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William Henry Gates, known to his friends and the rest of us as Bill, is probably the world’s most prominent entrepreneur. From a teenager’s interest in computer programming, he founded and built Microsoft to its position of global dominance of the vast personal computer market. He is certainly one of the world’s richest individuals. Entrepreneurs, entrepreneurship and enterprise are today very fashionable topics. The self-made, intelligent and visionary individual, who sets up a business that eventually arrives on everyone’s ‘must have’ list and sees off all rivals, is now the focus of press, film and TV. Entrepreneurs are now role models. Yet, in 1955, when Bill was born in Seattle, very few people ever mentioned the word ‘entrepreneur’. Even as recently as 1975, when Bill Gates and Paul Allen founded Microsoft, calling a business person an entrepreneur was often a term of abuse in Britain, if not in the US.

Bill Gates.
[image © copyright BBC]

However, merely being extremely rich is not the same thing as being an entrepreneur. There are plenty of people with inherited wealth who did not have to lift a finger or take a risk. The term was first used to refer to merchants and traders who were prepared to bear the risk of buying goods and services at certain (fixed) prices, to be sold elsewhere or at another time for uncertain future prices. They were people who had the skills and energy to spot opportunities in trade and to act on their judgement. In the 1920s, Joseph Schumpeter, an Austrian economist, took the view that entrepreneurs are not opportunists but are energetic and competitive people who seek to gain an edge over their rivals by creating and adopting innovations. By this, he meant not only new goods and services but also novel processes, marketing, distribution, financing and ways of doing business. Thus, ‘modern’ entrepreneurs, in contrast to ‘classic’ entrepreneurs, create their own luck and opportunities. Furthermore, they are controlled rather than unbridled risk-takers. Schumpeter, however, was also interested in the motivation of the entrepreneur, which he ascribed to three main drives – a desire for social status, the joy of creativity or a desire to conquer, win and beat rivals (what is now often called need for achievement). So, what sort of entrepreneur is Bill Gates – classic or modern?

"merely being extremely rich is not the same thing as being an entrepreneur"

Bill Gates was born in Seattle to a father who was a leading lawyer there and a mother who was part of a prominent banking family. So, young Bill had no problem with social status and the family was not short of money. However, there is evidence that Bill was driven by a joy of creativity. As a boy, he was fascinated by computers and programming. He even managed to convince his teachers to let him drop maths so that he could pursue programming. At the age of 14, Bill and his school friend, (and future Microsoft partner) Paul Allen, converted an Intel processor into a traffic counter and earned $20,000 each for themselves. Six years later, in 1975, Paul talked Bill into dropping out of Harvard and travelling halfway across the country to New Mexico, in order to develop an interpreter of the BASIC programming language for the new Altai microcomputer. This opportunity gave birth to Microsoft but was clearly driven not by a desire to beat competitors but more by a love of doing something new, with new technologies, in a new industry.

Within ten years, however, Microsoft was creating its own opportunities and was on the path to becoming the $50 billion, 80,000 employee, multinational, dominant force that it is today in computing. The big opportunity came in 1981, when IBM turned to Microsoft to produce the operating systems for its new personal computers. To meet the IBM deadline, Microsoft bought the rights to an existing system for $50,000 and adapted it into the PC-DOS. Each IBM PC sold included the Microsoft system yet Microsoft retained the rights to sell to other customers. As clones of the IBM PC began to flood the market, they too were mostly using the Microsoft disk operating system (MS-DOS). As the money poured in, Microsoft stepped up its R&D so that it soon began to lead, rather than follow, market developments. So, Bill moved from being something in between an enthusiastic hobbyist, and a classical opportunity spotting entrepreneur, into a thoroughly modern entrepreneur who savours the creating of new opportunities. Bill now clearly enjoys being a winner.

Weblinks

• Join the discussion
• What makes an entrepreneur?
• Are you an entrepreneur?
• Just Do It
•  
• Watch the trailer
• Video extras: Bill and Paul's excellent adventure
• Is Microsoft finally breaking the mould?
• Bill Gates: The skills you need to succeed
• Profile: Bill Gates

Courses

• Professional certificate in management
• Investigating entrepreneurial opportunities

About the author

Colin Gray is Professor of Enterprise Development at the OU Business School, where he is responsible for research and teaching in small business and entrepreneurship.

