Small and medium-sized enterprises make up about 90% of all businesses worldwide and provide about 70% of jobs. SMEs are crucial players in economies and societies worldwide. They make enormous contributions to GDP, exports, employment and livelihoods in developed and developing countries alike, they are also engines of economic growth and social development. /1/ Against this background, it is important to analyze the potential behind this power and how it can be tapped.
A contribution by Prof. Dr. Markus Hesse and Suchi Shinde
From a European perspective, SMEs contribute 50% of GDP in OECD countries, and some global estimates go up to 70%. This contribution varies by sector and is particularly high in services, where SMEs account for 60% or more of GDP in almost all OECD countries. /2/
Almost all companies in Germany belong to the small and medium-sized enterprises (SMEs). There are 2.6 million SMEs in Germany, a good half of the working population in Germany are employed by SMEs. They generate 42% gross value added. /3/
Most companies today face complex challenges. Growing impacts of climate change, technological disruption, socioeconomic stratification (related social unrest), the COVID pandemic and changing expectations of the role of business in society.
In a post-pandemic future, understanding how businesses can face these challenges will be crucial…
• Become more resilient
• Take advantage of new opportunities that arise from these changes
• Create long-term values, which include the social, ecological and economic aspects.
Most of the world is moving towards digital transformation, a trend that has accelerated since the pandemic began. The COVID-19 crisis has accelerated customer digitalization by several years. According to a 2020 McKinsey Global Survey of Executives, companies have accelerated the digitization of their customer and supply chain interactions, as well as their internal operations, by three to four years. /4/ The share of digital or digitally enabled products in their portfolios has accelerated by a shocking seven years. (Figure 1)
Figure 1: Digital offerings by region (Source McKinsey & Company)
It is important to understand how SMEs are progressing on this digital journey and whether they are at risk of being left behind. Despite their significant contribution to the global economy, SMEs face unique challenges, many of which are directly related to their survival. While SMEs benefit from greater speed and agility, they face major challenges due to their smaller size and limited resources.
Manufacturing SMEs will be left behind in the fourth industrial revolution (Industry 4.0). The trend contributes to falling industrial productivity of SMEs, economic inequality and limited opportunities for social mobility of the people involved worldwide. In order to take advantage of Industry 4.0, SMEs must overcome the challenges they face – technological advances, a lack of skilled employees, limited access to capital and unclear returns on investments. There is a need to upgrade their organization’s infrastructure & processes and upgrade information technology. The emerging technology landscape is also a major challenge which is mostly designed for big enterprises. /5/
Overall, the digital transformation of SMEs is strongly related to the way in which value is created for customers within the company and the industry. Larger companies (with more than 500 employees) use the Internet of Things (IoT) in an industrial way six times as often as SMEs. /6/
SMEs in Germany can improve their chances of success and make a positive impact in the future by becoming Future Ready.
Future readiness is defined as a set of organizational skills and orientations that enable organizations to thrive on challenges and seize opportunities that arise from constant disruption. /1/ A global assessment showed no significant differences in the future viability of SMEs at regional or industry level. SMEs are not disadvantaged by their geographic location or their industrial area when it comes to moving towards future viability. Differentiation is achieved through the ability to influence their internal processes (alignment and business model) and their immediate external environment (networks) in a sustainable manner. As expected, there are differences in the flexibility of business models across industries. /1/
Core characteristics and pillars of sustainable SMEs
In order to develop a comprehensive understanding of sustainability, the WEF (World Economic Forum) applied several different but complementary research methods. The WEF compiled peer-reviewed literature and consulted with industry and academic experts to create a quantitative perception survey. In addition, the WEF conducted high-level roundtables and structured qualitative interviews with SME executives to gain a deeper and more nuanced understanding of their commitment to sustainability. The research with the SME subject matter experts resulted in identifying three core characteristics or pillars of sustainable SMEs:
1. Sustainable growth
(a) the financial performance of the companies compared to their competitors over the last three years
(b) the company’s level of innovation (e.g. its ability to offer customers differentiated products and/or services, to develop revolutionary Go2Market concepts and to use the latest technologies).
2. Social impact
(a) Extent to which a company pursues the Sustainable Development Goals. This considers the development of specific indicators in stakeholder engagement and the incorporation of social and/or environmental considerations in service delivery.
(a) Resilience assessed from the measure of recovering from difficult times using available financial and non-financial resources with subsequent positive alignment.
(b) Agility evaluated in terms of being able to respond quickly to changes in consumer demand, e.g. when introducing new products or services.
Main drivers and challenges for the sustainability of SMEs
The WEF ran statistical regression models and analyzed clusters of organizations based on region, specialization and size. According to the WEF, the main drivers for the described pillars of the future viability of SMEs are:
• Business model flexibility
and 11 subdrivers – as shown in Figure 2.
Figure 2: Drivers and derived drivers for future readiness of SMEs (source WEF)
Top challenges (cited by SME leaders) include talent acquisition and retention (52.5%), survival and expansion (43.8%), funding and access to capital (35.7%), unsupportive policy environment (21%), the difficulty of maintaining a strong company culture and a clear company purpose and value (20%). (Figure 3)
Figure 3: Key future readiness challenges for SMEs (source: WEF)
Use of driver and lever
The question now arises as to how SMEs in Germany can deal with these challenges and opportunities and how they should use specific drivers and levers to strengthen their entrepreneurial future viability.
