The five essential rules for SME survival

The inability of SMEs to contribute to national GDP is largely attributed to several obstacles such as non-conducive legal and regulatory frameworks and relatively lower lending penetration.

Small and medium enterprises, or SMEs, are the backbone of any successful and sustainable economy and are often considered as the main drivers of economic growth, development and diversification of any country. While the Western world realised this fact decades ago, the GCC's track record is particularly weak despite strong entrepreneurial traditions and the large size of the SME sector. For instance, SMEs represent over 90 per cent of the total registered companies in most GCC countries, yet their contribution to overall GDP remains substantially lower, with an exception of the UAE - the most diversified economy in the region, as compared to developed markets. In the UAE, SMEs contributed to over 60 per cent of the GDP and provided 80 per cent of private-sector employment, while their contribution to GDP in rest of the GCC states was less than 35 per cent.
The inability of SMEs to contribute to national GDP is largely attributed to several obstacles such as non-conducive legal and regulatory frameworks and relatively lower lending penetration, which leads to higher failure rate for the sector. However, in the last five years, almost all GCC governments have made significant headway in nourishing the overall SME environment by establishing specialized bodies, regulations and programs. Furthermore, the banking sector has also rolled out several initiatives and products focused on SMEs.
While such positive steps will pave the path for innovation, job creation, and international competitiveness going forward, they will also increase the competitive ferocity for SMEs that are already troubled with lower-margins and unfavourable economies of scale. Therefore, it is imperative for all SMEs to raise their game to higher standards and focus on essential survival strategies to edge past the crowd.
Robust business plan
SMEs need to distinguish themselves from others through unique and innovative business models to gain interest and support of financial institutions such as banks, private equity firms and VC funds. According to a whitepaper released by the UAE's Khalifa Fund on SME financing, the rejection rate among SMEs applying for a loan in the UAE ranges between 50 per cent to 70 per cent, primarily due to lack of progress in building a proper financial infrastructure and very little information on credit-worthiness.
It therefore becomes essential that young entrepreneurs understand how they can better engage the support of financial institutions with a solid business plan that is based on managed growth, innovative business model and strategic capital utilisation plan at various evolutionary stages of the company.
Corporate governance
A large share of SMEs in the GCC are also family businesses and, consequently, they face the typical family business issues of sorting out the distinction between ownership and management, building succession plans and separating family from company finance. Family dominance also makes it difficult to attract qualified non-family managers while centralization of power can push talented family members to leave the company, which further complicates SMEs' human resource quandaries.
Therefore, it is imperative that SMEs should set up a formal governance structure and financial transparency guidelines in the initial stages of incorporation as these factors are key to enhancing business performance and capabilities through fund raising and/or strategic partnership with international companies. For instance, a Dubai-based IT company that features in the top SME 100 list, expanded from a mere two-member team in 2007 to 110-member-strong organisation with offices in the UAE, US and India, on back of strong business ethics, corporate governance and transparent operations.
Cross-border sales can reduce the business failure risk drastically for SMEs. Although most SMEs currently operating in the region lack the resources such as market information, IT infrastructure, distribution network and adequate manpower required to venture overseas, some companies, particularly in the UAE, are expanding their geographic reach through strategic partnerships and alliances.
According to the 2014 Global SME Survey released by global insurer Zurich, nearly 18 per cent of SMEs in the UAE expanded their activities to new overseas markets in 2014, higher than the global average of 15 per cent and established exporting countries such as Germany (11 per cent), Italy (12 per cent) and the UK (13 per cent). A UAE-based fast food franchise is a classic example of internationalisation trend wherein the company that started operations in 2007 is currently present in over 18 countries.
Business innovation
SMEs typically operate in highly competitive markets, with thin profit margins largely due to relatively lower adoption of innovative and productivity improving technologies and approaches. As per Alexandar Williams, director of strategy and policy at Dubai SME, the overall investment in technology innovation remains low in the region. Given that innovation is increasingly becoming a global game, SMEs should think towards merging and combining talents, ideas, insights and resources across the world to come up with stimulating and disrupting business ideas, especially in the wake of the upcoming Dubai Expo 2020, which is likely to open the door to a host of fresh opportunities for new market entrants.
Talent development
SMEs in the GCC have a weak track record of employing nationals and are largely dependent on expatriates. For instance, nearly 98 per cent of SME employees in Saudi Arabia are estimated to be foreigners. Moreover, sometimes the real owner of the SME (in terms of the person who advances the capital and acts as the entrepreneur) is an expatriate, while a national serves as a front for legal purposes. In such an arrangement, the expat managers typically delegate daily operations which tend to limit innovation and the acquisition of skills among nationals.
Therefore, SMEs should focus on developing skill sets of nationals through effective training programmes and should also ensure long-term retention of their local workforce. For instance, a Dubai-based ICT company that provides consultancy and turn-key solutions to the IT and telecommunications industry is one of the fastest-growing companies in the UAE and largely owes its success to its workforce of more than 120 qualified professionals.
The writer is the founder and chief executive of Al Masah Capital. Views expressed are his own and do not reflect the newspaper's policy.