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Blogging about

Money Programme

Get the facts behind the big business and finance stories from around the world – and down your street, in The Money Programme.

One afternoon in the late 1990s, I was sitting in traffic on the mile-long floating Lake Washington Bridge, driving back home to Seattle from my office in suburban Redmond. My flatmate and I, who shared the 12-mile commute, were talking about our respective days at the office. “Do you think,” he asked me suddenly, “that one day, we’ll be telling our kids about how we were a tiny part of one of the most revolutionary movements in American history? That one day we’ll look back and say, ‘You know, I worked at Microsoft in the late 90s’?”

There’s no doubt that it was a heady and exciting time. The Seattle area, where we lived, was home to some of the most impressive names in technology. There was Aldus (later Adobe), who revolutionized desktop publishing; Real Technologies, who created one of the first platforms for streaming audio content; Amazon, who turned the relatively new Web into a marketplace; and hundreds of others.

Bill Gates.
[image © copyright BBC]

As a young university graduate in the mid 1990s, I began to hear rumblings about how the Internet, which at that time was still very limited in scope, was changing everything. And the west coast was the place to be. Fortunately, I had family in the Seattle area, so I packed my bags and, like generations of Americans before me, headed west.

Within days I had a job with a large software company at twice what I was making on the east coast, and within a few months I realized the reality of high-tech work in Seattle: sooner or later, almost everyone ends up working for Bill Gates. The company couldn’t grow fast enough and soaked up every talented body that came to town – from computer programmers and math geeks just out of university; to English graduates like me and many of my technical writer and editor colleagues; to people like my flatmate, who had dropped out of seminary on a summer field trip to Seattle and parlayed his technical abilities into a well-paying job formatting and producing technical manuals at Microsoft.

"known by his email alias (as was almost everyone at Microsoft), billg was always present and active in the company"

The culture of the company was exciting and new at the time, even if it has now become something of a cliché. We worked hard and it was an exciting intellectual challenge, and late nights and weekend work were common. Holidays – just two weeks per year – had to be taken around the cycle of product releases, and when things went into “ship mode,” usually about four to six months prior to releasing a product, everything in your personal life went on hold. But at the end of the cycle, once the product was released, the company always sponsored a massive party. Sometimes lasting over a few days, they consisted of everything from bouncy castles and a barbecue in the car park to weekend ski trips to Canada.

Known by his email alias (as was almost everyone at Microsoft), billg was always present and active in the company, even as it grew to upwards of 20,000 employees, and it was common to see him around campus. Occasionally, I saw him doing that same cross-lake commute, just like many of his employees. Tough and demanding, he was passionate about the company he created, and he wanted nothing less from all of us who worked for him.

In return, the perks of working for the company were second to none. The health insurance, which is a must in the US, was gold plated; the stock option grants made millionaires of thousands of early employees. Set carefully in stands of evergreens, almost every office in the campus looks out onto the beautiful scenery. And every building featured the necessities: a coffee stand and a café open from early in the morning until late in the evening, so you never need leave the campus (or your work).

When I started working at Microsoft, I was just 25 years old and the Internet revolution was just getting underway. I remember thinking, naive though it was, that it might just be the pinnacle of my working career – it may be the last place I worked. But as I sat with colleagues in the Redwest café one sunny summer afternoon, eating lunch under a section of the Berlin wall (part of the company’s permanent collection of art and historical artifacts), looking out over the evergreens to the stunning snow-capped Cascade mountains, and discussing a new feature for one of the world’s most popular software products…well, maybe I could be forgiven for getting caught up in the moment.

Weblinks

• Join the discussion
• What makes an entrepreneur?
• Are you an entrepreneur?
• Just Do It
• Watch the trailer
• Video extras: Bill and Paul's excellent adventure
• Is Microsoft finally breaking the mould?
• Bill Gates: The skills you need to succeed
• Profile: Bill Gates

Courses

• Professional certificate in management
• Investigating entrepreneurial opportunities

About the author

Gabriel Reedy is a lecturer in learning and teaching innovation in The Open University Business School. His research focuses on the social and cultural impacts of teaching and learning technologies, and he studies how technology can support professional learning.

