top of page

EU ESG-Regulated Framework: A Strategic Catalyst for Micro-Enterprise Growth?

Introduction

 

Small and Medium Enterprises (SMEs) are the backbone of today’s economies, and their growth is of the greatest importance for job creation and economic welfare.

 

In OECD countries, SMEs account for about 99 per cent of firms and 70 per cent of all jobs, and they contribute more than 50 per cent of GDP in high-income countries worldwide. But between February 2020 and April 2021, 70 to 80 percent of SMEs across 32 countries lost between 30 and 50 percent of their revenues (Mckinsey & Company, 2022).

 

In the European Union (EU), there were estimated to be approximately 24.4 million small and medium-sized enterprises (SMEs), in 2023, representing 99.8 per cent of the total number of enterprises in the EU, and 90 per cent of them fall in the category of micro-enterprises.

 

Micro-enterprises are often defined by their modest size (only employing fewer than nine people), by having less than five years of existence, and by being operated by individual entrepreneurs or families. These micro-enterprises provide two-thirds of private sector jobs (employing approximately 100 million people) and contribute to more than half of the total added value created by businesses in the EU.

 

Nevertheless, micro-enterprises struggle with a lot of challenges that sustain their growth.

 


Challenges of Growth

 

Scaling up operations can be challenging for micro-enterprises. According to the latest data, up to 90% of new businesses fail. Across almost all industries, the average failure rate of new businesses is (Howarth, J., 2023):

 

•   10% in the first 1 year

•   20% in the first 2 years

•   45% in the first 5 years

•   65% in the first 10 years

•   75% in the first 15 years

 

These numbers confirm that most start-ups begin small and die small and never enter a significant growth stage (Davidsson, Achtenhagen & Naldi, 2010).

 

Penrose (1959) argued that organic growth could be hindered by three factors: internal, external, or a combination of both. Internal refers to the managerial ability, external to products and markets, and the combination of uncertainty or risks (Penrose, 1959).

 

 

Internal Challenges of Growth


According to Ylinenpää (1996), internal challenges to micro-enterprises growth can be simplified as managerial and resource challenges, which include the:

 

  • Limited entrepreneurial skills — some micro-entrepreneurs may lack essential business management and entrepreneurial skills. This skills gap can hinder their ability to navigate challenges and make strategic decisions.


  • Limited access to information — micro-enterprises may face challenges in accessing relevant market information, industry trends, and business best practices. Lack of information can hinder their ability to make informed decisions.


  • Limited access to skilled labour — micro-enterprises often struggle to attract and retain skilled employees. Limited resources may restrict their ability to offer competitive salaries or invest in employee training and development.

 

 

Storey (1994) argues that the most important factors to consider are:


  • Manager‟s motivation, education, and experience.

  • Number of founders.

 

Penrose (1959) further stated that a significant internal challenge of growth is the need for the allocation of resources and capabilities, which also could be referred to as purposeful planning, which needs managerial capabilities to function.

 

This fact is reinforced by the CB Insights (2021) survey results, in which 38% of the 111 startups’ post-mortems that were questioned pointed out that their main reason for failure was to scale too quickly, without adequate financial resources in place.

 

While the business is expanding, it may be challenging to create new managerial services, skills, efficiency, and organisational structure to keep and capture the growth possibilities (Davidsson et al., 2010).

 

According to the 2023 Workplace Learning report (LinkedIn Learning, 2023), the skills that companies in general, including micro-enterprises, need the most are management, communication, customer service, leadership, sales, project management, research, analytical skills, marketing, and teamwork.

 

Developing new skills is even more important for micro-enterprises since they struggle a lot to find, hire, retain, and engage employees. According to the SCORE's Spring 2023 report, which surveyed more than 1,500 small business owners, significant employee-related challenges remain: 

 

  • Eight in 10 (84.3%) small business employers report challenges regarding hiring new employees.


  • Nearly half (45.8%) say it's difficult to retain existing staff.

