impact of recession on small and medium …...affecting sme’s because of recession which will...

IMPACT OF

RECESSION ON

SMALL AND MEDIUM

ENTERPRISES (SMEs)

BUSN20016: RESEARCH IN

BUSINESS

RESEARCH PROPOSAL

A Research Proposal submitted to the School of

Business and Law, in fulfilment of the

requirements of BUSN20016 (RESEARCH IN

BUSINESS) for the degree of Master of

Management for Engineers

AA BB CC

STUDENT ID: *****

June 2015

BUSN20016 RESEARCH PROPOSAL

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CONTENTS

SECTION I ............................................................................................................................... 2

INTRODUCTION ................................................................................................................ 2

PROBLEM STATEMENT ................................................................................................... 3

RESEARCH OBJECTIVES/QUESTIONS .......................................................................... 4

JUSTIFICATION OF THE PROJECT ................................................................................. 5

EXPECTED RESEARCH OUTPUT/OUTCOME............................................................... 6

SECTION II ............................................................................................................................. 7

CONCEPTUAL FRAMEWORK AND RESEARCH HYPOTHESIS ................................ 7

METHODOLOGY ............................................................................................................. 11

SECTION III .......................................................................................................................... 13

ORGANISATION OF THE STUDY ................................................................................. 13

GANTT CHART ................................................................................................................ 14

PROJECT BUDGET AND BUDGET JUSTIFICATION ................................................. 15

REFERENCES ........................................................................................................................ 16


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SECTION I

INTRODUCTION

Small and Medium Enterprises (SME’s) are the major contributors to the economy of many

countries and within the European Union (EU) itself, they produce a turnover of 50 million

euros (Lin & Ma, 2010). They are an important part of most western countries accounting for

two-thirds of all employment but, when Recession occurs, they face a lot of difficulties and

there are many factors that have to be considered that influence their survival (Lin & Ma, 2010;

Nanto, 2009). The “Great Recession” of 2007 was sparked by the collapse of the U.S housing

market which led many financial institutions and banks to become bankrupt and ultimately

resulted in the overall decline of the U.S economy that forced many companies to run out of

business (Athanasiu, 2010).

The growth of SME’s spark an economy. When SME’s grow, jobs are created, unemployment

rates drop and the overall economy improves (Sharples, 2011). There is an understandable

connection between the struggles of SME’s and unemployment rates in many countries,

more so, in the year 2007 (the “Great Depression” period) (Sharples, 2011). SME’s are the

most sensitive sector and worst affected by the economic recession reducing the development

rate and increasing the number of bankruptcies with start-ups in particular being the most

vulnerable, lacking the resources to survive the downturn (Hodorogel, 2009). Consequently, if

proper research is conducted in this area, it would be beneficial to all the SME’s in the world.

The purpose of this assignment is to undertake a complete research proposal in the field of

Recession and the impacts/issues faced by SME’s so that they can safeguard themselves

against Recession and be better prepared whenever Recession occurs. The research proposal

is centered on how Recession affected all kinds of businesses, particularly SME’s, who were

the worst hit and what strategic adaptions SME’s adopted to overcome and survive it.

The organisation of this assignment is as follows. This Introduction forms Section I of this

research proposal. This is followed by the Problem Statement, Research Objectives,

Justification of the proposed proposal and the expected outcomes which also fall under Section

I. Then, Section II comprises Conceptual Framework, Research Hypothesis and Methodology.

Finally, Section III comprises Organisation of the Study, Gantt chart and the Budget required

to carry out the proposal.


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PROBLEM STATEMENT

Recession is a phenomenon of decreasing demand for raw materials, products and services and

its beginning, progress and ending depends on the operational measures used by different

researchers and federal agencies (Shama, 1993). It leads to a drop in share market, an increase

in unemployment, stagnant wages, a fall in retail sales and a decline in the housing market

(Amadeo, 2015). If a recession lasts longer, it can be classified as economic depression. There

were worldwide recessions during the years 2007 – 2009 (“The Great Recession”). Large

business companies were a bit resilient during this time with government subsidy and grants

but, smaller companies which contribute more to the overall employment growth were badly

affected (Nanto, 2009).

