A Quick Read on the State of Small Business and the Small Business Success Index 2009 Baseline Study of Small Business Success

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1 A Quick Read n the State f Small Business and the Small Business Success Index 2009 Baseline Study f Small Business Success March 12, 2009 Spnsred by: Netwrk Slutins, LLC and Rbert H. Smith Schl f Business, University f Maryland Presented by: Rckbridge Assciates, Inc. Cpyright 2009 Netwrk Slutins, LLC. All rights reserved.

2 Why d Small Businesses Matter? Accrding t the Census Bureau, the United States has 27 millin businesses with fewer than 100 emplyees. This includes 6 millin small businesses that maintain payrlls. Small businesses accunt fr 98% f all businesses with payrlls, 27% f business receipts, and 36% f jbs. In the aggregate, the small business sectr is respnsible fr ver 40 millin jbs and a staggering $6 trillin in revenues 1. Just as imprtant, they are a vital surce f innvatin and cmmitment that drives the U.S. ecnmy, and prvide a path t persnal independence fr millins f Americans. Given the imprtance f the small business sectr, Netwrk Slutins, LLC and the University f Maryland s Rbert H. Smith Schl f Business have partnered t cnduct a baseline telephne survey f 1,000 small business wners in rder t take the pulse f small businesses and track their cmpetitive health ver time. Hw d yu Measure Small Business Success? Cmpetitiveness in this cntext is defined as the level f success a small business achieves in cnducting the rganizatinal activities critical t its shrt and lng term viability. The mre cmpetitive a small business is, the mre likely it is t meet the persnal and business gals f its wners and shw psitive financial results. Because success is multi-faceted, an index is needed t adequately assess it. The Small Business Success Index (SBSI) prvides ne verall measure f success, based n several unique dimensins f cmpetitiveness. Success can therefre be quantified n a scale f 0 t 100 (cmpletely failing t cmpletely successful). The SBSI is based n 28 measures, which capture the six dimensins (r sub-indices) belw: Capital Access, including availability f wrking capital, capital fr lng term investments, and expert financial advice Marketing and Innvatin, such as identifying new prspects, shwing effective crprate psitining, cnverting leads, finding ways t efficiently advertise, and the ability t cme up with new ideas Wrkfrce, including the ability f small businesses t attract, retain, develp, mtivate and deply emplyees efficiently, as well as encurage creativity frm them Custmer Service, which is the ability f small businesses t service their custmers, shw they care abut them and grw their relatinships Cmputer Technlgy, which includes making technlgy wrk effectively and efficiently in the rganizatin Cmpliance, which is the ability f the small business t understand and cmply with laws and regulatins, including ensuring data security 1 Surce is the U.S. Census Bureau, including: 2002 Ecnmic Census, 2006 Statistics f U.S. businesses (SUBB), 2006 Nnemplyer Statistics. Business receipts and revenues are based n businesses with payrlls. Cpyright 2009 Netwrk Slutins, LLC. All rights reserved. 1

3 Hw Cmpetitive are Small Businesses Tday? As f the beginning f 2009 when the baseline survey was cmpleted, small businesses have an SBSI scre f 75. This can be cnsidered a middling rating, r the equivalent f a C. Based n their scres, individual small businesses can be classified int fur cmpetitiveness grups (see Figure 1): 25% f small businesses are Highly Cmpetitive (an SBSI scre f 85 r higher) 29% are Marginally Cmpetitive (an SBSI scre f at least 75 but less than 85) 27% are Marginally Failing (an SBSI scre f at least 65 but less than 75) 20% are Failing (an SBSI scre belw 65) Cmpetitiveness, as measured by the SBSI, relates strngly t the ability f a small business t succeed in meeting brad business gals. Owners f businesses in the highly cmpetitive categry largely believe they have successful businesses; fr example, the businesses are grwing, creating wealth, aviding risk, and meeting the wners expectatins fr incme and an attractive lifestyle. In cntrast, thse in the failing categry tend t be failing in meeting these brader gals, and thse that are marginally failing can be deemed as nt in a crisis but clearly nt successful in meeting the wners expectatins. Figure 1 Cpyright 2009 Netwrk Slutins, LLC. All rights reserved. 2

4 By lking at hw small businesses scre n each sub-index r dimensin, a mre detailed picture emerges f small businesses strengths and truble spts. The single biggest cmpetitive disadvantage f America s small businesses tday is in meeting their capital needs t grw their businesses; as shwn in the reprt card belw, they are struggling the mst with Capital Access, earning the equivalent f a D+ n this sub-index (see Figure 2). The scarcity f capital may be csting the ecnmy billins in prfits and mre than a millin jbs. As the federal gvernment cnsiders where t direct the stimulus funds, a gd bet fr revitalizing the ecnmy and creating new jbs wuld appear t be in targeting credit t America s small businesses. Althugh American small businesses are admired fr their ingenuity and aggressiveness, this is anther area where they struggle, earning the equivalent f a C- in the Marketing and Innvatin sub-index. Small businesses are nt as successful as they wuld like t be in effectively marketing themselves t grw their businesses beynd their current size. They als fight t think f new innvatins, but ften cme up shrt. Figure 2 The bright spt fr American small businesses is in the impeccable service they prvide their custmers. They have what it takes t retain current custmers and treat them with care. This is reflected in the A- they earn in Custmer Service. These dimensins have varying imprtance in a small business s verall SBSI scre. Fr example, perfrmance in Capital Access has the mst impact n verall cmpetitiveness, accunting fr ne-third f the ttal cmpetitiveness scre. Marketing and Innvatin is als especially imprtant, making up almst ne-quarter f the SBSI scre. These weighting factrs, which sum t 100%, are based n the degree t which each sub-index is able t explain a small business s perceived success in meeting brad gals such as building wealth, grwing, and prviding an attractive incme and lifestyle fr the wners. Cpyright 2009 Netwrk Slutins, LLC. All rights reserved. 3