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Athletes who win gold at this summer’s Olympics will have an incentive to skip the lap of honour and run straight to the bank. Gold’s price has moved back above $900 an ounce this year, from less than $300 ten years ago. The once forgotten metal is back in demand – from savers and investors worried about inflation, and a growing number of industrial users who target its material properties as much as its symbolic asset value. Because mining activity was run down during the long price slump, the upturn in demand has quickly run up against a limited supply.

In China, India and the Middle East, as Max Flint discovered on his trip to Dubai for The Money Programme, gold’s attraction as a safe store of wealth has never really gone away. Given the scare stories circulating about the state of some banks, particularly in China, it’s unsurprising that many households still prefer to keep their savings in a jewellery box than a bank vault. Some analysts lucratively anticipated the emerging world’s gilt-edged appetite a decade ago.

Elsewhere in the world, gold’s decorative role now competes with some fast-growing industrial uses – as a component in electronic circuits, catalyst for speciality chemical production and air filtration, corrosion protector, and upmarket dental substitute. Industry absorbs little more than 300 tonnes from an annual world consumption of over 4,000 tonnes, but it means those stocking up at the souks and bazaars have some powerful corporate buyers to haggle against.

Gold bars
[image © copyright Photos.com]

Even after this year’s rise, gold price is less than half its last (1980) peak price in real terms. The run-up hasn’t been as smooth as that for oil, or even platinum, and there are plenty of reasons why it might be short-lived. There’s a large global stock – held by central banks, individuals who hoarded it before the long price slump, and speculators who bought during the recent recovery – which will be offloaded whenever the price goes too high. Many of those industrial users can turn to substitute metals when gold gets too expensive.

And if Federal Reserve chairman Ben Bernanke is right, the dollar zone (including China) is already through the worst of its inflation fears and bank scares, so less in need of gold as a precautionary investment. In calmer times ten years ago, gold’s future looked decidedly bleak.

"if they’re left holding too much when the price goes down again, at least they can wear it to the next party"

No-one knows how big the available stocks are, and those looking to sell have an interest in concealing how much they hold. Prices could suffer if too many analysts raise their estimates of the ‘free’ supply. As big gold trades are still confined to a small number of exchanges and traders, there are also suspicions that these can manage price movements, to smaller players’ disadvantage.

But just as the fight for Olympic glory is driven by motives beyond money, it’s more than financial calculation that makes investors go for gold. Otherwise, we’d see more of them buying the shares of gold mining companies – whose risks are spread wider, because the same seams often yield other metals – or of precious-metal investment funds, not sinking their funds directly into shiny bars.

After the great stock market crash of 1929, one chastened speculator observed that he’d have been better off buying $1000 worth of beer than $1000 worth of shares in the company that brewed it. The remaining stock would have been worth more – and given something to drown the downside sorrows in. There may be a similar motivation behind the old bulls’ return to new bullion. If they’re left holding too much when the price goes down again, at least they can wear it to the next party – and shake hands with their banker without having to count the rings.

Weblinks

• How to get rich in a recession
• The colours of money
• Join the debate
• Rough Science: Properties of gold
• What is money?
• Silver and gold bring health and wealth
• The Aussie Gold Prospector
• Watch the trailer 

Courses

• Issues in international finance and investment
• MSc in International Finance and Management

About the author

Alan Shipman is lecturer in economics at the Open University, and a former financial journalist. His books include The Globalization Myth, The Market Revolution, and Transcending Transaction. He is involved in OU's new courses on personal finance, and research on insurance pools, 'chaos pricing' and Eastern Europe.

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The advent of the so called ‘Web 2.0’ and the explosion in social networking that the web sites and ‘mash ups of technology’ that underpin it have enabled has led to a resurgence of interest in electronic or digital democracy. This is the belief that first emerged in the United States in the 1970s that new information and communication technologies (ICTs) can be used to renew democracy. It was argued then, as now, that the interactivity of these new technologies – by which contemporary advocates of digital democracy mean the internet – will deliver new forms of political practice and participation, thereby reinvigorating and reinventing public debate and political accountability.

