Small in size, but big in profits and innovation

We live in a commercial world where size matters. National retail chains dominate every high street in the land, squeezing out independent retailers. Supermarkets are the size of small villages, while small villages struggle to support more than one or two local shops. Huge multinational companies have turnovers bigger than many countries' GDPs. In business at least, the policy of "big is better" has never seemed more true.

For smaller businesses, it's easy to think that becoming successful means trying to be big. Stories of entrepreneurs who spent their first few years in business pretending that their company was much bigger than it actually was, are ubiquitous. There's no doubt it can work. But it's not the only way. There's a wave of small businesses that see their relatively small size as an opportunity to create competitive advantage. Their size is not something they try and hide, but something that gives them strength. They use it to become commercially successful, not by aping larger, more traditional businesses, but by being flexible and punching above their perceived weight.

"Small businesses are not faceless corporations. They are the manifestation of the individual, or individuals, who run that business," says Professor David Storey, director of the Centre for Small- and Medium-Sized Enterprises at Warwick Business School. "The common element in those that are successful is that they do something which is smart. I call it the smile factor, it makes you think, isn't that clever? They do whatever they do, but in a different way from the competition," he says.

Peter Rampling, head of business marketing at O2 and director of the Arena O2 X Club awards for entrepreneurs, says that one of the prime advantages in being small is the ability to adapt more quickly to market changes and the commercial climate than their larger competitors. "Corporates can experience great difficulty when tackling a more formalised procurement process. The decision to buy - or to do most things - has to pass through many departments and hierarchies. Small companies can get round that problem," says Rampling.

Another area where small businesses can use their size to their advantage is in terms of staff. It is difficult for a small business to match the salaries offered by larger companies with deeper pockets, but it can play on other strengths to attract suitable recruits.

According to a survey by market research organisation Ipsos in 2002, 80 per cent of university graduates want to work for an organisation they regard as ethical, friendly and trustworthy, and 90 per cent want their employer to play a part in improving society.

That's not to say that for a business to be ethical, friendly and trustworthy it has to be small, but it makes it easier. It is easier to create a friendly, welcoming environment in a company with two dozen employees, than it is for one with 5,000 employees. And it is easier for employees to relate to and feel part of a company where the managing director greets them by name, rather than one where the boss is a shadowy stranger ensconced in a bunker in head office.

"People are driven by achievement and personal satisfaction rather than power. They want their voice to be heard and they want an environment where they can make an impact. It's easier to create that environment in a small business, and it's one that in turn can lead to greater energy, innovation and motivation," says Stephen King, managing director of FDUK, a small consultancy that provides part-time financial directors to small businesses.

Small businesses can also be more innovative when it comes to retaining staff and keeping them motivated and committed. Large organisations may provide clear opportunities for career progression and clearly defined roles, but these can be as much a weakness as they are a strength. Strict career paths and rigid responsibilities tend to stifle creativity and dynamism rather than nurture it. By being more innovative, small businesses can develop a workforce that is more committed, more motivated and more loyal.

Natural drinks company Innocent was set up by three friends in 1999. It now employs 70 people and turned over £17m last year. Every quarter, it awards the Innocent scholarship, a gift of £1,000 to enable a member of staff to accomplish something outside of work. It could be anything from football training or a cookery course to finishing off a music recording they've been working on. In addition, there's a "baby bonus" of £2,000 for new parents, free massages once a month, an employee share scheme and free toast, fruit and cereal, every day.

Marketing manager Ailana Kamelmacher says that the principle of treating staff differently is as strong now as it was in the company's early days, when it had just a handful of employees.

"We are all treated as individuals, not just employees. It's about trying to create an environment where coming into work isn't the worst thing that's happened to you that day. People work very hard here, everyone is passionate and dedicated, but that doesn't mean it can't be enjoyable and friendly," she says.

Small businesses can potentially get closer to their customers, too, than can larger ones. Because of their size, it is both physically and psychologically easier to build a strong customer relationship. Innocent, for example, advertises its "banana phone" customer hotline and business address on all its products, inviting customers to ring up or even pop in for a chat when they're passing. The banana phone can be answered by anyone in the office, from the temp to the directors.

Kamelmacher says people are surprised when they ring and someone actually answers the phone and talks to them. Similarly, they're amazed when they turn up on the doorstep and are invited in and shown around. "It gives you a very direct line of contact with your customers, which is something I think big companies struggle with. They put up all these barriers. You go to the website and can't find a phone number or you have to fill in forms to get in touch. We try and make it as simple as possible. Its different and it works," she says.

The joy of striving to do things differently is that there are no rules. What works for a high-profile natural drinks company in London, would not work for every small business. But by questioning the received wisdom in its industry, every small business can find its own way of developing.

Hugh Facey, chairman and founder of Sheffield-based engineering firm Gripple, has built a hugely successful business on doing things differently. Formed in 1988, Gripple was based on a new invention for joining and tensioning wire and rope. Since then it has sold over 130 million units worldwide and its products are available in more than 50 countries.

Facey says that the mantra of doing things differently pervades every aspect of the business. There are no job descriptions, personnel department, or planning department. "Everyone knows what has to be done to make the business run. If you give somebody a job description, it inhibits them from doing anything else," says Facey.

Nor does the company have a health and safety committee. This may sound reckless for an engineering company, but, Facey explains, it's too important an issue to leave in the hands of a committee. "Everybody is incredibly aware of health and safety issues. If there's anything wrong, anyone in the company can put it right, no matter what the cost, on my authority. It's a constant focus, not something left to a committee to look at once a month," he says.

Most of Gripple's 150 employees own shares in the company. They own 38 per cent of Gripple and 48 per cent of its sister company, Loadhog. Given that the group made £3.25m profit on sales of £15.5m this year, it's a powerful incentive. The employees invest in the shares themselves, they aren't given them. The company will lend them up to £10,000 to buy shares, which is paid back out of their monthly salary, together with a commercial rate of interest. "It demonstrates that they believe in themselves as well as the company, and it really does give us a substantial competitive advantage," says Facey.

There is a target of between 20 to 25 per cent of the company's turnover coming from products which have been launched in the previous three years. And that means brand new products, not updates or modified versions of existing ones. Facey says that Gripple will only ever manufacture products that it can patent. To meet this target, it invests 7 per cent of its turnover in product development every year. Willing to admit it can't do everything itself, Gripple works with research partners in the wider market such as specialist engineering teams at Sheffield's two universities, Cardiff University for rapid prototyping and Cambridge University for its cutting-edge research.

Of course, the end goal of such innovation is to be successful. And success usually means growth, which in turn could threaten the very environment that facilitated the innovation in the first place. Sooner or later the successful small business with the flexibility to be different will grow into a much larger business with much less flexibility. As the business grows, the risk is that it drifts towards the easier, accepted way of doing things.

"It's a risk, but you just have to fight harder to make sure the constant questioning is so ingrained it can't just be turned off. No matter what the business is doing or how big it is, you've got to keep thinking, how could we do this differently?" says Kamelmacher.