Here is an excerpt from an article written by Diaan-Yi Lin, Sruthi Namratha Rayavarapu, Karim Tadjeddine, and Rebecca Yeoh for the McKinsey Quarterly, published by McKinsey & Company. To read the complete article, check out others, learn more about the firm, and sign up for email alerts, please click here.
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What are SMEs?
Because they understand that threats to SMEs [small and medium enterprises] are threats to economies and societies, governments around the world have made supporting SMEs a priority throughout the COVID-19 pandemic through programs such as direct financial assistance, public guarantees on loans, and tax relief. While such financial support is beneficial, it does not necessarily set up firms to thrive in the long term and to combat the many converging challenges they’re facing, including pressure to decarbonize, internationalize, keep up with digitalization, and secure the right talent. In addition, many of these supports are on the verge of expiring.
Indeed, a Canadian study showed that the most effective way to support SMEs is by pairing financial support with advisory services. One way to provide this dual support is through National Champion Programmes. Such programs typically work to identify SMEs with high growth potential and provide them with the one-on-one support they need to realize this potential over a defined period of time. Support could include building capabilities (such as digital, marketing, and leadership skills), providing advice from experts on how to navigate the market, guiding transformation efforts, and arranging introductions and networking opportunities.
A handful of existing programs and research from countries around the world—Canada, France, Malaysia, Singapore, the United Kingdom, and the United States—reveal several best practices for governments looking to support SMEs through the challenges they face. Specifically, these programs suggest that governments can help set up SMEs to thrive well into the future by focusing on midsize companies, employing a rigorous selection process, targeting specific groups and tailoring solutions to their needs, providing incentives for commitment, and partnering with the private sector.
Internationalizing strategically
Several studies reveal that SMEs need to internationalize to grow, but they often struggle to expand outside their home market or to do so strategically. Even prior to the COVID-19 pandemic, high-potential SMEs in many markets found success domestically, but their potential was capped by the size of their local market. Unlike large companies, many SMEs don’t have the resources to conduct extensive market research before expanding into new markets, instead following opportunities and growing only marginally.
9In the European Union, nearly all of the 20 percent of small businesses with e-commerce sales sell within their own economy. Fewer than half of these businesses—representing only 8 percent of the overall market—sell in other EU countries. Only 4 percent sell outside of the European Union. A similar trend is true among medium-size firms. In the United Kingdom, SMEs that have ambitious growth targets for the next five years have twice as much turnover from exports, with nearly 40 percent of their sales coming from online channels.
Uncertainties about overseas markets brought on by the pandemic have made internationalization more difficult. Indeed, in a survey in Singapore, 84 percent of SMEs stated that they had delayed their internationalization plans because of the pandemic and the challenges it has exacerbated. Additionally, global supply chain issues have hit SMEs hard and have set back export growth. A June 2020 survey in the United States revealed that 45 percent of small businesses had experienced disruptions in supply chains. And in many cases, leading firms have handed risks down the supply chain to vulnerable SMEs in developing countries, causing job losses and even bankruptcies.
Challenges and opportunities for SMEs today
The imperatives facing SMEs a few years ago have become more pronounced as the world shifts to the next normal, presenting both challenges and opportunities.
Keeping up with digitalization
Most of the world is working to digitalize, a trend that has accelerated over the course of the pandemic, and SMEs are at risk of being left behind.
A July 2020 survey of executives reveals a rapid shift toward interacting with customers through digital channels, with adoption rates years ahead of where they were in previous surveys. The shift is particularly pronounced in Asia–Pacific, where the share of digital consumer interactions has advanced by four years, higher than the global average.
The shift to digital persists across countries and categories, as consumers in most parts of the world are engaging less with retailers outside the home. The online customer base across countries for food and household products, for instance, has grown by more than 30 percent, on average, since before the pandemic.
While such growth certainly comes with benefits, these benefits have disproportionately accrued to larger businesses. The top decile of companies by size in digital channels capture 60 to 95 percent of digital revenues. And small firms remain less digitalized than medium-size firms—and medium-size firms less than large firms. Behind this reality is the fact that digital solutions are often designed for large enterprises and are difficult to scale down for SMEs. In Singapore, for example, 56 percent of respondents to a survey reported that digitalization is too expensive for SMEs. The effects could be more significant for underrepresented segments; in the United Kingdom, for example, a report found that female-led SMEs are 20 percent more likely to opt out of digital solutions to improve productivity.8
Internationalizing strategically
Several studies reveal that SMEs need to internationalize to grow, but they often struggle to expand outside their home market or to do so strategically. Even prior to the COVID-19 pandemic, high-potential SMEs in many markets found success domestically, but their potential was capped by the size of their local market. Unlike large companies, many SMEs don’t have the resources to conduct extensive market research before expanding into new markets, instead following opportunities and growing only marginally.
In the European Union, nearly all of the 20 percent of small businesses with e-commerce sales sell within their own economy. Fewer than half of these businesses—representing only 8 percent of the overall market—sell in other EU countries. Only 4 percent sell outside of the European Union. A similar trend is true among medium-size firms. In the United Kingdom, SMEs that have ambitious growth targets for the next five years have twice as much turnover from exports, with nearly 40 percent of their sales coming from online channels.
Uncertainties about overseas markets brought on by the pandemic have made internationalization more difficult. Indeed, in a survey in Singapore, 84 percent of SMEs stated that they had delayed their internationalization plans because of the pandemic and the challenges it has exacerbated. Additionally, global supply chain issues have hit SMEs hard and have set back export growth. A June 2020 survey in the United States revealed that 45 percent of small businesses had experienced disruptions in supply chains. And in many cases, leading firms have handed risks down the supply chain to vulnerable SMEs in developing countries, causing job losses and even bankruptcies.
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SMEs are crucial actors in economies and societies worldwide. These businesses make outsize contributions to GDP, exports, employment, and livelihoods in developed and developing countries alike, but they’re facing increasing threats that could undermine their growth and ability to contribute meaningfully. Learning from existing National Champion Programmes, governments across the globe have an opportunity to help SMEs continue to thrive—through the pandemic and well into the future.
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Here is a direct link to the complete article.
Diaan-Yi Lin is a senior partner in McKinsey’s Singapore office, where Rebecca Yeoh is a partner; Sruthi Namratha Rayavarapu is a consultant in the Bangalore office; and Karim Tadjeddine is a senior partner in the Paris office.