CXO

Peter Cochrane's Blog: SMEs rule the world

The combined impact of small business is huge

Written at and despatched from a Xian hotel via a low cost wi-fi service

It would be easy to come to the conclusion that the whole planet is supplied and powered by a handful of mega-corporations but nothing could be further from the truth. The reality is that almost everything is produced, prepared and delivered to us by a huge number of SMEs (small and medium-sized enterprises).

Millions of small operations are responsible for the generation of more than 90 per cent of the GDP of both individual countries and the planet as a whole.

Thousands of small operations, employing less than 250 people and with an annual income of less than $50m, power the economy of countries by feeding the assemblers and the system integrators of washing machines, TVs, automobiles and aircraft etc. They also form the basis of most of our serviced industries. In the UK for example there are more than four million SMEs for a total population of around 60 million people. Needless to say, the vast majority of these are very small, singleton or 'mom and pop' operations.

The bigger companies and mega-corporations make use of this SME resource to create flexibility and offset risk. Whilst the big move slowly and tend to last a long time, they have huge brand power and a reasonably faithful customer base.

By contrast, the small are faster on their feet, change rapidly and adapt in accordance with market demand and economic pressures. But they are relatively unknown from a brand perspective and thus customers are not very loyal. Everything from food to aircraft components are supplied to the large companies by the small.

The really interesting feature of the SME sector has been the impact of the internet. An impressive website can convey or infer a greater capability or power than is actually available in reality.

Recently a whole new business scene has opened up for those clued into technology, with individual SMEs coming together to form partnerships for the duration of a project or product development.

Unfortunately, it seems the vast majority of the SME population have a poor web presence and generally fail to gain from the leverage that the latest technologies can afford them. Most seem to have risen to the challenge of the digital fax and mobile phone and many have email but as for a convincing website, many appear to be sadly lacking. Even more worrying, there is a large proportion without any computer or IT-based systems. In some regions up to 80 per cent get by using paper and pen alone!

In the same way the web opened up new levels of international trade for the big companies, SMEs can see big opportunities from digital communications. To my mind, the future of business is going to be more and more SME-based, much more flexible and adaptive.

When I see young people starting their own companies, they really seem to get IT! They may start a SME straight off the bat, or work in a big company or two (to gain experience) first, but they always start with a convincing web pitch giving the details of the company, the product offerings, past customers and so on. More importantly, they don't come to the party with a local or country-wide ambition - they immediately produce a global pitch.

I see a significant number of energetic and ambitious SMEs powered by young entrepreneurs. And this is where I think resources for R&D funding need to be focused, in a sector with the potential for a far greater ROI. A lower investment will gain you a bigger return compared to the big players which have vast infrastructures and plants to maintain.

Now and again, a SME will break out and become a large company with a recognised brand and huge influence. Judging by web behaviours of late, we even have a few SMEs performing like mega-corporations! How come? The power of huge numbers of people has been replaced by the power of the technology - or the bits overcoming the atoms!

Seems to me high time we looked at revising the definition of what a SME is. Perhaps we only need to consider the financials and not the people. After all, we now have five-person companies generating well over $50m of income, and I suspect we will soon see even bigger earnings/man ratios as the technology advances.

I also suspect the gaming generation will be far more business-savvy than the baby boomers in this respect. They will naturally lead with the technology and what it can do, as opposed to the classic shop front. And guess what? Their subsequent generations will just see it as natural, somehow right!

About Peter Cochrane

Peter Cochrane is an engineer, scientist, entrepreneur, futurist and consultant. He is the former CTO and head of research at BT, with a career in telecoms and IT spanning more than 40 years.

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