Daventry House

Daventry House Limited is the private company of Neil Rathbone, a management consultant specialising in research, technology, innovation and enterprise.

An SME classification system

I have developed a system for classifying SMEs (Small and Medium-sized Enterprises).

SMEs make up 99% of all European companies. There are more than 16 million of them. They account for more than half our industrial output and two thirds of all jobs. They are seen as the most important factor in our economic prosperity.

However, SMEs vary so widely in their character and behaviour that it is impossible to deal with them as a single type of organisation. While classification systems already exist, they are very limited in their value. Current systems use size or type of product/service. This approach does not adequately reflect the factors that make SMEs behave differently.

Many organisations need to deal with SMEs. However, they usually need to know about SME behaviours rather than products or size, which are surrogate indicators, and poor ones at that. It would be of great benefit to them to have a system of classification which is:-

Meaningful in terms of actual SME behaviour
Simple to use
Based on publicly available information
Consistent and objective
Capable of being used in a database

So why hasn't someone come up with a system a long time ago? Well I have observed a number of attempts at classification, but each has fallen into the same trap. The creator has set out with the objective of classification in terms of their own perspectives. So, for example, banks will measure financial parameters while economic agencies might try to measure growth potential.

What each of these approaches is missing is that the process is a two stage one. You have first to find out what makes companies fundamentally different, and then as a separate excercise relate that to behaviours that you are interested in.

There is a reasonable parallel in consumer marketing where residential districts are classified into neighbourhood types (stage1 of the process). Different people (old, young, social classes etc.) live in different neighbourhood types. These types are mapped to postal codes so you can target consumers. The types are also related to in-depth consumer research (stage 2) which identifies the behaviours that the marketeers are interested in and relates stages 1 and 2. Finally you have a system that allows you to market products to consumers in a targeted way.

So how does it work?

SMEs may appear to come in many varieties, but in reality they are most influenced by three factors:

The way the enterprise creates or add value

The stage of life the enterprise is at

The ownership and management structure

There are a relatively limited number of variations on these three factors (less than 10 in each case), so by classifying SMEs empirically according to the major variations of these three 'behavioural' factors, and converting the classifications to an alphanumeric code, you have a system that is:

A descriptive tool - to record and transmit company information objectively and concisely.

A diagnostic tool - to relate existing knowledge to company types and produce generic guidance to advisors.

A targeting tool - where the investment in time to code a population of companies on a database is worth the effort in order to achieve the ability to target companies.

A research tool - in order to provide a ‘common denominator’ between different SME research projects.

A design tool - for the creation of public interventions which are aimed at identified needs in certain types of SME.

Any classification system will be a generalisation rather than a perfect descriptor, but despite the inevitable limitations, this system has a number of advantages:

logically structured

simple enough to be learned

can be derived from public information

can be recorded in database fields

For example, let us take two of my 'value' categories and look at the differences:

If we take just two businesses – one in the ‘intellectual’ category that would include Lawyers, architects, or doctors for example, and the other in the field of ‘batch process’ that would include printers, steel works or speciality chemicals. How do they add value? Clearly one does it through knowledge and the other through operating their expensive capital equipment to produce product.

For the intellectual category to survive and prosper their intellect must be respected (notice that they don’t have customers but have ‘clients’); their time must be available as this is the ‘unit’ by which they charge and any non-chargeable time on sales and administration (or research) must be loaded onto the chargeable time as an overhead; they must take care to update their knowledge. Thus they will monitor closely the usage of their time. They have very few suppliers and usually none that are critical to their product. It takes little capital to start such a business, which can be started slowly and thus they are often referred to as ‘soft-start’.

The ‘batch process’ category is dramatically different. It is hugely expensive to set up in business and no business can be transacted until after all the capital investment has been made. This is referred to as a ‘hard-start’ business. It adds value because of the expensive plant that is able to turn lower-value raw materials into higher-value product. Thus the plant must be maintained and working at all times. The percentage of use of the capital plant for processing orders is a direct measure of the efficiency and success of their business. What the management does with its time does not matter as long as the machinery is running. They always try to operate with the minimum of personnel as they constitute an overhead (as opposed to being income generators, directly or through saving the time of the principals, in the intellectual business). The cost of raw material is also a critical issue and they are quite dependent on their suppliers.

These characteristics apply to the companies in the two categories despite the fact that they are in different industries as classified by traditional systems, and may have different sizes. This is just one example of the power of one of the three codes to differentiate between enterprises.

Interested?

The system is my intellectual property so I can't say too much here. It is available for use and for further development. I am open to working with organisations on relating their specific interests to the codes (ie. stage 2) and then on licensing the use of the system.

Contact Information

Tel: +44 1664 852614

Fax: +44 1664 852615