5 Hw can small businesses imprve their cmpetitiveness in the marketplace? Use the Internet. Assuming that a venture capitalist is nt ging t suddenly appear and shre up mst small businesses, a sund investment a small business can make is in ramping up its Internet business slutins, r s it wuld seem based n the experiences f thse small businesses wh have dne it. This means mre than just building a website, but making a cmmitment t nline advertising, allwing custmers t view and rder prducts nline, prviding custmer service and self-service ptins t custmers. It als invlves imprving internal cmmunicatins by having a shared netwrk fr emplyees t cllabrate n prjects and prviding the means fr them t cmmunicate nline with each ther. By ding these things, small businesses can imprve their verall cmpetitiveness grade, ging frm a lw C t a C+, and imprve in ne f the mst imprtant drivers f cmpetitiveness, Marketing and Innvatin. It affects the bttm-line t. Small businesses that invest in Internet business slutins have a higher likelihd f meeting their business gals. Fr example, small businesses with a cmmitment t Internet business slutins feel they are highly successful in imprving their prfit margins 16% mre ften than small businesses that emply minimal Internet business slutins. The mst plugged-in small businesses are mre cmpetitive cmpared t thse using fewer Internet business slutins (see Figure 3). Nearly ne in three small businesses that are Internet tech-pwered (using 6-14 f the Internet technlgies included in this survey) are highly cmpetitive, cmpared t ne in fur f thse with mderate Internet technlgy usage (2-5 Internet business slutins), and just ne in five f thse with minimal Internet technlgy (using 1 r n Internet business slutins). This trend hlds true even amng very small businesses; amng businesses with fewer than 5 emplyees, 60% f Internet tech-pwered businesses are marginally r highly cmpetitive versus less than half (48%) f very small businesses that have minimal Internet technlgy. Figure 3 Cmpetitiveness by Internet Technlgy Usage Internet Tech-Pwered (n=313) Mderate Internet Tech (n=376) Minimal Internet Tech (n=311) Highly Cmpetitive 31% 24% 19% Marginally Cmpetitive 32% 25% 29% Marginally Failing 25% 30% 25% Failing 14% 20% 24% Tech-Pwered=using 6-14 Internet business slutins in their rganizatin Mderate=2-5 Internet business slutins; Minimal=0-1 Internet business slutins Cpyright 2009 Netwrk Slutins, LLC. All rights reserved. 4

6 Mre Insights n the SBSI The full reprt prvides mre detail n the tpics discussed here. In additin, it cvers the fllwing areas: The Sub-Indices: A detailed lk at hw small businesses perfrm n the 6 dimensins f success, including perfrmance n the individual measures that make up each subindex The Cnsequences f Cmpetitiveness: Are small businesses meeting business gals like minimizing csts, meeting incme bjectives, and increasing the cmpany s value? D they have better business utcmes? Hw des cmpetitiveness affect their perfrmance? Internet Business Slutins: Small businesses use f and need fr Internet business slutins and the effect f technlgy n their success The Crrelates f Cmpetitiveness: Hw d ther characteristics f a small business and its wner relate t its success? What types f small businesses are mre cmpetitive? D macr factrs like glbalizatin, regulatin, and industry trends play a rle? Small Businesses in the Current Ecnmy: Hw has the ecnmic dwnturn affected small business, and what des it mean fr their future? Abut the Small Business Success Survey The baseline fr the Small Business Success Survey was cnducted in December 2008 thrugh January A ttal f 1,000 small business wners were interviewed by telephne. Small businesses included in the study were privately wned (nt publicly traded), fr-prfit, had fewer than 100 emplyees, and had a payrll and/r cntributed t at least 50% f the wner s husehld incme. The data are weighted t ensure representativeness t the entire ppulatin f small businesses in the U.S. The survey is lngitudinal in nature, and will track trends in Small Business Success ver time. These are the results frm the first wave f data cllectin. The survey is spnsred by Netwrk Slutins, LLC and the Rbert H. Smith Schl f Business, University f Maryland. Rckbridge Assciates, Inc., an independent marketing research firm, cnducted the survey. Netwrk Slutins, LLC Sunrise Valley Dr. Suite 300 Herndn, VA Rbert H. Smith Schl f Business, University f Maryland 3461 Van Munching Hall Cllege Park, MD Media Inquiries: Susan Wade, Directr f Public Relatins fr Netwrk Slutins, LLC swade@netwrkslutins.cm Carrie Handwerker, Public Relatins Assciate fr Rbert H. Smith Schl f Business chand@rhsmith.umd.edu Cpyright 2009 Netwrk Slutins, LLC. All rights reserved. 5