Smaller businesses suffered huge net employment losses due to sharper cuts in the rate of gross

job gains which in turn reflected on slower business creation and a lower rate of hiring among

expanding small businesses (Laderman, 2013). Between 2007 and 2012, small businesses

experienced disproportionate job losses wherein their overall job losses was double their 30%

share of total employment. Also, jobs at small businesses declined about 11% and the payrolls

at businesses that had 50 or more employees declined further by 7% (Laderman, 2013). SME’s

suffered disproportionately during such economic downturns because of their limited

financial resources, their relative shortcomings in technological, managerial and human

capabilities and their greater dependence on fewer customers and suppliers which readily

reduced their capacity to overcome the economic crisis (Bourletidis & Triantafyllopoulos,

2014).

In such a scenario, it becomes imperative to analyse and understand what went wrong for

these SME’s and this study will fill that gap with empirical evidence of the losses/impacts

suffered by the small firms during the period of recession. Also, the marketing strategies,

innovative tactics and new concepts adopted by them in order to survive the Recession will

be researched upon. This is done so that the future SME’s can take preventive measures and

be proactive if at all Recession occurs in the future.


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RESEARCH OBJECTIVES/QUESTIONS

The overall aim of this project is to investigate the Recession-related effects on small firms,

their responses to tackle that (i.e. their strategies) and the resulting impact on the performance

of the firm. More specifically, this study aims to answer the following research questions:

RQ1: How did recession affect the SMEs?

RQ2: What were the impacts suffered by SMEs as a result of Recession?

RQ3: How did the SMEs respond to the Recession conditions?

RQ4: What are the factors that drive the SMEs performance under Recession

conditions?

These questions will help answer the most important aim of this project: providing the best

options/schemes that any SME can follow in order to survive economic downturns.


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JUSTIFICATION OF THE PROJECT

Recession has been a period of intensive soul searching in which longstanding business models

had come under scrutiny (Sharma, et al., 2011). Also, the fact that Recession had affected the

world’s economy including a majority of countries like USA, UK, Canada, Japan, Australia,

China, New Zealand and India is a serious case to consider. The world’s greatest banks

suffered losses and unemployment rates were at an all-time high during the period of 2007-

2009 and countries like Greece and Iceland declared bankruptcy (Sharma, et al., 2011). This

proposal will be undertaken with the help of extensive literature review and feedback from

SME managers and owners (through surveys and questionnaires). Their feedback will provide

specifics on the strategies they adopted to stay afloat during Recession which will be quite

utilitarian for all the SME’s in the world.

Under these circumstances, the following are the benefits of conducting this research

proposal:

It will help those who wish to understand how Recession influences SME’s activities

and performance. Also, they must also take into account the mechanisms through

which Recession conditions exert an influence.

This research proposal will also help broaden the understanding of how Recession

conditions shape a SME’s business activity and performance.

SME managers can make use of the strategies presented in this research to fight

Recession where in this research proposal will help them to identify the right focus

areas during and post-recession. But, there is no guarantee of a single ‘best method’

that can ensure a SME’s survival under economic downturns.

The results obtained from this research proposal will be of use to business owners,

researchers and policy makers.

This proposal will be extremely useful to new ventures/start-ups as they can

understand the causes, effects and impacts of Recession. This, in turn will help them be

better prepared and pro-active in case Recession occurs in the future.


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EXPECTED RESEARCH OUTPUT/OUTCOME

The outcomes of this study will provide an analytical framework for investigating the factors

affecting SME’s because of Recession which will ultimately help develop and analyse the

strategies used by them in order to survive the economic downturns. Though the response of

any business under Recession conditions might be highly variable, it will still help in

understanding and providing a wholesome picture about Recession and help comprehend the

factors that drove some SME’s to perform even under Recession conditions. Small business

adaptation and performance during such times depend upon many factors like the available

resources and external influences including product, labour and capital market conditions.

