Four stages of transition for SMEs

SMEs are dynamic and complex, and will transition at different rates, spending different amounts of time within each stage, dependent on their individual context. Furthermore, some may choose to remain firmly in one stage over time.

Although the four stages are depicted sequentially, organisations are able to move forward or backward between the stages for good reason, by conscious choice and often not due to failure. And likewise, in difficult economic periods, an SME may choose to halt growth and focus on consolidating existing activity to ensure they are in a strong position for when the economy picks up.

In this first start-up, entrepreneurial stage, the organisation is characterised by informality and contingency, with an emergent strategy, fluid structures, flexible job roles and tacit knowledge exchange. There is usually no formal human resources role in this stage; instead, people management issues are dealt with by the owner/entrepreneur.

Learning is mainly experiential and on the job. There is an emphasis on the salary side of reward, with rates decided by the owner, perhaps supplemented with share options or equivalent, but benefits at this stage are unlikely apart from legal requirements. The owner’s vision and values drive practice.

At this stage, people’s engagement tends to be largely intrinsic, coming from the excitement of working for an entrepreneurial company, the opportunity to be involved in different aspects of the business, and both personal and organisational achievements. Recruitment is ad hoc, based on immediate skills requirements. However, applicants’ attitude also plays a large part in recruitment decisions, in particular if they are willing to be flexible to meet the changing needs of a start-up business.

This stage of organisation transition is typically characterised by formalisation of the organisation’s structure (including team structures and more formalised job roles) and introduction of processes. In addition, with people and performance issues becoming salient, the fundamental HR policies and processes are introduced. However, HR tends to be transactional in nature at this point and reactive to immediate issues, such as the need to recruit quickly, or to ensure a consistent people management approach across the business.

The introduction of formality at this stage also tends to include a more consistent approach to training for operational staff. However, as the organisation is still emerging, flexibility remains important and needs to be considered when introducing people management policies and processes.

This stage of transition is generally characterised by reflection and improvement, where organisations may choose to ‘take a step back’, reflecting on what is in place already and assessing whether it is right for their future direction or whether change is needed. The amount of time spent in this stage can be due to good reason, through conscious choice and often not due to failure. However, it can also be a product of the external context.

The business strategy now tends to be planned rather than emergent. Therefore in this stage a more forward-looking, systematic and strategic HR approach tends to be adopted, ensuring practices support achievement of the organisation’s goals and are aligned with the organisation’s strategic direction and values.

The longer-term HR focus also means the development of a more planned and embedded approach to people development. As well as developing their in-house training approach, our case studies have engaged with various training courses and general support provided by the Singapore Government, which is aimed at increasing SME capability and hence their competitiveness and growth.

In the consolidating stage organisations typically have more management layers or dispersed operations, making a formal two-way communication strategy essential. A more formal and planned approach helps to ensure the right messages are being communicated, and that employees still feel their views are heard, as in the early days when the organisation was smaller when employees would have more face-to-face communication with the owner/ founder directly.

Finally, a more systematic approach to reward is adopted, aligned to business goals.

Further cementing a focus on the long-term performance of the organisation, during this stage more HR attention is paid to internal factors and external macro trends which could affect the organisation, both now and in the future.

It is through having a deep understanding of your organisation’s unique context, including an extensive knowledge of the market in which it operates, the business strategy and the capabilities or weaknesses of the organisation, that it is possible ‘to bring to bear a unique insight into what is most badly needed to drive short- and long-term performance’ (Sears 2011).

Internally, the organisation culture, engagement and cross-function collaboration become even more of a significant focus.

HR needs to be scanning for, anticipating and responding to external opportunities and challenges in a timely way.

It is vital that the HR strategy remains closely aligned to the business strategy, facilitating the organisation’s long-term goals. Likewise, the organisation’s vision and values need to be the golden thread through all practices and approaches, including reward. A total reward package is common, with attention focused on financial and nonfinancial rewards, including job enrichment and talent development.

Also in the established stage, there is a focus on career development and succession planning.

And finally, at this stage of transition there is also a noticeable shift in our case study organisations from management training to leadership development.

Insights for practice

Based on our research, we suggest six insights which we believe are important to support the sustainable long-term performance of SMEs, with implications for practice. Under each insight we pose questions for you to consider – whatever stage of transition your organisation is in – about whether your current HR practices and approaches are contributing to the long-term performance of your organisation. And there is no one-size-fits-all solution, as the most appropriate courses of action will depend on your organisation’s individual situation.

  1. Anticipation is key: readiness and relevance will determine success
  2. Organisation values and purpose need to be the constant bedrock of the business
  3. Skilful alignment of people management insight with leaders’ aspirations is a critical HR challenge
  4. Simplicity of structure and purity of process preserves innovation and entrepreneurship
  5. Sustainable growth involves striking a balance between preservation and evolution
  6. Look beyond immediate operational issues and take the opportunity to lay the organisation’s cultural foundations for the future

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