SME Survey 2010: Diversify to boost resilience and profitability
According to principal researcher Arthur Goldstuck, SMEs need to diversify more actively if they are to be more sustainable, profitable and resilient to inevitable market changes; when he says ‘diversify’, Goldstuck doesn’t mean the SME should act as a conglomerate, but rather that it should address different customer segments if possible.
“The first recession to hit South Africa in over 17 years was instructive: those companies which didn’t have all their eggs in one basket are the ones which weathered the storm more effectively,” he says.
Goldstuck says it is a reasonable assumption that a level of diversity in who the customer is will have an effect on how a business fares in the face of changes to the economy.
“Those businesses which have a better spread of customers are able to cope with changes. It is unlikely that all customer segments will be affected equally by any economic event, such as the recession. So, it follows that businesses which serve corporations, the ‘man in the street’ and public sector, for example, will do better than the company which only does business with the man in the street.”
More diverse means more competitive, in short. “It goes to the reliability of the income stream and the health of the target market,” Goldstuck comments. “When one sector comes under pressure, it helps to have others to carry the business through tough times. Typically, however, if you serve corporations, you are likely to be more resilient and more profitable.”
Pointing to the research, Goldstuck says that 39% of SMEs in established markets typically have done business with corporate customers; but only 31% of businesses in emerging markets. Meanwhile, in established markets, 43% of businesses typically serve other SMEs, but only 32% in emerging markets.
Wholesale and retail is the one sector which procures the very least from SMEs. Zeroing in, Goldstuck points to the gap between the established SME which enjoys these businesses as customers (31%) and emerging companies (21%).
“This presents an issue, since BEE legislation encourages sourcing from small business and in particular, from emerging small business. That could make a case for more intervention from government in terms of enforcing procurement policy,” he notes.
Andile Lungisa, NYDA Chairperson, encourages corporate South Africa to consider its procurement policies carefully. “Economic development and emancipation is a key challenge of our time. We would like to see continued and accelerated participation from big business in supporting and developing emerging talent to achieve the capacity which is required by the procurement arms.”
To facilitate on a practical level and create procurement opportunities for youth owned enterprises, the NYDA launched the Buy Youth Campaign (BYC) which was initiated to address the challenge of market access faced by most emerging SMEs.
Lungisa adds, “Selected SMEs undergo training in supplier development, presentation skills, and B-BBEE procurement. The BYC is taking advantage of the B-BBEE strategy by enticing large entities to earn points and at the same time receive the value provided by SMEs after being developed. The Campaign is also intended to create a platform for industry buyers and youth owned SMEs to convene, engage and conduct business. Proudly South Africa supports the Campaign which is seen as a competitiveness driver and an activist for South Africa’s National Buy Local Campaign.”
Goldstuck however acknowledges commercial realities which have to be taken into account; wholesale and retail industries have very specific and stringent quality requirements which render it difficult for any supplier to gain approval. And, these organisations tend to procure on a massive scale.
In conclusion, Goldstuck says that it is clear that a diverse target market means not just sustainability, but also the improved likelihood of profitability. “There is a strong difference in diversity between established and emerging SMEs, especially in terms of corporate procurement. That could make a case for gearing policy towards promotion of emerging market businesses.”
SME Survey 2010 is sponsored by the National Youth Development Agency. Visit www.smesurvey.co.za
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