Growth and Its Side Effects

Feature Article | May 15, 2006 by admin

Companies naturally want to grow. SMEs also need to expand in order to retain a competitive edge at an international level. This is becoming increasingly vital due to the unprecedented opportunities for growth opened up by globalization and the fact that more and more large companies are moving into the midmarket. At the same time, many SMEs fear that expansion could destroy their key advantages over the big players, namely their adaptability, their greater flexibility in terms of price structure, and their closer customer relationships. Growth and globalization thus represent a double-edged sword for small and midsize businesses. On the one hand, they see the possibility of remaining competitive through expansion, but do not want to put their intrinsic advantages at risk.
The SAP-sponsored study “Thinking Big: Midsize Companies and the Challenges of Growth” carried out by the London-based Economist Intelligence Unit (EIU) is dedicated to this topic. Between October 2005 and January 2006, the analysts interviewed more than 3700 managers of companies with annual sales between 20 and 500 million dollars about their growth strategies. The study surveyed SMEs from various sectors and a total of 18 countries, 39 percent of which were from Europe, 37 percent from the Asia-Pacific region and 24 percent from North, Central and South America.
The study found that the majority (62 percent) are aiming for slow and controlled growth to reduce the level of risk. Many companies have even specified an optimum growth rate and an ideal size. This is particularly true for companies from the Asia-Pacific region (73 percent) and the USA (69 percent), while only 53 percent of participants in Europe had set such targets.

Going it alone into new markets

Due to tighter budgets, almost half of the SMEs questioned (46 percent) intend to grow through their own efforts in the next three years. While larger SMEs were considering the option of acquisitions and mergers, smaller businesses indicated a preference for organic growth. Many of them are aiming to achieve increased sales with a larger customer base, an approach given priority by 62 percent of American businesses. In the Asia-Pacific region, only 50 percent are pursuing this strategy, while the figure for Europe is 46 percent. In both these cases, the majority of companies aim to generate growth by reducing cost pressure through more efficient business processes (Asia: 61 percent, Europe: 51 percent). This shows that companies are not prepared to pursue growth at any price. As before, profitability is the key objective.
The majority of growth will be generated outside domestic markets. More than a third of the companies (36 percent) throughout all the regions and sectors want to expand internationally. Due to their limited resources in comparison with the big corporations, they are being selective in which new markets they are choosing to enter. Others envisage sales cooperation agreements with local partners as the best route into a foreign country or they are opting to follow expanding customers. Thanks to new technologies and improved transportation, worldwide procurement, for so long a privilege of the big corporations, is now also an option open to the midmarket for reducing costs.

Lack of skilled staff holding back expansion

The potential growth of the midmarket is not only restricted by increasing competition from large companies and the associated pressure on prices. SMEs also face internal barriers to expansion, with around 33 percent of those surveyed reporting the lack of skilled personnel as the biggest hurdle they face. This problem is particularly acute in Asia, as the EIU analysis revealed. 41 percent cite the lack of qualified staff as the main factor restricting their growth. Recruiting suitable employees in their own country is difficult enough, but this becomes especially problematic when companies expand into foreign markets.
Tax regulations and official requirements also present significant challenges to SMEs, especially given the fact that, unlike large companies, they are not in a position to establish special teams in their finance and legal departments. For example, the CEO of an American IT company complains of the huge amount of information he has to provide to comply with Sarbanes-Oxley – right down to the location of the servers. 62 percent of SMEs would, above all, like to see a reduction in red tape and a lower tax take by the state. This is one area where small and midmarket businesses really see red. “The government could not care less about us,” an American entrepreneur told the EIU study.

IT plays a key role

Another challenge faced by the midmarket is that of IT, which must keep pace with growth. A third of the SMEs complain about a lack of system scalability, while 39 percent plan to invest in new software and hardware in the next three years.
The central role of IT in the management of SMEs is undisputed whatever the sector or country. 68 percent of those surveyed are of the view that IT is indispensable if their businesses are to grow. 57 percent report that the competitiveness of their company depends on powerful information technology, while 72 percent considered it vital that they remain flexible in spite of growth. One board member of a US retailer underlined this by saying that his company would not be able to expand without automating as many processes as possible. IT also helps to analyze customers and improve logistics and sales promotion activities.
It is clear to almost all the participants that IT is essential for supporting business processes. Three-quarters of the managers explained that their IT strategy is closely based on the overall corporate strategy. In 63 percent of the companies, the managing director or the chairman is responsible for key IT decisions.

Customized solutions are in demand

IT is key for midmarket companies in the areas of customer relationships, cooperation with suppliers and partners, controlling and innovation. This is precisely where a Customer Relationship Management (CRM) solution can help to maintain the traditionally close relationship of an SME with his customers as the business grows. 60 percent of those surveyed are convinced that IT plays a key role in cultivating customer relationships. A further 65 percent consider IT to be essential to cooperation with suppliers and partners. They need made-to-measure solutions for Supply Chain Management (SCM) and Supplier Relationship Management (SRM). Many SMEs deploy customized ERP applications to improve the flow of information within the company. Moreover, two-thirds of those questioned stated that IT helped them to remain innovative despite growth.
Many IT suppliers have responded to this development and are offering SMEs EPR, SCM and CRM solutions which are adapted to their needs and are cheaper than software for large companies. The latter is a key criterion for midmarket companies. According to the EIU study, license and implementation costs are the biggest hurdle in IT investment projects for 63 percent of the businesses involved in the study.
However, information technology is not a quick-fix panacea and is only as good as the person using it. In this regard, a number of companies complained of the lack of IT knowledge of their employees and the general resistance of the workforce to change. The impact of new technology is reduced by ineffective use.
Further information is available at
www.eb.eiu.com

Sabine Höfler

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