As with technological development generally much of the literature and debate on the internet and democracy has always been highly technologically determinist and optimistic: it treats technological development as historically inevitable (hence my use of ‘will’ not ‘can’, above), politically neutral, and fully accepts that any drawbacks and risks are outweighed by the benefits. For digital democracy specifically this translates into development, research and policy that is heavily biased towards the input side of democracy. That is, on technologies and their application and operation and not on what impact these have (if any) on outputs such as policy and decision making.

Allied to this entrenched determinism is a long standing tradition that can be traced back to the libertarian beliefs of the early pioneers of the internet: it is an inherently democratic medium. Its decentralised and devolved nature, and the weak forms of control to which it was subject for many years, certainly aided this view, thereby creating a utopian image of the internet as a separate socio technical system. Today we can witness this in much of the discussion of, and activity in, ‘virtual worlds’ such as Second Life, Habbo Hotel, and so on. However, the takeover of social networking sites and rapidly growing colonisation of virtual worlds by multi-national enterprises, allied with the widespread surveillance of cyberspace by government agencies must make even those who subscribe to the separate social system thesis question their position.

The potential for digital democracy has suffered the same fate, I believe. As the power and influence of governments and organisations committed to advancing consumerist forms of managed democracy has grown so the potential of the internet to act as a liberation technology has rapidly decreased. Instead we are witnessing the consolidation of a trend that was observable by 2000, when, working with colleagues from Denmark and Holland, we concluded our review of electronic democracy in Western Europe by reporting that:

“The scenario that emerges then, is of a “two-tier democracy”: a “big” democracy, concerned with policy and decision-making at a national and international level…And a “small” democracy where “ordinary” citizens try to make a difference in terms of the quality of everyday life. (Hoff, Horrocks and Tops 2000:187)

Since then the gulf between big and small democracy has grown as more and more people have become disengaged from the terrestrial world via their on-line personas, increasingly losing touch with, and interest in, real world politics and decision making and what they can do to influence and control these. To me, therefore, the main democratic problem of today seems to be how (or if) these two types of democracy can be reconnected.

Further reading

Democratic Governance and New Technology, edited by Ivan Horrocks, Jens Hoff, Pieter Tops, published by Routledge

About the author

Ivan Horrocks is a lecturer and member of the Technology Management Group at The Open University. He has written many publications about the relationship between information and communication technologies (ICTs) and government and politics.

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In 2008, food prices in the developed and developing world are soaring. Global inflation in food, as measured by the international food price index, increased by 40 per cent in 2007, and has soared further this year.

Levels of world cereal crops are at an all time low. As food-aid programmes run out of money, world leaders meet in frenzied anxiety about diminishing food stocks; they are beginning to acknowledge, at last, the severity of this ‘man-made’ global food crisis.

Forecasters, such as the international think-tank Chatham House, have predicted that demand for food will rise by 50 per cent by 2030. The UN have reported that to simply keep up with the growth in human population, more food will have to be produced in the world in the next 50 years than there has been produced during the previous 10,000 years. About 40 per cent of the world’s agricultural land is already degraded. In 1980 the world’s population was 4.4 billion. By 2050 it is expected to reach 9 billion.

Famine.
[image © copyright BBC]

In Italy, women have marched in protest as wheat prices more than doubled. In the UK, families are feeling the pinch, especially in the price of food commodities. From Haiti to Uzbekistan, the poor are bearing the brunt of the problem. Hundreds of people have died in protests across the world. In India, rice has been rationed. In April the World Bank predicted that at least 100 million people across the globe could face starvation. EU estimates suggest that 25,000 people are dying daily from hunger as food prices reach their highest level since 1945. In June the oil price keeps rising to an unprecedented 135 dollars a barrel.

The causes of this international food crisis are very complex. A variety of factors have been identified, ranging from climate change, poor farming practices, deforestation and soil erosion to global overpopulation. Speculation on commodity futures in the world’s stock markets, following the collapse in confidence in conventional financial markets and the fall of the dollar, has exacerbated the problem. Following the credit crunch the search for profits has resulted in enormous fluctuations in market prices that do not appear to be related to shifts in supply and demand.

