To many larger corporations, SMEs may not be of particular interest; possibly used as local suppliers, but not typically perceived as potential global business partners or competitors. With regard to a particular new type of SME, this assumption is no longer valid.
Within just the last decade, a new breed of SMEs has emerged. Unlike ’traditional’ SMEs, which are primarily local in their outlook and customer base, these new SMEs are global operators that make extensive use of e-commerce solutions. Their avid adoption of technology has also allowed them to maximise the business agility inherent in their relatively small size to support their atypical business models. This article examines the important implications this new breed of SME has for larger corporations.
The new international e-SMEs
These new SMEs combine the traditional agility of the SME with a global outlook and then leverage both with a strong grasp of technology. This combination can result in an organisation with phenomenal global growth potential that (depending upon whether they are a partner or competitor) can significantly assist or disrupt the business strategies of corporations many times their size. Their niche expertise is no longer constrained to the clichéd traditional ‘mom and pop’ store, but can be deployed globally via the Internet with the aid of emerging technologies.
Advances in globalisation and technology have now effectively “geared up” the traditional attributes of these SMEs so that they now have the opportunity to punch far above their weight. That many have chosen to do so is evident from the number of household names today – such as PayPal, Skype and eBay – that have emerged within the past two decades. The end result is an organisation that is effectively an international e-SME.
Technology ...
The evolution of the internet over the past few years has given SMEs a degree of technological agility that fits exceptionally well with their existing business/strategic agility. Business processes and infrastructure that were formerly a significant time and resource burden for SMEs are now both far more accessible and affordable; in effect, the frictional costs of doing business for SMEs have declined, while the scale of their potential markets and customers has increased.
When it comes to dealing with customers, suppliers and distribution, international e-SMEs now have access to services such as Ariba, Amazon, eBay and Alibaba.com, which can all deliver global reach at minimal cost. For payments, they can use services such as PayPal, Square and various escrow services, while for accounting and ancillary services there are Xero, Yodlee and assorted API tools. When it comes to communication they are positively spoilt for low-cost choice, with assorted IP-based forms of telephony and short messaging service (SMS). Finally, they now even have access to enterprise resource planning (ERP) technology that was formerly the preserve of far larger organisations, in the form of products such as SAP Business One and Business ByDesign.
On the financial side, as banks become aware of the potential of international e-SMEs, some of them have responded with products that go well beyond their traditional quasi-retail domestic SME offerings. Banking platforms that deliver multicurrency accounts and transfers, together with hedging and trade applications are now becoming available. Banks have also started to release a series of more agile mobile products that are particularly well-suited to international e-SMEs and their customers. Android banking applications, banking platforms tailored for mobile use and mobile expense tracking tools for the SME credit card market have all emerged in recent months.
... and how to use it
A further consideration is that all these areas of technology and technology-based service are evolving rapidly. Again, this is a natural fit with the way that the new international e-SMEs do business; if a technology looks relevant and promising to the business, they can implement it within days. By contrast, at a large multinational it might take months for it to be ratified by the board and for trials and user acceptance testing to be completed.
As a result, international e-SMEs can now offer products and services in areas that directly compete with the largest multinationals and where they were previously excluded because of the capital investment in technology required. At the same time, SMEs in general are increasingly eager to take advantage of this opportunity on an international basis; a recent HSBC survey of small business confidence revealed that 29% of SMEs already operated internationally and that 40% were planning to so within the next two years.
Opportunity or threat?
Considering the various attributes of the new wave of international e-SMEs, it is inadvisable for larger corporations to ignore them. Their impact both on established markets and in creating new markets is self evident. Lastminute.com went from SME to global brand phenomenally quickly and in doing so fundamentally changed the nature of the travel business. While it created a new market (online, last minute, “on a whim” travel purchases) it also took significant volume away from traditional “bricks and mortar” travel agencies and holiday companies. Therefore, the entrepreneurial talent and exponential growth possibilities of the international e-SME can make it either an opportunity – or a threat.
Compete?
The way in which larger corporations respond to this sort of disruptive newcomer varies considerably. Some will attempt to play catch up with a “me too” offering that attempts to replicate the SME’s. While this may have some success, there are several obstacles. Apart from first-mover advantage, international e-SME’s facility with technology and their business agility gives them an evolutionary edge. By the time the corporation has rolled out its competing offering, the SME will almost certainly have redeveloped or refined its original offering multiple times, leaving the larger competitor continually attempting to reach a rapidly moving target.
Another obstacle is brand; in an e-commerce world, the domain name is the brand. The SME that sets the ball rolling and benefits through the viral marketing that comes from being a successful first mover in a new niche establishes the definitive brand for that niche. For a larger corporation to establish an e-brand of similar value may cost millions in conventional and online marketing, as well as potentially diminishing their own existing brand equity.
Acquire?
Other corporations will seek to acquire new breed SMEs that have compelling products and services. This can be either a defensive or creative step, or both. The defensive stance is self-explanatory; the corporation perceives the SME as a direct threat in itself or possibly as an even bigger threat if acquired and successfully managed by a competitor. A few corporations will deliberately try to stifle an acquired SME to ensure that a direct threat has effectively been bought out of the market. The obvious downside to this strategy is that other corporations that acquire competing SMEs and manage them well will be an even bigger threat. There is also the consideration that SMEs are often founded by serial entrepreneurs, so once their non-compete period has expired they may start up another new competitor.
By contrast, those corporations that acquire an international e-SME and manage it creatively as an integral part of their businesses can “scale up” the SME’s brand and turnover by providing the right supporting infrastructure. Sabre’s acquisition of lastminute.com and AOL’s purchase of bebo.com are examples of how this can work in practice.
Partner?
