SMEs need to analyse the current scenario and take some sharp decisions to weather the economic crisis. K. Rangarajan, Head, Centre for SME Studies, International Institute of Foreign Trade explains

The global financial crisis of 2008 is a major ongoing financial crisis, the worst of its kind since the Great Depression. Amidst this global financial crisis, more small businesses are feeling the pinch of deteriorating economic conditions and are forced to contemplate closing up shop. As the global financial crisis continues to spread, small- and medium-sized enterprises are increasingly seeing their buffer zone disappear amid increased difficulty in raising capital and a dwindling number of orders. According to a survey of 227 small- and medium-sized enterprises (SMEs) in Korea, 31.7 per cent of SMEs saw their sales increase this year, while 23.8 per cent said sales had not changed much. However, 74 per cent of SMEs said their profits had decreased in the first eight months of the year, compared to what they were in the same period a year ago. The results show that big businesses have continued to demand lower prices from SMEs, while SMEs have failed to take the surging costs of raw materials into account when pricing their products.

Enterprises have to re-analyse their business models and product ranges, re-balance their spending and try to limit risks by shortening the time it takes for returns on invested capital.

Understanding the problem

For SMEs to take corrective measures, they need to identify the root problem and issues associated to it. Rising raw material prices and smaller payments from clients are leaving small businesses short of sales and devoid of cash.

SMEs face a strong challenge from both foreign enterprises and large domestic enterprises that can affect the viability of many SMEs. They also sometimes have to limit their work to only some stages of production and distribution of commodities. However, the problems faced by SMEs may be compensated by harnessing the resources of multinational companies (MNCs) either by adopting the “hub-spokes” model to weave around MNCs or by other ways. MNCs can serve as mentors to small enterprises and by bringing together local companies and MNCs, the operating efficiency of participating SMEs can be improved. They can widen their product range introduce new processes and undertake joint product or process development with the MNCs.

It is generally seen that in the maturity stage it is a great challenge for the organisation to explore new avenues for the business to grow. At this point, a partnership between an MNC and an SME will prove fruitful to explore new growth drivers by the complementation of the core competencies of the two types of business houses resulting in a resurge of the business concept.

PEST analysis

SMEs can use the PEST analysis to assess the environmental influences on a business. It is a useful way of summarising the

external environment in which the SME operates.

Future strategic options

It is critical to use this understanding to develop strategic options for growth and survival. The SWOT approach is used to generate and evaluate future strategic options.

Need to nurture SMEs

Over the past decade, world trade has grown more than twice as rapidly as world GDP. The successful countries are those that have integrated well into the world trading economy. Integration brings with it improved allocation of resources, intensified competition and pressures to raise productivity, as well as exposure to new technologies, designs and products. On the flipside, the current crisis has demonstrated how a lack of such integrated and globally regulated fiscal structure can bring down the global

development. It is clear, however, that open trade regimes will only foster trade integration when there are complimentary policies in place. Growth of individual enterprises with lack of such complimentary policies can damage global industrial growth and this makes it imperative to nurture SMEs across the globe as the catalysts for prosperous global trade.

About Dr. K Rangarajan

Dr. K Rangarajan is a Professor of Strategy at IIFT. Currently he is heading the Center for MSME Studies and also the Kolkata Campus of IIFT. His expertise includes Business Strategy and Strategic Planning in general and internationalization of SMEs and..

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