Small and medium-sized enterprises (SMEs) play an important role in the world economy and contribute substantially to income, output and employment. SMEs are the growth engine for the emerging world economy, accounting for 85% to 90% of business population, 55% of private-sector value addition and 77% of private-sector employment. The contribution of SMEs to economic fundamentals varies substantially across countries: from 16% of GDP in low-income countries (where the sector is typically large but informal) to 51% of GDP in high-income countries. The BIG question is: are they equipped to grow in a changing business landscape with more cross-border opportunities emerging than ever?
The recent global financial crisis created a particularly tough climate for SMEs, reducing demand for goods and services and tightening the resources available from banks and other financial institutions. They face a challenging business environment including changes in business, leadership and approach.
Globalization is a market force and an economic reality. Though constrained by the global financial crisis and ongoing recession in some countries, SMEs want to take part in international growth once recovery is fully underway. The challenges they face are many.
- Assessing various business risks: A globalized business world involves various risk factors including finance, market, credit, liquidity and technological uncertainties to name a few. Furthermore, fluctuations in raw material prices, exchange rate fluctuations, currency risk, different accounting and control systems and inflation pressure add to the uncertainty of success. Assessing these risks and addressing them in business strategy is essential for International business.
- Access to markets: Apart from physical barriers, foreign-market regulations are another barrier for small businesses. Most SMEs have no clue about these markets.
- Sub-optimal scale of operation: The scale of operation of small businesses generally does not satisfy global demand. To increase production, more capital infusion will be needed and capital availability is a challenge.
- Technological obsolescence: Staying abreast of international standards, production practices and technology is vital in maintaining production capability and requirements.
- Supply chain inefficiencies: Productivity is very much dependent on the supply chain, and inefficiencies will lead to decreased profit margins.
- Funding shortages: Availability of funds is important for planning expansion, working capital requirements and other expenses. SMEs are often denied funds for new projects and products.
While the current global environment is full of opportunities, it poses unique challenges for entrepreneurs and small and medium-sized businesses. To cope with these challenges SMEs need to adopt innovative approaches.
This may require them to step out of comfort zones with real ambition.
Entrepreneurs hesitate to take the road to innovation because of the associated risk. The risk aptitude of SMEs is usually low and they look at direct and immediate benefits. In consulting they also need to have a more immediate tangible outcome rather than directional advice for managing risks. Ready availability of finance can be an approach which will help them to take up challenging projects, but understanding the associated risks and mapping them is fundamental yet at times overlooked.
This has given rise to a knowledge-based economy, with knowledge being the most important resource and learning the most important process. Competitive advantage lies in the ability to generate new ideas and transform them into economic and social value. Access to physical resources by enterprises comes only after this. Competitiveness lies in the ability to use knowledge to improve performance, which leads to innovation. This is the driving force behind expanding global SMEs.
The knowledge-based economy requires resources with the right skills. Building various functional skills including sales, marketing and communications is critical. Improvements in processes require innovative ideas. All these need the right leadership to take on the changing challenges. Choosing the right talent for each of the different resources is very essential, and providing them with need-based training with changing trends in the market is equally important.
Existence of a formal procedure and discipline is very important for an enterprise to function smoothly and even more critical for small and medium enterprises. Furthermore, there is a tendency for these procedures to change frequently. This makes it difficult for a third party or a newcomer to understand the existing business practices. Bringing in a process and functional approach is absolutely essential to establishing credibility when pitching to new clients.
Staying up to date with the latest technology is critical in the digitized world. Providing the systems with IT support is vital as they reduce redundancy and improve performance; with social media they can transform the concept of reach and communication to stakeholders. Leveraging the digitally connected world is a challenge as they require clear understanding and focus, and management might not understand the need to invest in this. SME management might require the use of information technology in day-to-day management and accordingly train employees to improve efficiency.
The Big MarchTM
An approach which can prepare a business to understand the elements of next flight; there is no magic pill for growth, but simple elements like understanding the real value of their efforts, defining success in the business, the valuation of enterprise, sustainable elements can unleash their own growth path.
A deep understanding of business objectives or intent, well-defined resource strategy, efficient work systems to get things done, and talent that builds a growth ecosystem is the bedrock of BIG MARCH. Business Intent, Growth through Systems, Marshalling Resources and Channelizing talent.
A focused business intent will help develop a strong strategy with the required resources and create an ecosystem for the talent involved. Establishing a system and processes coupled with the right resource tapping will help SMEs reach their goals in the ever-evolving business landscape.
“The current global environment is full of opportunities, but it poses unique challenges.
SMEs need to adopt innovative approaches.”
Dheeraj Rathi, ECOVIS RKCA, India