The business world is experiencing a major attack on traditional business models, due to radical technological innovation. The “immune systems” of some large corporations may succeed in averting the attack by rapid implementation of new technologies in key sections of their “DNA-strings” but a considerable proportion of them will succumb. New technologies are the main building blocks of the DNA of startups, as well as that of Unicorns like Uber and Airbnb. But what about SMEs[1]? How can they survive the attack?

SME’s Importance to Society

SMEs, by number, dominate the world business stage. Precise, up-to-date data are difficult to obtain but estimates suggest that more than 95% of enterprises across the world are SMEs and that they account for approximately 60% of private sector employment.

However, no. of employees alone is a poor indicator of value creation. For instance, salaries and wages paid to employees vary quite a lot from sector to sector, and position to position. The value created – in terms of turnover and profit, vary even more (value created by an ICT-employee is several times higher than that of an employee in agriculture).

Thus, in 2012, there were 20.7 million SMEs in the EU. They account for 99.9 percent of all enterprises, employ 67.4 percent of all workers and contribute 58.1 percent of gross value added.

 

SMExO_Business_Plan_Slide_Deck

Just like the EU as a whole, the Danish business structure consists almost exclusively of SMEs. More than 90 percent of businesses are micro enterprises with <10 employees. According to Statistics Denmark, there are almost 300,000 companies with 0-99 employees (converted to full-time employees). [2] They represent (2013):

–       99.4 percent of all companies

–       52.3 percent of total company turnover

–       37.9 percent of No. of employees

Guardians of Coherence

SMEs play another important role in society. Often being situated outside the major cities they support local retail and service industries. Many SMEs have existed for generations and their employees have a high seniority. SME-owners tend to hold on to their employees longer than large corporations also in times of recession. SMEs are run “family-style” with a strong sense of shared values and belonging, and they are frequently deeply involved in local activities.

Potential for Growth

Generally, SMEs are more flexible than large companies and have a built-in ability to change fast, if driven by opportunities or threats. Unfortunately, they rarely do so in practice.

They often possess a profound knowledge of the products and services they offer but limited access to knowledge about their environment, and to exchange of ideas for expansion. Thus, they focus on their existing offers and customers and do not think in terms of growth, and cash generation for that purpose. They also have little interest in – and chance of – attracting capital.

The biggest potential for growth is not startups but SMEs. In Denmark, e.g., 18,000 new businesses start up each year (but only a very small fraction survives). The 300,000 SMEs mentioned above employ 800,000 people but very few are growing. This growth potential will be exploited only if SMEs are enabled to use new technologies for creating radically new business models.

Low Growth

In the EU, SMEs with more than 9 employees provide relatively less value added & employment growth compared to micro enterprises – of which many are startups. Value added growth of large enterprises is almost proportional to their share of total value added but their contribution to employment growth is decreasing relative to their total share of employment:

This represents a major problem also for the Danish economy. Slow growth characterizes the European economy but Denmark lags behind most of the other European countries in terms of economic growth.

Danish SMEs do not grow and they create no new jobs. In the ten years 2004-2013, Danish SMEs have grown more slowly than the few large ones. Thus, they have lost share of total turnover. They now have a lower turnover per employee and the average company is smaller in terms of employee:

·No. of companies has increased by 5.5 percent (only in companies with 1-9 employees)

·No. of employees has decreased by 2.4 percent

·Turnover has increased by 45.2 percent (increase only in companies with 0 employees)

Threat of Disruption

Technological innovation is much faster than a few years ago. Just consider digitalization, ICT, artificial intelligence, robots, drones, self-driving cars, 3D printing, to name a few. It enables startups with radically new business models to disrupt existing businesses and business sectors.

Particularly the overwhelmingly large proportion of business represented by SMEs is a serious but overlooked risk for the economy. For instance, the loss of jobs due to SMEs being disrupted may easily surpass the future number of new jobs created in Denmark and elsewhere. SMEs are extremely vulnerable to disruption and most of them are not aware of it. Disruption will hit sectors of industry in a certain order. First came the technology sector and then media & entertainment. Now it is retailing, finance, information & communication, education, hotels & restaurants, food, health, light/gas/electricity, broadband, oil & gas, and finally pharmaceuticals. Other large sectors in focus are the service sector: real estate & rental, knowledge services, business services, travel agencies/cleaning/other operational services. All together about 200,000 Danish SMEs are estimated to be exposed to disruption.

Threat to Business Ownership Succession

Aging of SME owners may lead to a near exponential growth in SMEs for sale in the coming years. In Denmark, e.g. 21% of owners are 65+ and 27% are between 55 and 65, according to a recent survey[3]. Thus, many SMEs will be up for ownership succession in the coming years.

At the same time, there may be a near exponential decline in the number of sellable SMEs.

E-commerce and 3D-manufacturing, a.o., threaten to disrupt the traditional role of SMEs in the value chain. E-commerce has already made it easy to source globally thus reducing the traditional home market advantage of SMEs. 3D-manufacturing is rapidly enabling OEMs and even end-users to become self-sufficient by making the products they require themselves – cheaper, better, and in exactly the quantities they need, superseding the traditional sub supplier role of the SME.

Therefore, while many more SMEs will be up for sale, owners may find that their companies have lost their competitive advantages due to disruptive technologies and that their businesses are no longer sellable.

 

[1] SMEs defined as enterprises with less than 250 employees

[2] “NN Markedsdata” offers a register of 700,000 firms.

[3] Center for Owner-Managed Businesses, Copenhagen Business School