This study has identified key success factors to support SMEs reach the bar of superior performance and stand out from the crowd:
Maintain a Sharp Focus
It is increasingly important that SMEs are very clear on their target position within the sector in which they decide to operate and have a very strong understanding of the dynamics and changes within that sector. Certainly the recent experiences of many SMEs involved in sectors such as construction and retail serve as stark lessons in terms of positioning, understanding and predicting market trends and risk management.
The best SMEs internationally have proved that such focus is key. Hermann Simon, author of "Hidden Champions: Aufbruch nach Globalia" describes this sharp focus as one of the key ingredients of the German “Hidden Champions”, mid-sized market leaders in their respective world markets. These companies define their markets narrowly, know their markets and the market dynamics intimately and work deep into the value chain. They are pragmatic in terms of balancing focus and depth with their scale. While they outsource they adopt an anti-outsourcing approach to their core competencies to ensure total quality control and focus on being the best or world class.
While not every SME will be looking to be an international player or indeed leader, even local and regional players need to understand how they add value and differentiate themselves within markets. A local retailer for example can differentiate itself by selling local produce or in the words of one commentator “Don’t keep making hamburgers when a McDonald’s comes to town. Sell something else.”
For some there will have to be hard choices in terms of sector and market position, particularly those that have not taken a long term and strategic approach to markets and market position. Across the EU-27, half of SMEs in terms of both number and employment are involved in three sectors which are heavily reliant on domestic demand - construction, wholesale and retail, and accommodation and food services. Due to the significant proportion of SMEs operating in these traditional sectors and in particular those countries where domestic demand remains low or has stagnated, many SMEs are operating in a very competitive space where organic growth will be difficult and hard choices will have to be made. These choices may include:
- Repositioning the Product or Service Offering: SMEs may seek to reposition their product or service offering to other target customers, for example, budget versus high end.
- Consolidation with Others: Organisations may benefit from economies of scale and purchasing power through consolidation with others at a regional or national level. As a very broad rule of thumb larger organisations are more successful in securing finance. Therefore, consolidation for size and growth may in itself be a medium to long term strategy for supporting improved access to credit.
- Alignment with National and Regional Strategies and Initiatives
There are gains to be leveraged from participation in industry or sectoral clusters. For example, accommodation and food service operators need to ensure they are aligned with tourism strategies and initiatives to enhance visitor numbers, durations of stay and levels of spend.
The SME Performance Review, as well as the analysis within this report, strongly suggests that innovation has become critical if not the most important thing for business sustainability and growth. On the one side competition is increasing through greater globalisation and the growing application of smart strategies by leading SMEs. On the other side there is a much more discerning and demanding consumer base, both across the B2B and B2C segments.
More SMEs need to focus on these smart strategies which will increasingly become the minimum performance benchmark. This will require innovation in products, innovation in business models, innovation in process for speed and cost efficiencies, and innovation through technology - placing technology at the heart of the business to ensure a competitive advantage.
Build Resilience and Financial Discipline
Financial discipline and a focus on investing in the core business is a hallmark of success particularly for the SME segment in countries such as Germany and Sweden. In recent years, SMEs in many other countries were distracted by ancillary or non-core business investments, in particular property.
Working capital management is a key aspect of financial resilience and sustainability at any time, but particularly during a prolonged downturn such as this. Irish SMEs are significantly more reliant than their EU peers on bank overdrafts, credit lines or credit card overdrafts. As overdrafts and trade credit are essentially short term funding sources, this pattern of high reliance does suggest some sign of financial fragility.
The access to finance debate, which is very prominent for the SME segment, must focus on the lessons learned from the financial crisis to ensure SMEs have adequate funds for their business in the long-term. SMEs should ensure that their working capital policies and procedures are rigorous, including having clear guidelines on how to accept or reject new customers, price negotiation and credit terms in an effort to reduce the prospect of excessive bad debts and cashflow difficulties. Furthermore, it may also be useful to do business in overseas territories where settlement patterns are better than the local market.