 

Micro-enterprises also tend to not have or have smaller R&D departments than larger firms and finance functions that focus more on accounting than strategy, potentially making it difficult to grow (OCDE, 2019).


 

External Challenges of Growth


According to Ylinenpää (1996), external challenges to micro-enterprises growth can be simplified as:

 

  • Regulatory burden — complex and burdensome regulatory environments can be a significant obstacle for micro-enterprises. Compliance with various regulations, licenses, and permits may require resources that are beyond their capacity.

 

Case-study: A survey by the National Small Business Association found that 29 percent of micro-enterprises consider government regulations a top challenge to their growth.
Case-study: Indeed, SMEs in general, and micro-enterprises are less well equipped than larger companies to go along with, for example, sustainability regulations. For example, according to a survey by YouGov for energy firm World Kinect Energy Services, 40 percent of micro-enterprises, in the United Kingdom haven’t made a sustainability plan—and 30 percent don’t intend to do so whatsoever. However, 53% of SMEs and 45% of medium-sized businesses do have a plan in place for the 2050 deadline and have achieved some of their goals (Future Net Zero, 2021).

 

  • Limited technological adoption — many micro-enterprises may not have the resources or knowledge to adopt modern technologies. This can hinder their efficiency, productivity, and competitiveness in the market.

 

  • Limited networking opportunities — building professional networks and partnerships can be difficult for micro-enterprises. Lack of networking opportunities may restrict their ability to collaborate, learn from others, and access new markets.


  • Limited access to finance — one of the most significant challenges for micro-enterprises is accessing financial resources. Limited collateral, lack of credit history, and high-interest rates can make it challenging for them to secure loans or investments.

 

Case-study: The latest  MetLife and U.S. Chamber Small Business Index (MetLife and U.S. Chamber Small Business, 2023), states that about 49% of micro-enterprise owners surveyed say their current access to capital or loans is good. That is slightly lower than in Q2 2022 (54%), and significantly lower than those who said their access was good in Q2 2017 (67%). The data also shows that compared to 2021, more small business owners are turning to personal savings to fund their businesses. In the case of the EU, the scenario is even worse since the investment in European start-ups dropped by 43% in Q3 2022 compared to Q3 in 2021.

 

Kangasharju (2000) also discussed four external challenges that determine micro-enterprises growth:


  • Limited understanding of the demand for products and services — micro-enterprises have difficulty understanding and managing this demand for effective business planning and strategy.

 

  • Difficulties in market access and competition — micro-enterprises often operate in highly competitive markets. Limited visibility, distribution challenges, and difficulty accessing larger markets can hinder their ability to compete effectively.


  • The high production and labour costs — which can squeeze profit margins for micro-enterprises. Micro-enterprises may find it difficult to compete with larger businesses that benefit from economies of scale. The ability to offer lower prices is often a competitive advantage, and high production and labour costs can hinder a micro-enterprise's ability to match or undercut these prices. 


  • Vulnerability to economic fluctuations — micro-enterprises, due to their small size, are often more susceptible to economic downturns and fluctuations. They may lack the resources to weather financial challenges, making them vulnerable to economic shocks.

 

 

The Combination of Internal and External Challenges of Growth

 

Penrose (1959) argued that a third major set of challenges exists, which refers to the combination of internal and external challenges. She explained the combination through the concepts of uncertainty and risk.

 

Since a firm needs to obtain certain information before acting, this will effectively limit expansion if the managerial capabilities and experience are not attainable (Penrose, 1959).

 

 

Thriving and Expand Up Against Growth Challenges

 

Micro-enterprises face unique challenges when striving to thrive and expand. Overcoming these challenges requires a combination of strategic planning, innovation, and adaptability. Micro-enterprises can thrive and expand despite growth challenges by pursuing the following:

 

  • Committing to Conscious Leadership Development — This is a transformative step toward creating organisations that prioritise a strong and nurturing culture, ethical decision-making, social responsibility, and sustainable practices.

