Geographies in Depth

Here's why smaller companies make the most valuable partners

An employee of tech start-up Sendy, which offers online logistics services, works on her computer at their office in Nairobi, Kenya, October 30, 2018. Picture taken October 30, 2018. REUTERS/Baz Ratner - RC1FE1B5F060

Small and medium-size enterprises provide 80% of jobs and represent 90% of all companies in Africa. Image: REUTERS/Baz Ratner

Tarek Sultan
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This article is part of: World Economic Forum Annual Meeting

In recent years, large global companies have come to understand the need to innovate and evolve more rapidly to stay competitive and relevant. That recognition gave rise to the corporate ecosystem, an ever shifting collection of partnerships, alliances and collaborations that expose companies to fresh ideas, minimize their cost of trying new things, and let them learn by doing.

Ecosystems for small and medium-sized companies (SMEs) have been slower to take shape. Now they’re finally coming into view.

Strategist James F. Moore first noted the parallels between the natural world – where living organisms interact with one another and with elements in their environment – and what was taking place in the business world at the dawn of the Internet Age.

Moore wrote in the Harvard Business Review in 1993 that by joining a business ecosystem, companies could “co-evolve” and innovate together. “Successful businesses are those that evolve rapidly and effectively. Yet innovative businesses can’t evolve in a vacuum. They must attract resources of all sorts, drawing in capital, partners, suppliers, and customers to create cooperative networks.”

Business leaders today accept the importance of the ecosystem as a means of creating future value. In a 2017 study by Accenture, more than 97% of major companies said future business models would be created within ecosystems.

Smaller businesses need their own ecosystems. They require products, services, partners and collaborators that speed their digital journey; help them enter new markets; allow them to deploy their data; and give them access to scale-building technology that sharpens their competitiveness.

Big businesses are relentless in their hunt for the small, tech-driven “unicorns” that can bring outsized value to their ecosystems. But until now they’ve had little interest in more prosaic SMEs as ecosystem collaborators, protégés or even customers. That’s been especially true in emerging markets.

In Africa, where SMEs provide 80% of jobs and represent 90% of all companies, the life cycle for most small businesses is tragically short. Bigger companies and governments are doing little to help them develop their own ecosystems or close what the London Stock Exchange group says is a $140 billion SME funding gap.

Venture Africa says: “Unfortunately, the hostile business ecosystems in many African countries don’t support the growth of SMEs, resulting in their rapid death.”

That is changing, albeit slowly. The SME ecosystem is at the heart of some notable new initiatives. The Monetary Authority of Singapore has formed Business sans Borders, a hybrid business data and solutions hub that will use artificial intelligence and other capabilities to aid in the digital transformation of SMEs. Mastercard, SAP and others are taking part in the project.

Kuwait’s $6.5 billion National Fund provides SME startup capital and steers young SMEs to private sector mentor-advisor companies that can stress-test their ideas and help them figure out what it takes to go to market.

Similarly, Saudi Arabia is knitting together a network of innovation centres, entrepreneurship platforms, incubators, accelerators and co-working spaces to foster SME creation and growth.

Image: Accelerate SME 2018

Officials in Pakistan recently identified SME growth and ecosystem support as the country’s top economic priority.

Elsewhere, Scale-Up Denmark is introducing Danish SMEs to larger corporates and prodding them to sell in global markets. And SheTrades, an initiative of the Geneva-based International Trade Centre, aims to connect 3 million female entrepreneurs and female-owned small businesses by 2021.

Even sophisticated, tech-driven SMEs have been hampered by lack of access to affordable data analysis. Hal Varian, chief economist at Google, says powerful number crunching and analysis are now available to SMEs through programmes such as R and Python, Google’s Kaggle, or easy-to-use machine learning algorithms offered by TensorFlow, Cafee and others.

Varian is credited with coining the term “micro-national” to describe the new breed of entrepreneurs and small businesses that have joined the competition for cross-border trade. Micro-nationals are proliferating as they discover online tools that give them buying power, capital, market access and local connections needed to export and do business outside their home markets. Eighty-six percent of SMEs in one survey felt technology was “levelling the playing field” for them to operate globally.

In India, small manufacturers can now use a cloud-based platform to analyze the efficiency of plant machinery and begin their digital transformation.

Lazada, Shipa, Kabbage, First Circle and others are building technology, logistics infrastructure and financing mechanisms designed for small business “e-tailers” and entrepreneur-led e-commerce.

Banks in New Zealand, Spain, Germany and Australia are offering SMEs services like those they market to big corporate customers: advisory services, financial management, strategic insights, and tools that help with forecasting.

Florian Semle wrote in Medium: “Ecosystems emerge through cooperation of a wide range of different players – startups, companies, platforms, services providers, consultants, research hubs and more, to solve common problems.”

He said building an ecosystem “is the way to create a structured framework out of the noise and complexity of digital transformation. It is a process of social acceleration, designed to overcome organizational limitations in speed, expertise, talent, technology and flexibility”.

At many big companies, the ecosystem is awkward, uncomfortable, hard to manage. It is a painful social and cultural stretch that requires large organizations to offer creative freedom, collaborate, and innovate within a network in ways that feel alien. Only a small minority of those surveyed in the Accenture study believed their company culture was ready for that kind of collaboration.

Ecosystems that connect large companies and SMEs are good for both. SMEs, in addition to bringing ideas and energy, come with a hunger that is often missing in big corporates, along with a tendency to question entrenched notions and accepted practices. SMEs help quicken the metabolic rate in lethargic ecosystem partners that are slow to spot and grab market opportunities.

And in emerging markets, SMEs can be the most valuable ecosystem partners. That’s because larger homegrown players – usually the most sought-after partners for global companies – are often overly concerned about guarding market share and too hesitant to share proprietary data to be of much value as ecosystem collaborators.

Most emerging markets have voracious appetites for new business models. They feature a furious rate of technology adoption. They offer pools of eager, young talent. All these elements are essential to successful, dynamic ecosystems – meaning ecosystems that generate value.

India, where internet penetration has yet to hit 30%, hints at the wildly vibrant ecosystems driving growth in social media platforms that were adapted to local tastes and habits with the help of thousands of SMEs.

India is already the world’s largest market for WhatsApp and Facebook; no. 3 for Instagram; and no. 4 for Twitter; home to four of Tinder’s top 10 cities for paying users; and the location of one in 10 Uber rides, according to research firm eMarketer.

So the next time you take a hard look at your ecosystem, see if you can spot the hole.

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