As the world’s oil reserves decline, the switch by governments, including our own, to force increasing acreages of farmland to convert from food production to the production of crops for bio-fuels, has distorted the system of production to the extent that an attempt, if it was, to satisfy environmental priorities has created increased food scarcity and pushed up prices.

By 2010, across Europe it will be mandatory, for example, for petrol retailers to mix 5.75 per cent of bio-fuels into fuel sold to motorists. However, it is not just in the EU that we are being asked to burn crops to fuel our cars – the USA, India, Brazil and China have similar prospective schemes. India, for example, has pledged to meet 10 per cent of its vehicle fuel needs with bio-fuels. In America, bio-fuel consumption for motor vehicles is now enough to cover all the import needs of the 82 nations classified by the UN as ‘low-income food deficit countries’. It is probably too simplistic to suggest that our transport systems can lead to starvation in the developing world, but the connection is unavoidable.

In seven of the past eight years, the world has consumed more grain than it has supplied. The growth in bio-fuel consumption has not only benefited the rich countries and denuded the poorest, but it has depleted global grain stockpiles, pushing millions more of the world’s poor deeper into poverty. The International Monetary Fund reported in April that corn-based ethanol production in the USA accounted for half the increase in the global demand for corn. Jean Zeigler, a UN expert on the right to food has called this new phenomenon a ‘crime against humanity’.

We may be on the cusp of the biggest structural change in the world food market for over a century. In the next few years, relief and aid programmes in the developing world may be undermined, while the tensions of international politics may further impinge on the life chances of humanity. Increased competition over depleted resources could lead to conflict and war.

The world’s population is growing at around 80 million people a year. In the rising powers of India, Brazil and China, a huge growth in middle-class populations has led to a revolution in demand for those consumer goods we in the West have taken for granted for so long. These countries have also seen a substantial shift in food consumption towards the dairy and meat-based diets of the western world. As the environmentalists remind us, they also have quadrupled their own use of oil to fuel their vehicles.

Unfortunately, as the world seeks a sustainable future and struggles with ways to limit the damage done by humanity to our environment, it is likely that there will be millions of losers. In 2008 the British Government predicted that by 2050 half the arable land in the world might no longer be suitable for production because of water shortages and climate change.

Today The UN’s World Food Programme is unable to cover the increased cost of food aid to the poorest nations in the world.  While we in Britain are feeling the pinch the impact on the world's poorest countries is huge. If you are one of the 2.8 billion people in the world who live on under $2 a day, you may pay for the recent surge in growing grain for petrol with your life. And it looks like getting worse.

About the author

Richard Skellington edits Society Matters for the Faculty of Social Sciences at the Open University. He’s an administrator who manages the Environment, Development and International Studies programme.

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Blogging about

Money Programme

Get the facts behind the big business and finance stories from around the world – and down your street, in The Money Programme.

You might think the obvious way to make money in a recession is to be involved in the production or sale of low cost versions of essential items – such as pizzas, bread or pork sausages. But you can still get clobbered by rising costs – petrol, utilities and, when your staff have to pay higher prices, on rising wages too. A more indirect way is to be in businesses that positively profit from others’ distress – here the obvious ones are firms that specialise in sorting out the financial messes that individuals or companies get into. So, bailiffs and company receivers do well in a downturn.

A more straightforward way, though, is to make money indirectly through the stock market. In the old days, it was quite hard to do. If you held shares and the market went down, you lost money. Now, you can easily take a position which makes money when a share falls in price. You don’t even have to be a stock market professional.

Stock market figures.
[image © copyright Photos.com]

You can use futures or options – so called ‘derivative products’ which are linked to the underlying asset you want to trade. If you think, for example, that the FTSE 100 stock market index is going to go down, you can sell futures contracts on the index. Your brokers will require cash from you, to protect themselves if you are wrong, but essentially, you hope the index will go from say 6000 to 5500 and that what you sold at 6000, you can buy back at 5500, pocketing a profit of 500. The more futures contracts you sell, the bigger your profit.