 

Case-study: Deloitte's 2020 Human Capital Trends Report (Deloitte, 2020) noted that leadership development is the most urgent human capital issue, with 49% of respondents citing it as very important or important. Also, according to a Gallup’s report, employees who strongly agree that they have a leader who makes them enthusiastic about the future are 70% less likely to leave their organisation within the year (Gallup, 2021).

  • Developing Strategic Planning — For micro-enterprises, strategic planning can be especially important for achieving long-term success. By setting clear goals and developing a roadmap for success, micro-enterprises can increase their chances of success and achieve their goals more efficiently. Effective resource allocation, risk management, and the ability to adapt to change can also help startups grow and thrive, even in challenging environments.

 

Case-study: A study developed by Scale-Up Institute, in the UK, found that 85% of scale-up leaders believe that having a clear and ambitious strategy is essential for their growth (Scale-Up Institute, 2020).

 

  • Fostering an Organisational Culture of Excellence and Recognition — This includes instilling a strong focus on quality in all aspects of the organisation, by implementing quality management systems, monitoring performance metrics, recognition, and appreciation for excellent results, and striving for continuous improvement in processes and outputs. It also includes the establishment of a culture of continuous feedback and open communication channels that contribute to individual and organisational growth.

 

Case-study: According to a study by Gallup & WorkHuman, employees who receive regular recognition are five times more likely to feel valued and appreciated, six times more likely to invest in their work, and seven times more likely to stay with their current employer for at least another year (Gallup & Workhuman, 2023).

Case-study: Another study by the Harvard Business Review found that a positive workplace culture can lead to a 16% increase in employee productivity (Harvard Business Review, 2015).

  • Investing in Human Capital and Talent Development — This includes investing in the development of employees’ skills and empowerment. As a result, it enhances the quality of products or services and equips the workforce to handle increased responsibilities as the business expands, motivating the team to contribute to the success of the micro-enterprise.


  • Embracing Agile Management — This allows the business to adapt quickly to changing market conditions. This includes being responsive to customer feedback and evolving industry trends.

 

Case-study: The PwC's 22nd Annual Global CEO Survey (2019) survey found that 81% of CEOs who participated identified agility as the most important characteristic of a successful organisation. Strategic planning helps organisations become more agile in responding to market changes.

 

  • Prioritising Customer-Centric Approach — Thriving micro-enterprises listen to customer feedback, tailor their products/services to meet customer needs, and build strong relationships that foster loyalty and repeat business.

 

Case-study: A report by Bain & Company indicates that companies with a strong customer-centric culture are 60% more profitable compared to their competitors (Walker, 2023).

 

  • Leveraging Digital Technologies — Establishing an online presence, utilising e-commerce platforms, and adopting digital marketing strategies open new avenues for reaching a broader audience.


  • Fostering Research and Innovation — This includes Encouraging employees to contribute ideas, stay informed about industry trends, and invest in research and development. The compromise with research and innovation is a key driver of competitive advantages for micro-enterprises.

 

Case-study: A survey by PwC found that 61% of CEOs believe that innovation is a key driver of competitive advantage (PwC, 2021).

  • Optimising Operational Processes — This includes streamlining workflows, investing in technology, and implementing automation where possible. It also includes managing supply chains more efficiently by diversifying suppliers and implementing inventory management systems to reduce costs and delays.


  • Building Brand Identity — Building a strong brand identity helps micro-enterprises stand out in the market. A distinctive brand image can instill trust, attract customers, and support the expansion of the business.


  • Collaborating with Strategic Partnerships — This provides micro-enterprises with the resources and support needed for growth, creating synergies that benefit all parties.


  • Adopting Efficient Financial Management Practices — This involves businesses maintaining a disciplined approach to budgeting, controlling costs, and reinvesting profits strategically for sustainable growth.


  • Engaging with Local Communities — This can lead to strong word-of-mouth marketing, community support, and a positive reputation that contributes to growth.


  • Integrating Conscious and Regenerative Governance Principles and Practices — Integrating conscious and regenerative governance principles and practices into operations, not only aligns with contemporary values and regulations but can also attract conscious investors and consumers.