These factors will have an impact on the final outcome of this research. All the research

objectives/questions as identified in the proposal will be answered based on the data

collections, findings and analysis that will be carried out for the same. These research outputs

will be viewed as important academic work for the problem that has been identified for this

research proposal. Also, this research will benefit future owners of start-ups/new ventures

before they embark on their enterprise.


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SECTION II

CONCEPTUAL FRAMEWORK AND RESEARCH HYPOTHESIS

The financial crisis that commenced in 2007 and its aftermath popularly referred to as the

“Great Recession” was responsible for the destruction of nearly $20 trillion worth of financial

assets owned by U.S households alone and the unemployment rate rose from 4.7% to 10%

which led to a decline the global GDP by 2% and somewhere between 50 and 100 million

people around the world fell into extreme poverty due to the crisis (Goodwin, et al., 2013). The

crisis exposed the weaknesses in the financial systems worldwide and demonstrated how

interconnected and interdependent economies are today which posed vexing policy dilemmas

(Nanto, 2009). The economic impacts of the crisis include unemployment and the vicious

recessionary spiral, inequality, bank size and deregulation, misguided corporate incentive

structure and globalization (Goodwin, et al., 2013).

There have been several financial crises in the past ranging from the 1930’s Great Depression

to the early 1990’s Recession (Sharples, 2011). After every one of them, a speedy recovery had

been possible because of the SME’s which played a huge role in economic recovery by

accounting for one-third of net job growth (they helped created new job opportunities) (Brown

& Lundblad, 2009). Historically, there has been proof from previous recessions that SME’s

have helped usher in an era of tremendous prosperity by creating 3.8 million jobs after the

1990’s recession (Lee, 2009). But, it turns out that when the 2007 Recession did happen,

SME’s were the worst hit because of the following reasons (Sharma, et al., 2011):

More difficult to downsize as they are already small.

Individually less diversified in their economic activities.

Have a weaker financial structure.

Lower or no credit rating.

Heavily dependent on credit and have lesser financing options.

More vulnerable as they bear the brunt of the difficulties of the large firms.

Narrower base of customers and product lines across which to spread risk.

Less bargaining power with a variety of external actors that include customers,

suppliers and financial providers.


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Most SME’s suffer from demand shock and there had been a drop in demand for goods and

services and a tightening in credit terms for SMEs at a global level (Bourletidis &

Triantafyllopoulos, 2014). Relevant Literature articles, previous Recession-related experiences

along with numerous researchers have come up with several survival strategies but, more so

only in the last ten years because the impact of Recession had been much severe now than

before. Some of these strategies are ((Sharma, et al., 2011) and (Bourletidis &

Triantafyllopoulos, 2014)):

Following Lean Guidelines

Improving Vendor Support and Quality

Reducing Obsolescence

Networking and Sharing

Keeping Existing Customers Loyal

Improving Customer Communication

Improving Manufacturing Flexibility

Keeping Inventory Level to a Minimum

Making use of ICT

Avoiding Hasty Lay-Offs

Enhancing Overseas-Marketing Capabilities

Moving to Higher Value-added Products and Services

Product Reengineering Process

Emphasis to new customers with environmental worries

Price fixing in the periods of crisis

Suppliers – ‘Stock Procurement’

Information from Stakeholders

In the words of P. Drucker, “the small businesses represent the main catalyst of the economic

growth” (Milin, et al., 2012). To be qualified as an SME, there are two things that need to be

taken into account – the dimension of the business and the management unit (Milin, et al.,

2012). In spite of all the previous research conducted, there have been circumstances where

some SME’s have triumphed during the crisis and not many analyses have taken place to

determine how SME’s adapted to Recession conditions in the ways they do (Kitching, et al.,

2009). Even though SME’s lack in technology and knowledge levels, they can overcome it by

imitating other firms’ best practices which may help them sustain their sustainability and

counteract the negative effects of the crisis, thereby stabilizing the economy (Bourletidis &


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Triantafyllopoulos, 2014). There is empirical evidence that shows export-oriented SME’s are

better able to adjust to crises (Sato, 2000). The performance of a firm/business during the crisis

is relative to others with whom they compete for resources and markets and such strategies are

likely to be context-specific varying with sectoral and spatial setting (Kitching, et al., 2009).

