Small and Medium Enterprises have a very important role in the economy. Also called SMEs, they are constantly studying their contribution to society. Therefore, on the European SME Day, we will try to make known a little about its history, its economic importance, and its role in society. Without further ado, let’s get started.
The first thing we must know is that the concept of SME or Small and Medium Enterprises is related to the economy. While the economy of a country is larger, its companies are also larger and therefore small and medium-sized enterprises will be.
According to some classifications, SMEs cover so-called micro-enterprises, but other classifications keep them separate. This is because small and medium-sized enterprises are generally formalized, while for microenterprises it does not always turn out to be the case.
There are different classifications according to the number of employees or by turnover, which we will explain later. And these vary according to the economy of the country where it is evaluated. That is why the analysis of SMEs is so complex. However, what has become clear to most people is that SMEs are fundamental to the smooth functioning of the economy.
Gustavo Mirabal is a faithful believer in the important role of SMEs in the economy. That is why today we will talk about the most important aspects of SMEs and their social contribution. Without further ado, let’s get started.
Table of Contents.
How is an SME born?
The first thing we need to be clear about is that all companies start as SMEs. It is true that there are large companies that separate their companies or brands for strategic reasons. But these companies are not really startups or nascent companies. This companies are simply the product of brand strategies, and their characteristics are:
- They maintain economic ties that make them part of a large corporation.
- This companies have strong financial backing from their parent companies.
- They generally have the logistical and renowned support of their parent companies.
This means that we cannot classify them for the purposes of this article as true SMEs. On the European SME Day, we will analyze the true essence of SMEs.
An SME is a company born from scratch. They are usually born by identifying a niche market or a particular unmet need. In these cases, the product-service is intimately linked to the company and its future. In the case of large companies, they have a diversity of products which makes them more stable.
The SME needs to concentrate on the product or niche market and focus its efforts there. Therefore, on the European day of SMEs we will talk about the keys to the success of an SME.
Keys to the success of an SME on the European SME Day.
That is why one of the keys to the birth of an SME is the birth of the product. The key to the success of an SME is always in innovation. Let’s not see innovation as technology but as “a new way of doing things”. In this way the differentiating element of the product is the differentiating element of the SME.
Whether the price is lower because we get the way to lower costs, that the product is of better quality or that we improve the logistics and customer service processes, the key to making a market is to differentiate.
SMEs do not have a plan B and therefore one of the keys to their success must be in focus. Diversifying would be step number two, but first they must be able to succeed with their core product. Without this success your finances will be in a very precarious situation.
That is why it is estimated that 80% to 90% of SMEs fail. This is not to discourage you, but to understand that new companies require a lot of focus to be able to get ahead. In addition, a company that fails is not always a failure for its founder. There have been many cases of entrepreneurs failing at their first attempt, but then succeeding. Therefore, SMEs are the germinator of new companies, but above all of entrepreneurs and new entrepreneurs.
The role of SMEs because the European SME Day is important
SMEs have a fundamental role in the economy of any country. As we saw in the previous section, SMEs make up most companies, generating most of the country’s GDP and also most of the employment. However, they do so under conditions of lower efficiency. This is because large companies by their size and scope can work with economies of scale.
Being such large companies, they can hire highly specialized and qualified personnel to handle specific topics. Large companies have their own lawyers who are paid to solve all kinds of situations. On the other hand, an SME must hire a lawyer for the specific needs it needs, resulting in a higher cost per number of hours invested.
That efficiency of large companies is partly what explains why they can pay better salaries, but in turn hire many people. That is why, to satisfy the right to work, governments must focus their efforts on empowering SMEs.
We must also understand that in low-return niches it is unlikely that large companies will want to make large investments. Many times, they are not interested in serving niche markets or local needs. In this, SMEs are experts and very necessary.
If we want a market that is supplied, flexible to demand and with a reasonable level of employment, let us boost SMEs. This is the importance of SMEs and the European SME Day.
Strengths of SMEs
The strengths of SMEs are many, both individually and in the sector as a whole. That is why today on the European Day of SMEs we will analyse the strengths of SMEs. Below is a short list of the strengths and advantages of SMEs for themselves and for the economy:
- SMEs generate many sources of employment. In any general economy they absorb two-thirds of a country’s workforce.
