Can SMEs hold their own in the international arena?
by Ken Allen, CEO, DHL Express
Ken Allen: "SMEs may have to learn to compete in different ways and to make best use of all resources available to them in order to hold their own on the world stage."
There's an old boxing adage which says, "a good big one will always beat a good little one." The same statement might easily be applied to the prospects of smaller businesses going up against multinational or state-owned companies in the global marketplace.
Trading across borders can be a time-consuming, complex and risky business. Researching market opportunities, finding partners and distribution channels, negotiating licences and permits, navigating customs, establishing production and building a customer base in an overseas market usually require considerable financial firepower, resources and political connections, all factors that favour heavyweight businesses. Stepping into the international ring with them, entrepreneurs and small businesses are in for a gruelling fight with the odds stacked against them.
A research paper issued by the Economist Intelligence Unit (EIU), Breaking Borders, also paints a rather gloomy picture about the international trading environment for SMEs. The companies surveyed highlighted a large number of barriers standing in the way of their global expansion. Infrastructure problems, prohibitive costs of establishing operations and networks abroad, bureaucracy, corruption and political instability were all cited as reasons for not entering overseas markets. The risks posed by these barriers, in the eyes of many, outweigh the rewards of international business. Of those that were venturing abroad, the vast majority were doing so very tentatively, 84% of the respondents cited cultural factors and language as important to them, which would explain why most SMEs expand into markets similar to their own. Despite the opportunities offered by air travel, telecommunications networks and the internet, it looks like globalization is still principally being driven by the big players.
China remains the most attractive developing market
The EIU paper offers a mixed assessment of the world's growth markets.
The EIU paper also offers a mixed assessment of the world's growth markets. China remains the most attractive developing market for the majority of SMEs, mainly because of its enormous consumer base and the country's economic policies, which continue to support growth. There are reservations, however, about the appeal of Africa, with 40% of surveyed companies saying that they see no potential in the continent. This suggests that it is mainly multinationals and state-owned companies with extensive resources and deep pockets that are taking advantage of Africa's growth story.
At the same time, despite the doom and gloom, the paper still revealed a positive outlook. Most of the SMEs intend to generate over 50% of their revenue from outside their home market within 5 years. Part of the reason could be defensive: as globalization has taken hold and markets have opened up, competition has intensified for smaller businesses. Domestic economies in most markets have also slowed or stagnated, which has put their margins under pressure, shrunk their customer base and .tightened the screws on cash flow, This is forcing businesses to look abroad to grow (or in some cases, even survive). It's not just a question of defence, however. A 2013 study by IHS Global Insight and DHL revealed that small and medium enterprises that trade internationally are twice as successful as those who trade only within their home market.
So how can SMEs go global without the financial "muscle" and manpower of bigger companies? Breaking Borders reveals that it takes resourcefulness, partnerships, a robust supply chain and the ability to make your size work in your favour. One UK-based SME, BuffaloGrid, for example, is embracing the fact that much of Africa is still relatively untapped to gain a 'first mover' advantage in the region. It has found an innovative way of getting its solar powered mobile phone chargers to market without the need for massive investment by piggybacking on a retail network of coffee shops.
DHL was a brash, upstart small business once. Thanks to an aggressive international expansion in the 1970s and 1980s and a similar 'first mover' philosophy, we have grown into one of the world's most international companies. That was a different time, and we're a very different (and heavyweight) company today, but we still have a keen eye for the opportunities of international trade. For any small business doubting their ability to tap into Africa's growth story, for example, we would say that the challenges are indeed there, but, as the experiences of BuffaloGrid and many of our customers who are trading successfully with the region show, they are by no means insurmountable.
SMEs may have to learn to compete in different ways and to make best use of all resources available to them in order to hold their own on the world stage. However, with good planning, a well-designed supply chain, a clear understanding of their competitive strengths and the right mindset, even the most lightweight of businesses can outperform the global heavyweights.