There can be two set of views regarding how SME’s are affected by recession which are

‘vulnerability’ and ‘resilience’ views. SME’s are much likely to cease trading than larger

enterprises (Storey, 1994). When small firms try adjusting to external conditions, there was an

effect of time-lag which first affected sales, then profitability and finally their ability to

survive (Smallbone, et al., 2012). The performance of a business does not map onto the

business size in a simple and direct way as Recession impacts unevenly on industries, regions

and related businesses that shape the diversity of experience of recession and related business

responses (Smallbone, et al., 2012). The two view-sets put the focus on the adaptive capability

of small firms and therefore, it becomes important to explore a firm’s ability to respond to

changes in the external environment in order to retain competitive advantage (Smallbone, et

al., 2012). The following diagram (Figure 1) provides a conceptual framework to understand

the relation between the global financial crisis, effects of the crisis in different countries,

recession-related experiences of the firms and their performance (Smallbone, et al., 2012).

Figure 1: Conceptual Framework (Adapted from: (Smallbone, et al., 2012))

Effect of crisis in different countries: Inputs are based on:

• Size and Structure of the Economy

• Banking and Finance

• Global Financial Crisis

Recession Related Effects on Firms: Inputs are based on:

• Effect of crisis in different countries

• Firm Size and Sector

• Policy

Firms' Performance: Inputs are based on:

• Firm's Responses

• Firm Size and Sector

• Recession Related Effects on Firms

Firms' Performance: Output can be either:

• Firms' are Vulnerable

• Firms' are Resilient


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Figure 1 summarizes the key external influences on an SME’s business performance,

emphasising on the interaction between SME’s and their external environment and how this

triggers strategic adaptation in small firms (Smallbone, et al., 2012).

When a firm has to make responsible decisions during such crises, they need to manage the

trade-off between benefits and costs of short-term crisis reactions (Bourletidis &

Triantafyllopoulos, 2014).

Based on the problem statement and the research objectives, the following Research

Hypothesis’s can be proposed that would be tested in this study:

H (1): Null Hypothesis: Recession does not have any impact on SME’s.

H (2): Alternate Hypothesis: Recession does have an impact on SME’s.


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METHODOLOGY

The following methodologies will be undertaken in order to effectively analyse the aims of this

research proposal. They are:

Literature Review: An in–depth study and analysis of relevant literature and

information available from various sources which include Google scholar, Science

Direct and journal articles by various authors. A thematic content analysis of these

documents will be undertaken to examine the extent to which the repercussions

have/have not affected SME’s. (Sharples, 2011)

Data Series and Surveys/Questionnaires (Data Collection Methods):

Numerous information collected from series of data and surveys will be

scrutinized to give an idea about gross job flows (job gains and losses) during

the times of recession, decomposition of job creation and loss, balance-sheet

and income statement items, business and economic conditions and changes in

lending practices and the changes’ effect on the credit markets. (Sahin , et al.,

2011)

In addition to the above, questionnaires will be prepared and handed out to

SME’s in order to gauge how they reacted during Recession, what were the key

impacts felt by them and what strategies they undertook to overcome and

survive it. For example, respondents can be asked determine to what extent

their businesses had experienced recession-related effects. Eleven items can

be used to measure finance as well as non-finance related effects using a five-

point Likert scale (where 1 = ‘strong positive effect’ to 5 = ‘strong negative

effect’) where in finance related effects include late pay by customers, bad debts

or uncertainty over customer payments, level of cash at the bank, credit

periods/terms from the suppliers and the availability of bank loans or overdrafts

(Smallbone, et al., 2012). Whereas, non-finance related effects include transport

costs, costs of supplies, changing value of the relevant currency, energy costs,

level of staff motivation and ability to recruit staff (Smallbone, et al., 2012).