The alternative to competition or acquisition is partnership. This is a strategy that an increasing number of corporations are adopting (sometimes as a prelude to acquisition, sometimes not). Where an international e-SME has a particular and well-defined niche expertise, larger corporations may seek to leverage this rather than attempt to compete.
A good example of this is the voiceover specialist voices.com. Rather than developing their own competing voiceover businesses, multinational advertising agencies around the world opt to use the services of this SME because they appreciate the choice, flexibility and pricing of its service. They can see little point in re-inventing what is already a highly efficient wheel.
While such partnerships between large corporations and international e-SMEs may be at arm’s length in terms of ownership, some corporations take the opportunity for closer collaboration. On an informal basis they may provide resources otherwise inaccessible to the SME, such as specialised hardware, or more general business advice and assistance, or even working capital via a supply chain financing scheme. Apart from generally enhancing the supplier relationship, this approach may also facilitate the international e-SME’s development of “niche within niche” products or services specifically tailored to the corporation.
The reality
Relationships between larger corporations and international e-SMEs offer numerous synergic opportunities. The founders of this type of SME typically do so because they have an idea for which they have identified a niche market. Their product or service is their primary focus and also the area in which they can add the most value; more general business processes (such as accounts receivable) are not. In most cases SMEs regard such processes as something they must endure and would gladly be rid of.
Business Infrastructure
This is therefore a potential win-win for the right combination of corporation and international e-SME. The SME can offload the business processes it regards as non-core to the corporation, which has the expertise and economies of scale to manage them more efficiently. This is particularly important in view of the explosive business growth international e-SMEs can experience, which can ironically prove fatal to the business. It is not inconceivable for an international e-SME to go from needing to issue 100 monthly invoices to 5,000 in a matter of a few months. If that process collapses, then it can take the business with it.
In short, the availability of professional management and process frees up the SME’s time, allowing it to focus on its core expertise because it no longer has to worry about the business infrastructure required to support future growth. (This need for scalable corporate infrastructure was one of the points raised by PayPal founder Max Levchin in the BBC’s “Start-Up Stories”, a series of interviews with the founders of international e-SMEs.)
Technology infrastructure
Despite their reputation for technological prowess, professional technology infrastructure support can be another area where a larger corporation can add value. Many extremely successful entrepreneurs have remarked on how hit-and-miss their early approach to technology was. In a BBC “Start-Up Stories” interview, Bebo.com co-founder Xochi Birch remarked that despite her and husband Michael’s background in computers and programming they were “complete amateurs” when it came to Internet start-ups. Michael recalls the beginning as “a comedy of errors, just trying things out”.
Brent Hoberman cited a similar experience for himself and fellow lastminute.com co-founder Martha Lane-Fox. “I understand technology but we weren't technologists … so it cost more than we thought, it took longer than we thought and it didn't work very well,” he said. “Basically the site was very buggy. Martha and I would wake up every morning and have to test the site. Was it still up? Was it still working? Could you actually transact?”
Market Knowledge
Alongside process and technology support is knowledge support. One of the biggest obstacles to globalisation for most SMEs is lack of knowledge. Matters such as taxation, regulation, local business practice or even just lack of business contacts can seem insuperable for SMEs looking to expand overseas. The time taken to research these properly will be hard to find alongside day-to-day business operations. Again, this is an area where a larger global corporation can contribute, as it will already have this knowledge. As a result, armed with this support, the SME is in the fortunate position of being able to expand globally far more quickly and with far less risk than if acting on its own.
The risks, and how to managing them
Corporations can benefit from the growth potential and niche expertise of international e-SMEs, while the SMEs can benefit from the professional management and infrastructure support of corporations. However, maximising these benefits to both parties involves dealing with a number of important risks.
From a corporation’s perspective, the international e-SME’s agility comes at a price – namely its dependence upon a very small number of personnel (perhaps only one). Post-acquisition, if any or all of these key personnel depart, much or, in some cases, all of the value of the acquisition is lost. While key person insurance offers some recourse, a more pro-active and forward looking method is to maximise knowledge transfer to others in the organisation. One method of accomplishing this is to keep acquired SMEs together in “incubator units”, which also increases the probability of new creative ideas being generated. When the SME is an independent supplier rather than an acquisition, managing this situation is more difficult. In some cases it may be the catalyst for an acquisition or the direct recruitment of disaffected SME personnel as so-called “intrepreneurs” (individuals with entrepreneurial roles within existing organisations or corporate structures).
One factor that can trigger the premature departure of key personnel from an acquired SME is their unwillingness to give up day-to-day control. This is something that needs to be addressed before the acquisition closes; who will be responsible for what post-acquisition and why? The chief executive officer (CEO) of the SME may not actually like conducting many of the business processes he or she is responsible for, but giving them up may still feel like loss of control. The onus is on the corporation to make it clear that it will be responsible for only non-core processes – the key creative processes will remain with the SME’s personnel.
For many SMEs, a major concern post-acquisition is that their creative processes will be stifled by the corporate environment. Accustomed to a “just do it” working environment, the concept of obtaining multiple approvals and sign-offs does not appeal. The key here is for the corporation to focus on removing all non-core processes from the SME’s responsibility, but without substituting others. The innovative skill is the commodity that has been purchased; suffocating it makes little business sense and increases the risk of key personnel departing.
Conclusion
For corporations looking for growth opportunities, the new breed of international e-SME has huge potential. Maximising the synergies between the skill sets of the two types of organisation may not be trivial, but if successfully accomplished, it can have a swift and positive effect on even a large corporate balance sheet.
Fostering the SME’s creative processes while taking control of its administrative processes is the key. This may be counter-intuitive to the normal corporate business model, but those corporations that can accomplish this change in mindset will have established a competitive edge over their peers.
This article will be published in HSBC's Guide to Cash, Supply Chain and Treasury Management 2012.