- In most cases they attend to basic needs and necessities.
- Generally, cater to local needs and markets.
- They can more easily incorporate technologies. This implies that they can be more flexible and permeable to innovation.
- By meeting local needs, businesses are distributed regionally. As a result, SMEs contribute to local and regional development.
- They can be very flexible and adapt to crisis situations.
- They can grow or decrease in size according to demand to adapt to the needs of the market.
- Being companies with fewer staff, there is more direct communication. Managers are able to get to know each of the people who make up the workforce better. This means that the maximum potential of the staff can be extracted, and it is avoided to have excess staff.
- They are the engine of the country and represent more than 50% of GDP. If they come together, they can achieve significant benefits as a sector.
- It is easier for SMEs to change their processes due to their small size.
Weaknesses of SMEs
On the other hand, SMEs also have their weaknesses. Not having the financial backing or the solid structure and processes of a large company can cause inconvenience and place obstacles to the survival of SMEs. We can see this with the failure rate of SMEs around the world. That is why today we will mention some of the weaknesses of SMEs so that by raising awareness we are able to mitigate them.
- SMEs are more susceptible to the economic conditions of the environment. Elements such as labor regulations, inflation and devaluation make them “stagger.” Therefore, SMEs must be more attentive to the macroeconomic and regulatory environment. They must also manage contingency plans within their operation for situations of this type.
- SMEs in general do not have large funds for contingencies. This means that periods of crisis can affect them significantly. Declining sales for extended periods or sudden increases in costs can cause them to fail. That is why having a line of credit and having good funds for emergencies are essential for SMEs
- They are more susceptible to government control and oversight. They find it difficult to keep up with all the changes in laws and regulations, and they do not have specialized personnel to fulfill this role within the company.
- Their financial resources are limited by lack of access to credit. SMEs access to sources of bank or government financing are quite restricted.
- Their possibilities of merging with other companies or absorbing them is very limited. This makes it very complex for them to achieve horizontal or vertical integration of the value chain.
- They have difficulty obtaining highly qualified personnel due to their limitations in paying competitive salaries.
- Quality control may be compromised.
A healthy economy is an economy full of SMEs
There will be no healthy business fabric without a policy that protects and encourages SMEs. One of the keys to the economy. We know that a healthy market economy requires information and free competition. Free competition and competition itself require more companies. That is why incentives for SMEs become an incentive to the economy.
An economy with good competition between companies is an economy that does not require price controls. Companies will compete to capture the attention of buyers with product quality and appropriate prices. If the economy is overheated by artificially injecting liquidity, if an overvalued currency value is maintained or if competition between companies is hindered, this ends up leading to economic vices.
One of the wisest tasks of a government should be to facilitate the creation of companies, facilitate their legalization and maintain a tax regime that does not suffocate new companies. Already, new companies have a difficult task of gaining a foothold among consolidated companies. Capturing the attention of buyers is a challenge. If the tax regime is very heavy, it will be impossible for small and medium-sized enterprises to succeed.
A government that is interested in achieving a healthy economy must encourage the creation of small and medium-sized enterprises and form a favorable tax regime for them. With this in mind, it will favor its increase and its survival, favoring the sources of employment and wealth.
The numbers of SMEs on the European SME Day.
Small and medium-sized enterprises represent in Europe:
- Between 50% and 70% of the GDP of the countries
- 99% of companies in each country
- Between 70% and 80% of jobs.
This indicates the importance of SMEs for Europe’s economy, but this is still the case in the rest of the world. For example, in Mexico SMEs represent:
- 8% of companies.
- 52% of GDP
- 72% of employment.
The opportunity represented by a well-managed SME
Gustavo Mirabal developed several companies that were born as SMEs and are currently based in several continents. A well-managed SME represents a great opportunity for the entrepreneur, for the country and for its own workers.
Therefore, SMEs require momentum and recognition. Therefore, on the European day of SMEs we want to highlight its full potential.
Without a doubt, it is a time to honor SMEs and give them the place they deserve in the planning of the economy. Today on european SME Day we want to recognize their contribution to the global economy.