Observing Key Indicators of Recession: Examining critical information from the

National Bureau of Economic Research that focusses on the study and communication


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of economic conditions in the U.S.A. They have defined certain key indicators that help

measure recession well in advance so that businesses can develop defensive strategies

to counter the effects of recession before it finally hits. (Research, 2015)

Data Analysis Methods: There will be two methods used for data analysis i.e.

Qualitative and Quantitative. Qualitative analysis will make use of online forums and

surveys with financial advisors whereas Quantitative analysis will make use of figures,

pie charts, excel sheets, mathematical and statistical modelling available online and via

scholarly articles.

The techniques used for analysing quantitative data will be descriptive

statistics (obtaining the descriptive statistics for the mean, median, standard

deviation and distribution of the key variables to see how individual values

cluster around the mean) and hypothesis testing which will consider the

likelihood of Type I and Type II errors (which relate to whether the data

supports accepting or rejecting the hypothesis). Also, regression analysis will

be used to check, say for e.g., “To what extent does recession affect the

unemployment rate?”

For analysing qualitative data, concepts from literature will be used as a

source of help to establish the findings and relationships will be examined

based on the answers from online forums and surveys.

This research will consider a mixture of all the above methodologies in order to arrive at an

accurate solution for the problem as identified in the problem statement. From the in-depth

understanding of the literature review and the responses obtained through surveys and

questionnaires, in order to arrive at the relevant findings, the data will be arranged first, grouped

together based on various factors and categories (like recession-related effects, strategies

adopted, sample characteristics, profile data and multivariate analysis of factors influencing

business performance) which will then be analysed and presented.


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SECTION III

ORGANISATION OF THE STUDY

The organisation of the study is as follows:

Chapter One will be the Research Proposal as outlined in this assignment.

Chapter Two will describe the case study of Recession in-depth.

Chapter Three will include the details of methodology – literature review, data series

and surveys (data collection methods), observing key indicators of recession and data

analysis methods.

Chapter Four will report the Findings and Analysis of the proposed research.

Chapter Five will summarize the important findings and discuss their implications in

making SME’s better prepared to survive Recession (mainly focussing on key strategic

adoptions by SMEs for survival).


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GANTT CHART

The following table shows the timeline for the whole Project to be completed.

Task Name Start Day End Day Duration

(Days)

Project Proposal 17/03/2015 31/03/2015 14

Literature Review 01/04/2015 15/06/2015 76

Data Collection 16/06/2015 16/08/2015 60

Data Analysis 17/08/2015 17/09/2015 30

Final Report Submission 18/09/2015 18/10/2015 31

3/17

4/1

6/16

8/17

9/18

14

76

60

30

31

7/11/201427/12/201415/02/20156/04/201526/05/201515/07/20153/09/201523/10/201512/12/2015

Project Proposal

Literature Review

Data Collection

Data Analysis

Final Report Submission

MILESTONES AND DELIVERABLES


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PROJECT BUDGET AND BUDGET JUSTIFICATION

The budget for the proposed research is around $4000 in order to complete this project within

the time frame (18th September 2015) as given in the Gantt chart.

This budget has been specified for the following reasons:

The Literature Review to be undertaken requires the use of textbooks, journal articles

and online resources that are not free of cost. This will cost around $1000.

Data collection in the form of surveys and questionnaires include printing, travelling

and posting/mailing costs. If e-mail is used, there is a chance of it ending up in the

Junk Box section of the e-mail. And, it is better to approach the SME’s in person and

collect information regarding the impacts of Recession on them and their survival

tactics. In cases where travelling in person might be impossible, the use of posts can be

availed of. This will cost around $2000.

