Facing unique challenges in the world of the SME

It may be the case that the world is flat for large companies which have the resources to deploy in being part of the global value chain. The real question is whether the world is flat for small and medium enterprises (SMEs).

They are far more restricted then their larger peers and face challenges which are unique to them and which may restrict the extent to which they can enter the global arena. More importantly, SMEs have a higher probability of bankruptcy, especially in their early years.

For a successful entry into global markets, firms need to have a well-defined strategy with clear outcomes as well as a commitment of scarce key resources. More often than not SMEs tend not to have an export strategy and conduct overseas activities in an ad hoc manner.

An export strategy allows SMEs to select the most appropriate target countries for their services or products and hence increase the probability of success. Such a strategy allows the company to assess the strengths of its services and products with those available in the target country and hence develop unique selling points for the market in question.

Studies have been shown that firms who have formulated a foreign market entry strategy are more likely to be active or successful compared to firms that have no formal system of export planning.

Meeting standards

In most cases even if the owner or management wants to export, they are not ready to do so. The SME needs to ensure that its products or services meet the necessary import standards for the market in question. In many cases these requirements, if greater than those in the domestic market, impose an obstacle.

In addition, the company has to be able to have the necessary systems in place to ensure that it can consistently supply the quantities required by the foreign buyer. Even if the SME can meet the import standards, they may not be able to produce the quantities required to justify the new investment needed.

The lack of export readiness is itself a manifestation of size in that the smaller the firm the greater the need for management capability building. Smaller firms tend to have few if any structured processes and tend to make ad hoc decisions.

This impacts on their ability to participate in global value chains where the competitive advantage of anchor firms (who tend to be the ultimate or key suppliers) is dependent on the performance of the entire global value chain. Therefore, the inefficiency of any one firm endangers the performance of the entire global value chain.

Anecdotal evidence tends to suggest that the weak links in most global value chains tend to be SMEs. As a result some global value chains deliberately exclude SMEs to ensure that they maintain the required levels of efficiency and performance.

The need to reduce transaction cost is also another very important reason as to why anchor firms seek to work with fewer suppliers. The cost of coordination and ensuring supplies from numerous small firms adds a financial burden that few firms choose to take on.

Also, a modern inventory management system demands that firms exchange internal data so that suppliers and buyers are fully aware of each other's inventory levels. This exchange of data implies a large investment in data systems and software which few SMEs can afford.

Furthermore, working with a single (or at best a few) suppliers implies that the importer receives a single set of documents and hence only one letter of credit needs to be initiated and thereby reducing the transaction even further.

Foreign market penetration is difficult for all firms and more so for SMEs. However there are some strategies that they can adopt to be part of the global value chain and expand their business.

Niche areas

They should seek to harness their particular strengths and concentrate on a niche area. Evidence suggests SMEs tend to be more successful in global markets when they focus on niche areas.

Such niche markets also imply that SMEs tend to have better cost advantages compared to larger firms. Also, more often than not the niche areas tend to be less prone to loss in sales during downturns.

The first step toward foreign market entry may itself be to work with overseas firms in the domestic environment. All too often multinationals that have carried out any form of investment in the domestic country tend to use local suppliers.

This initial supply relationship if executed correctly can turn into a partnership with the multinational and allow the SMEs to enter new markets. This is more likely where the multinational is the anchor firm in the global value chain supply chain. Strong relationships with multinationals also allow SMEs to have access to new product innovations and hence the ability to supply indirectly to a large global market.

The writer is the head of export market intelligence at Dubai Exports.