 

Thriving and expanding as a micro-enterprise requires a proactive and strategic approach. By addressing challenges head-on, leveraging opportunities, and fostering a culture of innovation, micro-enterprises can position themselves for long-term success in the dynamic business landscape.



EU ESG-regulated framework: a Catalyst of Micro-enterprises Growth?

 

As explored in the article: ESG Regulation and Policies and Their Implications for Companies (Domingues, L., 2023), the EU ESG-regulated framework, more precisely the Corporate Sustainability Reporting Directive (CSRD) will be applied directly to SMEs (including micro-enterprises) from 1 January 2026, with reports due in 2027.

Moreover, as large corporations, within which the CSRD regulation will be applied from 1 January 2024, extend the reach of CSRD throughout their supply and value chains, SMEs (including micro-enterprises) are beginning to feel the impact in a big way.


With the fear of losing valuable existing business with large corporations or facing exclusion from future tenders and opportunities if they can't effectively meet the sustainability requirements in the request for proposals (RFPs), SMEs (including micro-enterprises) that operate in EU territory, are increasingly interested in acknowledging the issues related with EU ESG-regulated framework and sustainability practices, in general.


As a result, 39 per cent of EU SMEs (European Commission, 2021) either have a carbon footprint reduction strategy in place or plan to develop one.

Starting to embrace environmental, social, and governance (ESG) principles into their strategy and operations, represents a unique opportunity not only to contribute positively to society and the environment but also to grow and thrive economically.


By embracing ESGs, micro-enterprises not only align with the large multinational corporation's requirements but also:


  • enhances creativity, innovation, and employee satisfaction.

  • contributes to a positive workplace culture

  • appeal to conscious consumers which builds brand loyalty

  • enhance efficiency and reduces the environmental impact of operations.

  • fosters collaboration with other businesses, NGOs, and governmental institutions that share similar ESG values.

  • ensures ethical practices throughout the supply chain 

  • position the micro-enterprise as a responsible and forward-thinking business.

  • increases the interest and support of financial institutions and investors in micro-enterprises. 

  • •   demonstrates a commitment to continuous improvement in sustainability and social responsibility.

 

Indeed, the EU ESG-regulated framework can be a catalyst for micro-enterprises’ growth, since the implementation of its principles can allow micro-enterprises to align with the values of conscious consumers, attract ESG-focused investors, and contribute positively to the communities and environments in which they operate. By integrating sustainability and social responsibility into their core business practices, micro-enterprises can not only grow but also make a meaningful impact on a global scale.


And you? What do you think about it? Do you consider ESGs-regulated frameworks as a challenge or as an opportunity for micro-enterprises?


If you are leading or collaborating with a micro-enterprise, are you implementing the principles of the EU ESGs-regulated framework?

 


References

 


Davidsson, P. Achtenhagen, L. Naldi, L (2010), “Small firm growth” Foundations and Trends in Entrepreneurship Vol. 6, No. 2 (2010) 69–166.

 


Domingues, L. (2023), ESG Regulation and Policies and Their Implications for Companies,

 

European Commission (2021), Flash Eurobarometer 498: SMEs, green markets and resource efficiency, 2021.

 

Future Net Zero (2021), “Around 40% of SMEs do not have plans in place to meet net zero.”

 

 

Gallup & Workhuman (2021), “Gallup's State of the American Workplace Report”, 2021.

 




 


Lin, Diaan-Yi, et. All, “Beyond financials: Helping small and medium-size enterprises thrive.” Mckinsey & Company, 2022

 

OECD (2019), “Access to innovation assets,” in SME and entrepreneurship outlook 2019.


Penrose, E. (1959), “The Theory of the Growth of the Firm”. Oxford: Oxford University Press.

 

 




Storey, D. J. (1994), “Understanding the Small Business Sector”. London: Routledge

 

Ylinnenpää, H. (1996), “Barriers to Innovation in Swedish SMEs”, proceedings of the 26th Small Business Seminar, Vaasa, Finland.

 


 

 

 

Comments


bottom of page