The business landscape in any economy is characterised by the presence of thousands of small and medium-sized enterprises (SMEs). They are often involved in a range of activities – from low-technology to high-technology manufacturing – and also in various kinds of services. SMEs generally account for a good proportion of economic growth and employment.
However, it is common knowledge that the mortality rate of SMEs is high – which begs the question: What strategies can improve the odds of SME survival and good performance?
Just as there is no one formula for success in life or business, there is no one formula for SME success. But there are a few paths that SMEs can take to improve their chances.
In a recent research article, my co-author and I found that SMEs which form alliances with a diverse range of partners achieve better performance.
A well-rounded set of strengths is needed to succeed, and that is where alliances come in handy.
The case for alliances for SMEs is straightforward. Typically, SMEs have a narrow set of skills and strengths. For instance, they might be born out of an interesting product or service idea of their founder(s). Tesla Motors, for instance, was born out of Elon Musk’s passion for electric cars.
However, narrow sets of skills – even if they are in the form of a superior product or service – often do not translate into business performance. A well-rounded set of strengths is needed to succeed, and that is where alliances come in handy.
Alliances, which are looser forms of cooperation than acquisitions, can include an array of arrangements such as minority equity stakes, or arrangements involving research, distribution and cross-licensing, among other things. Alliances are flexible as they can be altered to address an evolving environment.
A key benefit of alliances is that they can be formed with a variety of partners, each enabling an SME to fill a specific gap in its skills.
For instance, an alliance with a university might provide access to laboratory facilities for product testing, or research done by scientists at the university.
In some cases, SMEs can also collaborate with students on projects to solve specific problems relating to either technology or business strategy.
At the same time, venture capitalists – such as those working with start-ups at universities – can provide seed as well as later-stage capital infusions and valuable advice.
SMEs can also benefit in a variety of ways through corporate partnerships. In addition to providing funding, corporate partners can help in areas such as distribution and branding. Many SMEs, for instance, serve as original equipment manufacturers (OEM) suppliers for bigger corporates that possess superior skills in marketing and distribution.
Take Singapore Exchange-listed Hi-P international, which has grown larger than an SME. It is a firm that supplies mobile phones to a variety of customers including Xiaomi and Apple.
These alliances allow Hi-P to focus on its strengths in managing supply chains and assembly efficiency, while leaving marketing and distribution to partners that excel in those areas.
This also illustrates an important point – that it is not simply alliances, but alliances with diverse partners that can boost SME performance.
A number of other Singapore-based SMEs have benefited from alliances, such as Stone Apple, a technology services firm that was once classified as an SME.
It won the Enterprise 50 awards and has been growing at 55 per cent per year, so much so that today, with 1,400 employees, it no longer falls under the definition of an SME.
Stone Apple has benefited from investments by backers such as Khazanah, SBI Brunei and Philip Capital.
What is also noteworthy is that in addition to serving as sources of capital, such investments play a role in enhancing the credibility of the company in the eyes of stakeholders. Stone Apple is a “platinum partner” of software giant Oracle, and has been able to successfully complete many enterprise resource planning (ERP) implementations, mainly because of this partnership.
Clearly, alliances have been an important reason behind Stone Apple’s success over the past several years.
There have been other instances where Singapore companies were acquired by foreign parents and subsequently benefited greatly from their expertise.
After its acquisition by King Digital (maker of Candy Crush games), local gaming company Nonstop Games has profited in a variety of ways especially in terms of talent and resourcing, marketing and distribution.
Interestingly, some of these benefits could also have been accessed through an alliance – for instance, through an acquisition of a minority stake in the Singapore company by the foreign investor.
Mind the gaps
In summary, an alliance strategy can serve the interests of many SMEs well. To implement this strategy, an SME must figure out its focus, strengths, and key gaps such as skill shortages. Only when these gaps are identified can a company have a realistic shot at identifying a strategy to fill the gaps.
At the same time, it is important for SMEs to manage risks in alliances. They need to choose the right partners – partners who are interested in helping SMEs develop further and not extort their key skills, such as technology.
Partner management could also be a challenge, especially if there are significant differences in the way that an SME and its partner operate. However, partner management is a “soft” skill (an art rather than a science) and there may be a learning curve for SME managers.
This article first appeared in Business Times