capture the outcomes or consequences of competitiveness, as well as other factors that relate to competitiveness, both internal (such as owner traits or technology usage) and external (like the economy or regulation). These areas are covered in the survey questionnaire, and their linkages were validated in the baseline study (December2008/January 2009).

Figure 2

Small Business Success is measured on several dimensions and quantified on a scale of 0 to 100 (completely failing to completely successful). The SBSI is based on 28 measures, which capture the six dimensions (or sub-indices) below:

Capital Access, including availability of working capital, capital for long term investments, and expert financial advice
Marketing and Innovation, such as identifying new prospects, showing effective corporate positioning, converting leads, finding ways to efficiently advertise, and the ability to come up with new ideas
Workforce, including the ability of small businesses to attract, retain, develop, motivate and deploy employees efficiently, as well as encourage creativity from them
Customer Service, which is the ability of small businesses to service their customers, show they care about them and grow their relationships
Computer Technology, which includes making technology work effectively and efficiently in the organization
Compliance, which is the ability of the small business to understand and comply with laws and regulations, including ensuring data security

These dimensions have varying importance in a small business’s overall SBSI score. For example, performance in Capital Access has the most impact on overall competitiveness, accounting for one-third of the total competitiveness score (see Figure 3). Marketing and Innovation is also highly important, making up almost one-quarter of the SBSI score. These weighting factors, which sum to 100%, are based on the degree to which each sub-index is able to explain a small business’s perceived success in meeting broad goals such as building wealth, growing, and providing an attractive income and lifestyle for the owners.

Figure 3

How competitive are small businesses today?

As of December 2009, when the most recent wave of the SBSI survey was completed, small businesses had an SBSI score of 75. This can be considered a middling rating, or the equivalent of a ‘solid C’. Based on their scores, individual small businesses can be classified into four competitiveness groups (see Figure 4):

• 21% of small businesses are Highly Competitive (an SBSI score of 85 or higher)
• 34% are Marginally Competitive (an SBSI score of at least 75 but less than 85)
• 25% are Marginally Failing (an SBSI score of at least 65 but less than 75)
• 20% are Failing (an SBSI score below 65).

Figure 4

Competitiveness, as measured by the SBSI, relates strongly to the ability of a small business to succeed in meeting broad business goals. Owners of businesses in the “highly competitive” category largely believe they have successful businesses; for example, the businesses are growing, creating wealth, avoiding risk, and meeting the owners’ expectations for income and an attractive lifestyle. In contrast, those in the “failing” category tend to be failing in meeting these broader goals, and those that are “marginally failing” can be deemed as not in a crisis but clearly not successful in meeting the owners’ expectations.

The SBSI has not changed since the baseline one year ago (December/January 2009), when it was still 75. At the time of the baseline survey in December/January (Wave 1), small businesses were facing challenges from the economic downturn which at that point had been in force for just over a year. A year later (Wave 3), the economic situation has worsened, constraining the ability of small businesses to improve their competitiveness. As discussed later, this is most pronounced in the critical areas of Capital Access due to shrinking financial resources, and Marketing and Innovation, due to a lack of growth in revenues.

By looking at how small businesses score on each sub-index of the SBSI, a more detailed picture emerges of small businesses’ strengths and trouble spots. Small businesses are struggling the most with Capital Access, earning the equivalent of a ‘D+’ on this sub-index (see Figure 5). Another area where they are at a competitive disadvantage is Marketing and Innovation (the equivalent of a ‘C–’). On the other hand, small businesses excel at Customer Service, which can be graded as an ‘A–’, and small businesses do almost as well in Compliance. None of the individual sub-index areas has changed significantly in the past year. The prolonged economic downturn likely has restrained the ability of small businesses to improve their competitive health. Later discussion sheds more light on some of these areas, particularly Capital Access, where the recession is taking a toll, and Marketing and Innovation.

Figure 5

What are the top priorities for making small businesses more competitive?

By comparing the importance of each sub-index with its overall score, it becomes apparent which strengths and weaknesses have the most impact on the ability of small businesses to succeed in the future. The quadrant below (Figure 6) provides this perspective by comparing performance on each index dimension with its importance.

Figure 6

The quadrant map reveals just how important Capital Access is in affecting the ability of small businesses to compete. As noted later, the impact of the recession has worsened over the past year and the financial resources of small business owners have diminished, with many having to finance their enterprises by cutting pay and relying on personal assets. The map also reveals that Marketing and Innovation is not just a weak area, but a highly important one. Later discussion highlights how small businesses that seek creative solutions to meet customer needs are more successful in this economy. The discussion also reveals how leveraging internet technology improves competitive success, and that small business is rapidly embracing social media as a way to engage customers.

The Workforce dimension is classified in the quadrant labeled “less important, performing well.” However, it is on the border of other quadrants, being the highest in importance and the lowest in performance in its quadrant. If the economy rebounds, the C+ score could pose a problem. For now, the economy has forced many small businesses to downsize and cut pay and benefits.

The discussion on the six areas also reveals some interesting trends in the less critical performance areas. Small businesses do not perceive themselves at a competitive disadvantage in the area of regulatory compliance, but there is a perception that regulation is becoming more burdensome, which may be due to aggressive activities by governments to make up revenue shortfalls. Small business is effective in customer service, and later discussion reveals that superior service is a successful strategy for market differentiation.

The next six sections provide more perspective on each of the six areas in the index, including:

• Capital Access – this section includes fresh data on how small businesses finance their needs
• Marketing and Innovation – this includes new data on innovation and the use of social media such as FaceBook, LinkedIn and blogs
• Workforce
• Customer service
• Computer technology – this includes information on the growth of various technologies and their role in small business success
• Compliance.

The report concludes with fresh information on the impact of the economy and the outlook for the future. It also provides a profile of small businesses, including their involvement in selling and buying internationally.