"whether we are living in good times or bad, we can make money from the stock market"

Sounds too good to be true? The problem is – what happens if you are wrong, the FTSE 100 rises to 6500 and you have to buy back at a higher price than you sold? A lower risk way is to buy a put option. For a small premium, you have the option to sell the FTSE 100 say at 5750 when it is currently trading at 6000. If you are right and the index falls to 5500, you can effectively close out your position for a 250 point gain, less the cost of the put option. This way, if you are wrong, you can simply walk away, worse off only by the put option premium.

Investment professionals use futures and options to bet that prices will fall all the time. George Soros is famous for having made a fortune from selling the pound sterling just before it left the European Exchange rate mechanism. More recently, two traders at Goldman Sachs – Josh Birnbaum and Michael Swenson made money out of the ‘credit crunch’ – they sold products linked to the sub-prime market and bought back when prices had fallen. As a result, Goldman made around $4 bn from this strategy and Josh Birnbaum has set up his own $1bn fund trading sub-prime mortgages.

What can you do when markets have already fallen? The answer is invest in a so-called vulture fund which buys securities which have fallen dramatically in price, in the hope that they will recover. So, whether we are living in good times or bad, we can make money from the stock market. The only problem is getting your timing right!

Weblinks

• Join the discussion
• Competitive advantage
• Watch the trailer
• London Stock Exchange - what we do
• How the FTSE is calculated
• Is the FTSE 100 biased?

Courses

• Financial strategy
• Issues in international finance and investment
• You and your money: personal finance in context

The opinions expressed are those of the author and are not held by the Open University or BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.

About the author

Janette Rutterford is Professor of Financial Management at the OU Business School, having previously worked in corporate finance and investment. Jannette's research includes pension funds, equity valuation and investment history, in particular the history of women and wealth.

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The collapse of Silverjet, the low-cost, business class transatlantic airline, came quickly, with staff reportedly in tears and passengers arriving at the airport to find notices taped to the Silverjet desk. Arguments will continue over what caused their demise, be it oil prices or investors, but the collapse of this, and on average a third of all new businesses, serves to illuminate how risky business can be.

But the humorous adage about new business ideas – that the best way to make a small fortune is to start with a large one – masks some interesting detail. In fact, new business ideas range from the very safe to the very speculative and it is by recognising and managing those differing risks that investors make money.

All business plans have an inherent amount of risk due to the fact that they all, one way or another, make three basic assertions:

1. The market is this big
2. We’re going to win this much share of the market
3. That share will make us this much profit

Of course, none of these assertions are guaranteed. They are all more or less educated guesses and, to the degree that they are uncertain, they imply risk. In simple terms, therefore, the risk associated with a business plan is the sum of the risks associated with each assertion as follows:

• Market risk: the risk that the market won’t be as big as hoped
• Share risk: the risk that the strategy won’t win the share it hoped for
• Profit risk: the risk that, even if the sales are good, the profit margins won’t be what was hoped for

Calculating the risk.
[image © copyright Photos.com]

Clever business people realise that a careful reading of the business plan can reveal how big each of the risks is. For example, a radically new concept, like Glasses Direct, the web-based opticians, has a lot of market risk because nobody has any idea how many people will want to buy their glasses over the internet. By contrast, Apple’s iPod, although an innovative product, knew there was a market because it followed a trend set by the Sony Walkman. Share risk is a bit more complicated. It has a lot to do with how well targeted and compelling the offer to the customer is.

BMW, with its precise targeting of the driving-loving segment with “the ultimate driving machine”, has low share risk. By contrast, Woolworths, with its rather diffuse and outdated offer has high share risk. Finally, profit risk has a lot to do with the assumptions the firm makes about costs and competitor response. If you make optimistic assumptions about high prices and low costs, then assume that the competition won’t react, you’re taking a big risk. Silverjet suffered from some of all three risks, but it looks as if it was profit risk, created by fuel prices, that was the major reason for its downfall. 

What can managers and investors do about this? Is new business inevitably risky business? Well, yes, but there is something that can be done about it. In general, the more new elements a business plan contains, the riskier it is. That doesn’t mean don’t do it, it just means that investors should demand higher returns of new businesses and that conservative investors should chose more cautious investments. And if you do want to start or invest in a new idea, then the decades worth of research into risk have been distilled into a 15 point checklist to calculate and manage risk. 

In short, managers and investors have to take risks, but they don’t have to be uncalculated ones.