SME growth strategy – sustainable corporate growth is based on financial growth and innovation
For future sustainable growth, it is necessary to generate margins, profits and sales for the survival of the organization even in the COVID-19 pandemic. Sustainable organizational growth refers to expanding into new markets, opening new channels, connecting with new customers and maintaining sustainable financial growth through innovation.
Digital infrastructure for innovation
SMEs in Germany can become key players in the future economy if they increase their capacity for digital innovation, e.g. by [intelligently] expanding their digital infrastructure and planning digital transformation. A company’s digital infrastructure is a key driver for sustainable growth, social impact and adaptability. The digital infrastructure also seems to connect with other drivers of future viability.
If SMEs can arm themselves with the necessary tools and network resources to implement their innovative vision, they will be in competition with larger companies.
Societal impact was not on the top list of challenges for SMEs. They have been under intense pressure to survive the COVID-19 crisis, which remains the top priority for many.
Another reason [for the low priority] could be that many SMEs feel they are not sufficiently prepared to engage in sustainable practices or that they are too small compared to larger organizations to make a big impact.
Social impact as a differentiating factor
With innovative products or services that deal with sustainability, new markets can be opened up and the associated regulatory risks can be minimized. When SMEs commit to sustainability and [positive] societal impact, they get multiple value-adding avenues to address their biggest challenges. They can also gain reputational benefits by successfully implementing sustainability strategies.
Adaptability: Resilience and Agility
SMEs need to be aware that there are and will be constant disruptions to their business. Consequently, SMEs need to be resilient enough to absorb external negative impacts and agile enough to react quickly to new opportunities.
The size of SMEs is both an advantage and a disadvantage. Although smaller companies tend to be more agile and flexible when it comes to capitalizing on opportunities that arise from change, larger companies tend to be more resilient and better able to recover from adversity.
How can SMEs increase their adaptability if they have high agility but low resilience?
Lack of resources as a burden – SMEs need a surplus of financial and social resources in crisis situations. Unlike larger companies, SMEs typically have less access to finance, skilled workers and infrastructure to stay afloat in times of crisis. From a resource perspective, maintaining lean operations is a way for SMEs to weather these tough times better.
Smallness as a Competitive Advantage – Keeping Lean helps SMEs survive and thrive at a time when the only constant is change. With fewer and more direct communication channels between departments and executives in SMEs, they can respond to emergencies faster and more effectively.
Staying strategically small, investing in and trusting a core group of employees, and keeping the organization agile can enable SMEs to identify and respond quickly to opportunities in a saturated market. SMEs should also include explicit company-level strategies that consider societal impacts.
Guidelines for SMEs in Germany that want to increase their future viability.
Live your vision
For a vision to be followed across the organization, it must be clear, powerful, and well communicated. In addition to translating this vision into business activities, it is important to measure progress and results – for example using financial and sustainability metrics.
People as capital
SMEs should consider talent as one of their most strategic assets. With an innovative vision, organizational mission, purpose, autonomy, empowerment and development opportunities, companies can meet the challenges of acquisition and retention, resulting in sustainability on all dimensions.
Technology as an accelerator
Few businesses today can function without technology. Digital readiness and having good digital infrastructure in place can help SMEs survive in a fast-paced environment. An important insight is that technology is a tool that can be used to achieve goals. SMEs with a clear vision and the right people can achieve their goals more effectively by leveraging technology.
Importance of ecosystems
In times of adversity and growth, an SME’s resilience is strengthened by multiple, complementary and active local and global networks. Working with local governments can help SMEs communicate the infrastructure & policy support they need to innovate and create value for the local economy. Unlike larger companies, which can lobby for policy change, SMEs must rely on close collaboration and networks to thrive in their ecosystem.
Sustainable SMEs can approach growth in a number of ways. Some may choose to grow organically but prefer to remain small and nimble to better respond to and take advantage of changes in the external environment. Others may change their business models and transform internal processes and business strategies to make them more sustainable.
Whatever growth strategy they choose, SMEs can leverage their scale, people and shared vision to stay competitive.
Stay tuned, in our next article we will let you know how the implementation of these guiding principles can look like for SMEs…
Feel free to contact Rightsourcing SME Subject matter experts to discuss this further.
/1/ n.n., October 2019: The Power of Small: Unlocking the Potential of SMEs, [https://www.ilo.org/infostories/en-GB/Stories/Employment/SMEs#intro], Zugriff am 4.2.22
/2/ n.n., Nov 2021: World Economic Forum, Future Readiness of SMEs: Mobilizing the SME Sector to Drive Widespread Sustainability and Prosperity
/3/ n.n., Unternehmen: Kleine und mittlere Unternehmen, Statistische Bundesamt, [https://www.destatis.de/DE/Themen/Branchen-Unternehmen/Unternehmen/Kleine-Unternehmen-Mittlere-Unternehmen/_inhalt.html], Zugriff am 4.2.22
/4/ n.n., October 2020: How COVID-19 has pushed companies over the technology tipping point—and transformed business forever, McKinsey and Company
/5/ n.n., Feb 2021: The digital transformation of SMEs, OECD/6/ n.n., Dec 2021: COVID-19 and Technology Adoption in Small and Medium-Sized Enterprises: The Impact and the Way Forward, Whitepaper World Economic Forum
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