Also, in order to access charts/tables/government figures for Data Analysis, some of

the budget must be allocated for this purpose too. This will cost around $1000.

In summary,

Purpose Estimated Amount to be Spent

Literature Review $1000

Data Collection $2000

Data Analysis $1000

Total Budget Estimated $4000


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REFERENCES

Amadeo, K., 2015. Causes of Economic Recession. [Online]

Available at: http://useconomy.about.com/od/grossdomesticproduct/a/cause_recession.htm

[Accessed 5 June 2015].

Athanasiu, C., 2010. After the Crisis. Business Source Premier, Wednesday October, pp. 42-

45.

Bourletidis, K. & Triantafyllopoulos, Y., 2014. SMEs Survival in time of Crisis: Strategies,

Tactics and Commercial Success Stories. Procedia - Social and Behavioural Sciences,

CXLVIII(1), pp. 639-644.

Brown, G. W. & Lundblad, C., 2009. The U.S. Economic Crisis: Root Causes and the Road to

Recovery. Journal of Accountancy, CCVIII(4), pp. 42-49.

Goodwin, N. et al., 2013. The Financial Crisis and the Great Recession. In: J. Devine, ed.

Macroeconomics in Context. Massachusetts: Routledge, pp. 337-356.

Hodorogel, R. G., 2009. The Economic Crisis and its Effects on SMEs. Theoretical and

Applied Economics, V(1), pp. 79-88.

Kitching, J., Smallbone, D. & Xheneti, M., 2009. Have Small Businesses Beaten the

Recession?. Liverpool, Liverpool Vision.

Laderman, E., 2013. Small Businesses Hit Hard by Weak Job Gains. [Online]

Available at: http://www.frbsf.org/economic-research/publications/economic-

%20letter/2013/september/small-business-job-growth-employment-rate/


Lee, S. A., 2009. Guiding Your Small-Business Clients Through the Downturn Maze. Journal

of Financial Planning, XXII(5), pp. 24-29.

Lin, S. & Ma, Y., 2010. ‘Credit crunch’ and Small and Medium-sized Enterprises: Aspects

affecting survival. Journal of Financial Services Marketing, XIV(4), pp. 290-300.

Milin, I. A., Fruja, I., Milin, S. & Merce, I. I., 2012. The Impact of the Crisis on Small and

Medium Enterprises. Agricultural Management, XIV(1), pp. 499-506.


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Nanto, D. K., 2009. The Global Financial Crisis: Analysis and Policy Implications. Congressial

Research Service, I(1), pp. 1-89.

Research, 2015. Measure a Recession. [Online]

Available at: http://m.wikihow.com/Measure-a-Recession


Sahin , A., Kitao , S., Cororaton , A. & Laiu , S., 2011. Why Small Businesses Were Hit Harder

by the Recent Recession. Current Issues in Economics and Finance, XVII(4), pp. 1-7.

Sato, Y., 2000. How did the crisis affect small and mediumsized enterprises? From a field study

of the metal-working industry in Java. The Developing Economies,, XXXVIII(4), pp. 572-595.

Shama, A., 1993. Marketing Strategies During Recession: A comparison of small and large

firms. Journal of Small Business Management, I(1), pp. 62-72.

Sharma, D., Garg, S. K. & Sharma, C., 2011. Strategies for SMEs after Global Recession.

Global Business and Management Research: An International Journal, III(1), pp. 58-66.

Sharples, A., 2011. The Great Recession and its effect on small businesses and unemployment

rates, Carolina: Business Management and Marketing.

Smallbone, D., Deakins, D., Battisti, M. & Kitching, J., 2012. Small business responses to a

major economic downturn: Empirical perspectives from New Zealand and the United

Kingdom. International Small Business Journal, XXX(7), pp. 754-777.

Storey, D., 1994. Understanding the Small Business Sector. 1st ed. London: Routledge..

impact of recession on small and medium …...affecting sme’s because of recession which will...

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