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SME’s…The Engine of Economic Growth

Posted on 19 May 2009

SMALL AND MEDIUM BUSINESSES

THE ENGINE OF ECONOMIC GROWTH

Prepared by:

Doyle J. Girouard

CEO and Senior Managing Partner

The Cypress Group

Phone: 817-421-4774

Cellular; 817-307-7577

 

April 14, 2008…Southlake, TX. Small and Medium Businesses (SMB’s) represent over 75% of all businesses in the US, and are the engine and drivers of growth within the US economy. A business with headcount of fewer than 500 is classified as medium-sized; a business with a headcount of fewer than 150 is classified as small, and a business with a headcount of fewer than 10 is considered a micro-business.

The soft economy, rising fuel costs, demanding customers, and increased competition are what keep the majority of those running SMB’s awake at night. Approximately half of all U.S. small businesses experienced a decrease in their annual revenues during the last twelve months with an annualized revenue growth rate at approximately 8 percent. Much of the growth has largely been driven by SMB’s that have taken extra ordinary measures during this economic storm. If the US is truly teetering on an economic recession, especially with consumer confidence and spending measuring at recent all time lows, the impact could spread to a broader segment of the small and medium business market resulting in substantial lower growth.

 

SMB’s are as concerned about the continuing weak economy as their larger counterparts, and are particularly worried about the resulting downward pressure on profit margins. Without large cash reserves to draw upon during leaner times, SMB’s are reducing prices in order to stay in business. This effect is compounded by heightened competition, both from overseas firms with a lower cost basis and as a result of companies who were not previously rivals diversifying into new markets.

 

Today’s increasingly demanding customer and difficult competitive marketplace almost forces SMB’s into a discipline of paranoia where they really have to be on their game to remain successful. However, SMB’s need to ensure their cost reduction measures don’t destroy future business opportunities and value.

 

Although financing is important, running a successful business takes more than capital. It takes know-how. Access to information and skills development are the most fundamental components of a business foundation. As we know with most things, building a strong foundation is incredibly important.

 

The primary challenges for U.S. small businesses are core business issues: operations, customer relations, and employee relations. Business operations are a primary challenge for small businesses owners. Eight out of 10 (80 percent) SMB’s in a recent study* cited operations such as reducing costs or cash management as one of their top challenges. Customer-related issues such as customer retention and acquisition were cited by 44 percent of survey respondents as a key challenge; employee-related issues posted a similar response at 43 percent. Employee issues are largely driven by health insurance coverage — a concern for nearly one third (32 percent) of SMB’s owners. (*HP study on SME’s conducted on 5/1/05 where nearly 400 SMB’s were polled nationwide)

 

To make matters worse, the strategies undertaken by SMB’s to combat declining sales and increased competitive pressure are sometimes doing more harm than good. There appears to be a disconnection between the root problem and the effect being treated. For example, some measures being taken to combat falling sales are more appropriate in addressing margin pressure when sales remain buoyant. Reducing headcount to reduce operational cost is equally prevalent, whereas the remaining employee’s are used to support archaic and inefficient business processes, or are plagued by sub-standard business systems.

 

There is an overwhelming tendency among SMB’s to focus on short-term “fire-fighting” rather than on long-term strategies for survival and growth.

 

Failure to implement long-term business strategy is having an adverse repercussion on the agility of SMB’s. Inability to collaborate with suppliers and partners means that SMB’s often find they cannot deliver as quickly as firms who have adopted a more supply-chain centric stance. Meanwhile, a lack of attention to internal business processes and the technology used to support those processes is resulting in progressively worsening inefficiency and loss of productivity.

 

SMB’s are remarkably resourceful organizations, able to come up with highly innovative solutions to serious business problems. If that resourcefulness could be focused on long-term thinking as well as short-term tactics, SMB’s will be much better able to survive any further downturn in the economy, and better placed to profit from the upswing when it occurs. This amounts to the following; doing things right, and doing the right things!

 

Improving business effectiveness requires SMB’s to adopt business decision support systems and tools that enable the entrepreneur, owner, business managers, and employees to work together, and not depend on information which reside on archipelagos throughout the enterprise. Critical to improving business and operational performance is the ability to create real-time reporting and analysis over traditional static reports.

 

There is growing evidence of the importance of co-operation between SMB’s and employees for improving operational performance. One manifestation of this is the growing use of human resource management strategies to increase the involvement of employees in developing solutions to issues that face SMB’s. SMB’s who employ these strategies coupled with a commitment to non-price competition, developing longer term business objectives, intensity of training, a focus on innovation, developing business processes, and external collaboration and partnerships report higher successes in creating customer value. 

 

Technology needs to be uncomplicated and affordable for SMB’s to maintain competitiveness. Key technology advancements such as mobility solutions and the availability of locally based experts and customer support help them remain competitive. Information is critical, having it when and where it is needed and in the form needed is paramount.

 

Branding is not the exclusive domain of large companies. Branding is broadly defined as the appearance and reputation of a company. To be successful in their branding efforts SMB’s should aligned their Products/Services, Business Strategy, Business Systems, Processes, Resources/People, and Customer Deliverables which leads to highly satisfied customers. Once aligned, the SME can then begin the process of competing on factors other than price. Competing on price alone can result in declining revenues and profit margins whereas creating VALUE for customers will be a critical success factor to increased profit margins. Effective branding strategies can assist in both customer acquisition and retention efforts.

 

Top 10 SMB’s critical success factors (i.e. needs in order of importance);

  1.     Organize for maximum productivity
  2.     Execute planning through to completion
  3.     Develop a description of all processes within the business
  4.     Align day-to-day operations with overall business objectives
  5.     Staffing the business
  6.     Improved training and knowledge
  7.     Develop project management tools
  8.     Establish goals and direction for the business
  9.     Develop a strategic plan for the business
  10.     Develop an effective organization structure

NOTICE – PROPRIETARY INFORMATION – ALL RIGHTS RESERVED

This document is the property of The Cypress Group. Because it contains confidential information proprietary to The Cypress Group, no copies may be made whatsoever of the content herein, nor any part thereof, nor should the contents be shared with any party without the express written consent of The Cypress Group. This copy must be returned to The Cypress Group upon request. The Cypress Group reserves all rights to ownership, use, reproduction, distribution, and publication of this document and the intellectual property therein. Some parts of the document are reprinted from other sources.

 

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