Thursday, March 6, 2008

Cracking the SME Nut

For multinational corporations (MNCs) examining emerging markets, the small- and medium-sized enterprise (SME) segment remains one of the most profitable opportunities. Increasingly recognized for their contribution to gross domestic product, SMEs have garnered the attention of global philanthropies like Soros, Omidyar and Those organizations joined together last week to create a $17 million venture capital fund in India to support socially-responsible, early-stage companies. A recent article in the Latin Business Chronicle points out that certain developing-country governments are also trying to promote the development of the SME segment by reducing barriers to growth, facilitating exports, and improving access to financing. The author suggests that while deregulation puts competitive pressure on SMEs, they retain the advantages of greater flexibility, latitude, and speed in responding to threats and opportunities.

For many multinational corporations, the SME segment are becoming the “holy grail” of emerging markets. However, there is a troubling lack of information about the segment, for example many SMEs are part of the informal economy, lacking the capacity or incentive to implement transparent accounting or reporting practices. But even companies that are part of the informal economy need technology to grow and compete. Recent field research by Vital Wave Consulting in Central America on SMEs suggests that tourism and youth-focused companies present solid growth opportunities for technology companies. Small businesses with multiple locations also require more coordination and control and have a greater need for technology infrastructure.

To effectively target the fastest growing SMEs with growing technology needs, the segment must be broken down. Just as the term “emerging markets” lumps extremely diverse countries and economies into one category, so does the SME label. The diverse nature of the SME market means a broad-brush approach is not appropriate. A SME is most commonly described as a company with 10 to 250 employees, but this does not differentiate by industry or growth potential. There is a clear opportunity for MNCs that invest in a comprehensive SME segmentation and sizing analysis by sub-segment and by country or region. MNCs that understand the true size and nuances of the SME market opportunity will be best equipped to capitalize on this growing segment.

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