Right Size for your Company
Germany and the UK have approximately twice as many large enterprises in percentage terms within their overall population as the EU average. The higher proportion of SMEs active in the industry sector might, to some extent, explain the larger size of German SMEs. However, the profile of the German SME enterprise fabric has also been put down to a number of characteristics which may be critical to superior performance.
These include the adoption of a long term view to business positioning and planning, high innovation, a strong focus on niche products that link in to global supply chains, and strong national positioning as a global player. However, while size may be a product of these success factors, it may also now be an important influencing success factor itself. For example, success in internationalisation has been strongly correlated to increased size.
While size does matter, it is not necessarily true that bigger is always better. Rather than simply big being better, the more useful lesson is to ‘right-size’ your organisation. If a company is staying small, it needs to ensure it maintains a niche focus and that it is deeply rooted in supply chains and the wider ecosystem to ensure the benefits of critical mass can be leveraged. This may involve outsourcing non-core activities and developing strong partnerships with others as an alternative to internal organic growth.
Extend the Geographic Footprint
Most commentators and national studies on exports accept that more SMEs need to export. However, for many this will increasingly become a necessity as opposed to a choice, especially in countries where domestic demand has been low and is projected to remain stagnant in the short to medium term.
Many of the barriers to internationalisation are challenges to successful performance. The companies that address these fundamentals to achieve superior performance are more likely to naturally turn down the path of internationalisation, as a consequence of improved performance, as much as through an objective in its own right.
While some businesses will choose not to expand across national boundaries, this should be as a result of a considered decision rather than due to a lack of time to work on the business. SMEs need to be more innovative if they are to succeed in competing internationally. This requires not only innovation in terms of product but also innovation in terms of business models and processes.
The overwhelming majority of SMEs are micro SMEs employing fewer than ten people. They are mostly dependent not only on domestic demand within the national economy but also domestic demand at much more local levels. SMEs that are involved in a simple shop or trade service, dependent on the local economy, are likely to remain small and are at risk from unpredictable demand and the threat of new competition.
Many local businesses in Ireland over-invested in the local domestic economy and ran risks far beyond their natural thresholds. In most cases they were neither leaders nor innovators in their fields but rather provided simple and repeatable products, services and business models which made them very exposed to the downturn in their domestic markets. For such businesses extension of geographic footprint may involve simple strategies such as:
- Consolidation with other providers, regionally and nationally, to achieve critical mass and economies of scale.
- Strategic partnerships with other local product and service providers where complementary benefits and relationships can be leveraged to mutual benefit e.g. cross-selling, sharing of marketing campaigns.
- Introducing best practices to extend customer reach through working with industry representative groups and national development authorities/organisations.
More SMEs must extend their footprints to ensure sustainability and improve competitiveness. The extension of geographic remit should be rooted in better deployment of technology to enhance international marketing and sales, linking in to industry clusters including state support for growth and internationalisation.
Manage for Today and Lead for tomorrow
In our experience the ambition, focus and simple hard work displayed on a day-to-day basis by the owners and managers of a business is probably the single most important determinant of long term success or failure. Regardless of the location, size or sector, all managers have to harness four fundamental drivers of performance in order to succeed.
In the mid to long term, sustainable performance can only be achieved when the management team devotes sufficient attention and resources of the company to all of the fundamental challenges of today as well as the thinking, planning, investments and changes required to lead the business to a better future. This is a very difficult but crucial balancing act.
Some of the following characteristics of management style are conducive to sustained long term performance:
- Long term orientation - a long term approach to business planning.
- Risk based planning - a cautious risk based approach to opportunities.
- Competitive focus - a strong desire to be the best and compete at a high level internationally.
- Core business focus - strong clarity on market position and focus on quality of product offering.
- Financial discipline - financial management strongly integrated with business planning and risk management, a considered, non-speculative approach combined with strong control over fundamentals including tight working capital management.
This article first appeared in Business Plus magazine which can be downloaded below.