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SMME strengths, weaknesses and large business support

Photo by Marvin Meyer on Unsplash

Small, Medium and Micro Enterprises (SMMEs) have the strengths to drive economic growth in South Africa, particularly in areas of high unemployment if these are leveraged and weaknesses addressed through comprehensive multidimensional support programmes.

Corporates and South Africa at large have a vested interest in growing and developing SMMEs as this will ultimately strengthen supply chains, improve profitability and create an enabling environment for institutional longevity. Prior to SMME support and supply chain integration, it is important to understand the strengths and weaknesses of SMMEs as this forms the basis of ensuring a state of readiness for driving economic growth.

SMME strengths

The size and scale of SMMEs make them nimble and flexible, enabling them to explore new ventures and pursue new market opportunities by adapting their business models based on market/customer needs and their relative state of maturity.

In the early start-up phases, SMMEs usually have a singular and intense focus on a particular need that they can address through their service/product offering. Their product/offering is usually premised on the founder’s capability, experience and expertise. These founding principles allow SMMEs to exploit customer segments profitably. In these early stages, SMMEs are able to give dedicated and focused attention to customers, enabling them to form deep bonds and leverage customer relationships to increase the size and value of their customer accounts.

SMMEs tend to organise themselves using simple structures with few layers enabling them to be less bureaucratic in their decision-making processes, resulting in quick decision making and results. Additionally in certain industries, SMMEs are part of their communities and are well known and recognised amongst members, leading to high levels of trust and buy-in, which allows an SMME to leverage community relationships to create and sustain a strong customer base.

There are also opportunities for cross-selling and value chain partnerships that can be leveraged, as SMMEs are usually well-versed with other SMMEs that offer similar products and services to serve adjacent customer needs. This allows them to form an SMME network that allows them to leverage and refer one and another to customers.

SMMEs can also leverage increased labour intensity per unit of invested capital, as they usually possess a labour force that has the ability to perform more than one function without incurring additional costs.

SMME weaknesses  

SMMEs that are in the early stages of maturity usually dedicate resources to core operations. Enabling services such as governance, legal, compliance and other administrative functions are usually de-prioritised until such time that their clients request them to have a formalised back office or enabling environment usually for reporting purposes.

There is often little appetite to diversify away from their founding capabilities or offerings and SMMEs usually cannot afford to engage in deep research and development, activities that may lead to increased innovation or product changes. They usually prioritise resources and budget for serving the “customer of today” as opposed to the “customer of the future”. This makes SMMEs susceptible to competition and complacency risks.

While SMMEs can maximise their investment base, this base is usually small, limiting their runway and ability to scale and sustain themselves over long periods of time.

SMMEs cannot sustain risky or ambitious investments for too long, given their capital constraints and cashflow challenges. This is further impacted by SMMEs being unable to access finance as efficiently as large businesses. Furthermore, SMMEs struggle to receive payment on time from large customers especially state owned entities, resulting in them being unable to fund their operations and headcount sustainably.

SMMEs also cannot afford to access the same requisite service inputs that large businesses can. In South Africa, service clusters can be underdeveloped, which often leads large businesses developing such services in-house in search of organisational optimisation.

Furthermore, in terms of strategic planning and foresight, an insufficient amount of time is spent on crafting a well-defined and clear strategy that outlines the plan for serving existing customers and attracting new customers. Market opportunities are usually sought after on an ad-hoc basis and SMMEs pivot to serve markets as and when required. Resource and budgetary constraints also prevent them from continuously analysing their historical performance, accurately forecasting customer demand and anticipating potential risks and mitigating accordingly.

How large businesses can support SMMEs

Large businesses can support SMMEs in two major ways.

The first is through meaningful partnerships, which can positively benefit SMMEs in multiple ways. These include supply chain partnerships that can be set up for the long term and enable SMMEs to gain access to market opportunities on a continuous basis. Large businesses should also consider the impact of change on their business as well as on SMME participation to enable SMMEs to plan and adapt where possible, allowing them to sustain their presence in supply chains.

Once SMMEs form part of these supply chains, it is important to monitor their performance and provide ongoing formal/informal feedback for continuous improvement. Additionally, ensuring that SMMEs are paid on time is key to ensuring that they sustain the opportunities they have managed to secure.

Large businesses can form a production ecosystem with SMMEs, lowering SMME overheads and increasing employment intensity. Beneficiation partnerships allow large businesses to assist SMMEs through leveraging these smaller organisations in their values chains or via growth partnerships driven by acquisition. Channel partnerships allow SMMEs to access larger market opportunities while business adjacencies create linkages that can lead to M&A opportunities.

The second way in which large businesses can assist SMMEs is through creating an end-to-end support ecosystem.

Large businesses can give SMMEs access to long term opportunities, sub-contracting avenues and export market support by ensuring that SMMEs have the pre-requisites in place to maintain and sustain these opportunities. Large businesses can form partnerships with government organisations, other businesses, funders and incubators to offer holistic support to SMMEs based on their state of maturity and challenges. In this way, a tailored impactful support programme can be created for clusters of SMMEs.

Based on the SMME development plans, large businesses can monitor progress and plan for supply chain integration based on the SMME’s forecasted state of readiness. Entrepreneurs can benefit significantly from improved capabilities through technical support, mentorship, and partnerships for joint executions. SMMEs can also receive business capability support. This can allow an SMME to operate at increased economies of scale, receive business development services and leverage available IP for improved services and market access.

Ultimately, large businesses need to be cognisant that supporting an SMME is not a once-off event. SMME support should be viewed as a long term journey that required multiple forms of support enabling SMMEs to operate, evolve and continuously improve their capabilities in order to sustain and survive.

If your large business is seeking improved ways to leverage its ESD programme, visit the Economic Development page to learn about our sector expertise. BM/DM


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