Further reading

Risky Business is on the Decline, MBA Business Autumn 2004. PDF available on request from the author at brian.smith@pragmedic.com

Marketing Due Diligence: Reconnecting Strategy to Share Price by MacDonald, Smith and Ward, Elsevier 2005

Against the Gods: The Remarkable Story of Risk. By Peter L Bernstein, Wiley 1996

Taking it further

OU Course – Financial Strategy (B821)

About the author

Dr Brian D Smith is a Visiting Research Fellow in The Open University’s Marketing and Strategy Research Unit. He is the author of over 100 books and articles and runs PragMedic, a specialist strategy consultancy.

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It is clear that the banking and financial problems which have dominated the media since last year continue to cloud the economy and the wider business climate. What seemed like a problem localised last September to the North West of England, and caused by an even more remote US practice of pouring tons of dollars into the rather unpleasantly named ‘sub-prime mortgages’, was in reality the tip of a massive iceberg of financial poor practice and greed. The crisis is truly global but Britain’s four million or more very small businesses and self-employed appear to be particularly vulnerable.

Quarterly surveys conducted by the Small Enterprise Research Team (SERTeam), the independent small business research charity that is based in the OU business school (OUBS), revealed in the third quarter 2007 that, while less than one in five small firms had formal term loans from their banks, more than half were exposed to more volatile forms of credit such as overdrafts (28 per cent), credit cards (17 per cent) and re-mortgages (13 per cent). At that time, the economy seemed quite buoyant and small firm owners were more concerned about regulations and red-tape than they were about the state of the economy. By the final quarter of 2007, however, 30 per cent reported that they had been directly affected by the credit crunch, 60 per cent reported indirect effects (from customers, suppliers, and so on) and a very large majority of 85 per cent expected an economic slowdown, including one third who predicted a full recession.

Falling profits.
[Photo © Photos.com]

In fact, the current credit and property crisis has been building up almost unnoticed for some time. British Bankers Association (BBA) figures clearly show a sharp decrease in home purchases starting from December 2006. By March this year, home mortgage approvals were down to 35,417, less than half the December 2006 level and down more than 46 per cent on the previous March. The Council of Mortgage Lenders and the Federation of Master Builders confirm that, as mortgages become more expensive, house prices are on the way down. The Royal Institution of Chartered Surveyors (RICS) predicts a 40 per cent fall in house prices over the next five years. Indeed, this gloomy picture is confirmed by the Governor of the Bank of England, Mervyn King, who has warned that inflation is likely to remain two per cent over target for the next two years and that the booming ‘nice’ decade (no inflation, continuous expansion) is over.

This, of course, prompted comment that the ‘nasty’ decade is about to begin. With unemployment on the rise (the number of job seeker claimants has increased for the third month in a row), fears of a return to the ‘nasty’ early 1990s - the years of negative equity and business failures - are bound to grow. With private debt in Britain of some £1.4 trillion, British businesses and citizens are the most indebted in Europe (and, per capita, more in hock than the US). The UK accounts for one third of all EU credit card debt. Although an important source of business finance, particularly for the self-employed, this is very exposed to rises in interest rates and bank charges. Whether or not we are heading towards a repeat of the 1990s or worse, time will tell. What we do know now is that currently the sectors most at risk from the credit squeeze are the construction, financial and property-related/business services sectors (real estate agencies, surveyors, domestic repairs and so on).

Overwhelmingly self-employed or microfirms, they represent 44 per cent of all UK firms and some 28 per cent of all employment. The SERTeam Quarterly Surveys already show falling sales and employment in these sectors which will contribute to falling overall demand and spillover effects into other sectors. However, many of the smaller firms have shown in the past that they can be very resilient in recessions. They cut costs, reduce capacity and the larger ones do shed staff. The Quarterly Surveys conducted during the recession of the early 1990s revealed that owners tend to tighten their own belts first, cutting their own takings, and that they are reluctant to shed core staff (who, after all, may be family members). They keep their businesses ticking over, waiting for a change in fortunes when the recovery arrives, as eventually it must.

About the author

Colin Gray is Professor of Enterprise Development at the OU Business School, where he is responsible for research and teaching in small business and entrepreneurship.

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