Realizing the full growth potential of SMEs in PH

Small and medium-sized enterprises (SMEs) make up 99.6 percent of all registered businesses in the Philippines and employ over 70 percent of the working population.

However, they face a host of growth challenges—including lack of technical capacity, difficulty in accessing regional markets in Asean and, notably, a lack of access to finance—leaving them accounting for just 35 percent of GDP.

So what can be done to help this sector realize its full growth potential?

Current discussions frequently circle back to finding the right level of financial and private sector support but, while this is undeniably important, there’s another powerful route to growth that deserves attention.

It could be argued that the main driver of SME development lies not in external assistance, but instead in the DNA within the organization, in its level of readiness and openness to internal learning and the adoption of entrepreneurial activities to adapt and win in a competitive environment.

SMEs often lack resources and are buffeted by unpredictable events. But their very smallness means they can also be nimble. And it’s this flexibility—both in redeploying resources and changing goals—which can drive innovation and success.

Through my experiences working with business executives in the areas of innovation management, design thinking and business model innovation, I consistently come across four main ways in which this process can take place.

1. Recombining resources

The most skillful entrepreneurs recombine their resources to solve new problems and are able to imagine new possibilities for what they already have.

For example, the founder of a remittance company, who could not afford to hire more workers, created a mobile app for customers to wire money without queuing at the shop, thereby eliminating the endless queues and chaos during peak periods.

A startup wanted to rent iPads to tour companies but there was little demand. Talking to a banker during an event, it struck on the idea of developing an app and renting iPads for paperless conferences.

The team developed a prototype within a month, combining their existing resources, and pitched the idea to the bank, securing their first, and subsequently recurring, client, allowing them to launch the service.

2. Exploiting contingencies

Contingencies—events that are unpredictable and somewhat random—are often part-and-parcel of what entrepreneurs have to deal with. Innovative entrepreneurs turn lemons into lemonade by converting challenges into new opportunities.

For example, an SME was developing an easy-to-use home machine with limited features for older diabetic patients to monitor the condition of their blood vessels. But when the team talked to the patients and nurses at the dialysis center, they realized that patients were not interested in monitoring their own blood vessels.

On the other hand, nurses who were in charge of monitoring the dialysis process were keen on a monitoring device that could alert them of any abnormalities.

The team quickly changed their target product and market from a simple home device for dialysis patients to a more professional device with a range of features for nurses.

Another example is a company that manufactures temperature sensors and thermowells.

They had a temperature sensor that, due to the vibration it caused, generated a significant amount of customer complaints.

Such vibrations were common among the products in the market, but the company came up with a new vibration-proof sensor that has drawn new customers.

3. Willingness to cannibalize existing investments

Those companies that are more willing to cannibalize existing investments are able to more effectively exploit new contingencies.

For example, a game-developer company originally had a grand vision of producing a game that allows the player to progress in a nonlinear fashion.

As the company developed the product, it realized that nonlinear progress would generate an unlimited number of routes that users would take. This would require the company to develop an endless number of routes and mechanisms within the game.

Realizing this was unfeasible, the entrepreneur abandoned the project but recombined existing resources into a new game that did not allow users to move in nonlinear ways, but highlighted the strengths of the game mechanics—fast-paced and exciting functions.

Entrepreneurs need to be flexible in abandoning projects when such an action is called for, regardless of the amount already invested into the project.

In another example, a firm was developing a med-tech device targeted at developing countries.

The entrepreneur’s team, based in the United States, was unsuccessful in securing investments from venture capital (VC) funds from the country. In a chance encounter, the entrepreneur met a VC investor in India, who wished to invest in the company, on the condition that the company moved to India.

The company realized that this was a good opportunity to gain the required investments and be based in a target market. But it meant forgoing the investments in people and networks the team had cultivated in the United States.

The team decided to take the opportunity, even though it meant that they would need to build a new employee team in India, as most of the US employees were not willing to move.

It was only because of the company’s willingness to cannibalize its existing investments that allowed the company to move to the next phase of expansion.

4. Generating options

While researching ideas, entrepreneurs may develop ones that are not immediately useful, but might be worth considering in the future.

For example, an equipment repair company mooted the idea of developing software to monitor the conditions of customers’ equipment, to facilitate equipment maintenance. However, the cost of developing this software was prohibitive.

Nevertheless, he continued to cultivate this option by sending his staff for training in the related domain. When he felt that the technology was sufficiently mature, his company became one of the first to market with such a software.

So while the Philippine government moves to support future credit growth and stronger connections to regional and international supply chains, there is a more immediate opportunity to boost SME growth through the exploitation of their key defining feature: nimbleness.