SME growth happens, but not automatically. The reasons for this are partly specific (some firms aren’t capable) and partly structural (the system works against them). Let’s examine both.
Virtually all SMEs have things in common, unlike multinationals. A map of the world showing the locations of big corporations and illustrating all the connections between them would look like a bowl of spaghetti. Multinationals are connected everywhere. To customers, suppliers, partners and even competitors. They are connected to politicians, officials and central bankers. SMEs are poorly connected. Most of the connections they do have are related solely to current business.
Another glance at multinationals reveals their enviable ability to run at a loss. It is not unusual to hear a large corporation announce its return to profit after years of losses. How many SMEs could do that? SMEs operate closer to the break-even point and cannot think or plan further into the future than the profit line allows.
When it comes to structural challenges, the first assumption is that, because businesses all operate in the same markets, SMEs and corporations can prosper under the same rules. Yet, just as children are not merely small adults, SMEs are not merely small multinationals. Second is the assumption that SMEs are all the same. A sole trader start-up is not the same as a 30-year-old firm with 200 employees. SMEs are as different from one another as people are.
Other structural barriers to the growth of SMEs include the limited availability of finance, the disproportionate burden of regulation and the challenges of recruiting and retaining talent.
Whether in business or in nature, growth might be described as the ability to overcome competition. The antidote to competition is innovation. Many SMEs are adept at innovation, which is often how they grow beyond startup and why they are snapped up by larger organisations. But maintaining innovation as a core competency is difficult. Innovation is a function of ideas, and ideas are a function of connections. With respect to Archimedes, few people have their best ideas on their own – most come from sparking off other people. Connections are a vital component of sustained innovation.
The second specific challenge – living closer to break-even – is best met by cultivating agility. SMEs are often more agile than corporations because they can move quickly and decisively.
The structural barriers hindering SME growth can also be overcome, although not by all. Those who invest time and energy in relationships with banks and universities will see benefits, while those who utilise the power of their chamber of commerce or trade association can address regulatory imbalances, albeit slowly. Most important is the recognition that SMEs represent a critical mass of organisations. They matter to each other (SMEs as a group do more business with SMEs than with large companies or the public sector) – and they understand each other.
SME growth, which has been a goal of economic development for decades, could be achieved with small supportive tweaks. Helping firms to connect more widely, working with banks to reduce risk aversion when assessing SMEs, encouraging universities to treat SMEs as a valuable career route – any of these could transform the percentage of SMEs that grow consistently.
The pandemic forced some of this on government, banks and large businesses. Those SMEs fortunate enough to retain a market and agile enough to continue serving it – or who have been innovative enough to access new markets – have shown that SME growth happens. And it happens where barriers are removed and connections are made. ‘
Voices from our community: John Mark Williams is the CEO for The Institute of Leadership & Management.