Global Challenges Impacting SMEs - Essay Example

Global Challenges Impacting SMEs Contents Introduction 3 Discussion 3 Factors impacting the growth and development of SMEs in the global marketplace 3 Challenges evident within the global business environment and the impact on the SME sector 4 PESTLE framework to identify the factors impacting SMEs growth and development in the global marketplace 6 Political Factors 6 Economic Factors 7 Social Factors 8 Technological Factors 8 Legal Factors 9 Environmental Factors 9 Strategies and future scopes for growth and development of SMEs 10 Conclusion and evaluation 12 References 13 Introduction Small and medium sized enterprises (SMEs) are businesses in which the number of human resources employed for below certain pre-defined limits. The limit for personal numbers varies from country to country. The abbreviation “SME” is used by international organisations like the United Nations, The World Trade Organisation (WTO) and the World Bank. The small and medium sized enterprises generally outnumber large corporations by a wide margin. These enterprises also employ more numbers of people in a regional setting. Considering the contribution of the SMEs to the different sectors and the overall economy of the nation, SMEs are deemed to be important drivers of competition and innovation in many economies around the world. However, in the present corporate environment, the small and medium enterprises are experiencing new challenges and hurdles in the way of functioning in a competitive, sustainable as well as profitable manner. This report is aimed at identifying and analysing the different kinds of challenges that are being faced by the Small and Medium Scale enterprises while functioning in the present day dynamic, intensely competitive, concentrated and demanding integrated global business environment. Discussion Factors impacting the growth and development of SMEs in the global marketplace In an intensely competitive, globalized and integrated platform, it has become mandatory for the SMEs to develop their resources, capabilities and competencies for being able to confront and mitigate the completion and challenges arising from the developed and emerging countries and at the same time capture the new opportunities arising in the markets of these countries. For this purpose, the SMEs have to first identify the challenges and sources of challenges and prioritise the same so that they can prepare suitable strategic management plans and business development plans which are to be implemented for reinforcing the sustainability, growth and success of these enterprises (Organisation for Economic Co-operation and Development OECD, 2010). At the same time, the SMEs have to build their competency to compete with the international level and large scale firms and capture specific target market segments so that their success and market shares are not compromised upon. There can be direct links established between the performance of SMEs and internationalization. Internationalization is an aspect that drives the competiveness, efficiency and response systems while reinforcing growth and facilitating the long term sustainable competitive advantage creation for the small and medium scale enterprises in any nation. Challenges evident within the global business environment and the impact on the SME sector Challenging and dynamic global markets have created the need for the SMEs to compete with both domestic and international rivals. In addition to that, the need to consider a number of emerging issues like sustainability, ethical and environmental compliance , human rights management and the management of cross cultural business activities and diversified and homogenous human resource groups also act as key challenges that have to mitigated and managed by companies of all level. Nevertheless, in such adverse situations, the competitive capability of the SMEs is often questionable. The SMEs as business organizations face challenges because of two main aspects. On one hand, the constraints present in the physical and financial resources and capabilities of these enterprises act as a limiting factors which restrain the ability of the SMEs to compete on a global platform and on the other hand, the local markets being fast penetrated by the powerful multinational organizations are also threatening the business continuity of the SMEs in many segments of the global business domain. Sustainability issues, globalization and competition, technology usage, cultural heterogeneity, regulatory policies, changing dynamics of the globalized marketplace and need for high scale resources and capabilities, market liberalization, government policies and regulations are some of the major challenges that are threatening the survival of the SMEs. Globalisation is one of the main factors that has significantly impacted the functioning and performance of the SMEs (Van Scheers, 2012). Since globalisation has made it possible for large scale multinational companies to enter into emerging local markets, therefore, the SMEs are facing the pressures of intense competition in the domestic as well as international markets of operation. Globalisation has also brought about major changes in the corporate environment through the increased use of information technology, cross border transfer of ideas, information, products and services, human resources etc. All these factors have upped the level of competition for all kinds of firms including the SMEs. It can be said in this respect that, the SMEs operating in the developing and under developed countries are facing the maximum brunt of the adverse situations, while the aspects like technological advancement, market liberalisation and globalisation have created unprecedented opportunities for companies to gain higher success and profitability, these factors have simultaneously intensified the risks for companies which are already lagging behind or which operate with small scale resources. Thus, in an intensely liberalised and globalised economic scenario, intense competitiveness and rivalry among firms of different cadre have started posing as major challenges for the SMEs (Pasricha, 2010). PESTLE framework to identify the factors impacting SMEs growth and development in the global marketplace The PESTEL analysis is used as a key strategic management tool that can be implemented in this report for analysing the external environment of the SMEs. This analysis tool is used for identifying and evaluating the impacts of the macro environmental factors on the success, inception, growth and continuity of the SMEs in the global corporate environment ((Hill and Jones, 2010). The PESTEL analysis for the SMEs done on a global marketplace perspective is given as follows: Political Factors The political environment in the global forefront seems to be much favourable for the development and sustainable growth of the SMEs. This is because most of the countries across the world, including the developed and the developing countries recognise the SNMEs as major sources for growth, innovation, revenue generation and the overall economic prosperity of a country. As such, the government authorities and state governments of all types of nations favour the SMEs and try to make the regulatory environment supportive and beneficial for the functioning of the SMEs. The government policies and regulations also act as significant sources of challenge for the profitable and sustainable functioning of an SME in a country. Access to financing is one of the most dominant challenges for the inception, survival and continuity of SMEs. The government policies can support the SMEs to tackle the environmental challenges as well as create scopes for them to achieve innovation led growth. In general, the government of different countries try to support the SMEs by employing three types of measures including Enhancement of the SMEs position to access liquidity. Supporting the SMEs to maintain their financial position and investment level. Supporting the revenue generation of the SMEs. Preventing the depletion of the available working capital in such enterprises (Ahiawodzi and Adade, 2012). Economic Factors The contributions of the SMEs to the economic position and revenue generation of a country are indispensable. The SMEs not only provide income to the country but also create scopes for local employment, knowledge generation, economic value creation and community development. As such initiatives make the role of the SMEs much profound in the economic and national domains. Also, the overall global economic growth situations are creating newer opportunities for the SMEs to capture new markets, increase their productivity and performance levels and revenue generation. The fact that the SMEs are recognised as critical to the growth, innovation, income generation and sustainability factors in an economy, makes it clear that fostering the continuity, growth and success of the SMEs are not only the interests of the enterprises themselves, but are also equally significant for the stakeholders including the government, customers and employees and the communities to which these SMEs belong. The SMEs can in fact add value to an economic system if they can employ suitable strategies to tap in the present and future opportunities generated by the globalization and integration of the international markets and at the same time are adequately supported by the governments of the respective nations through supportive policy making and financing provisions that could enable the SMEs to function in a more efficient, compliant and competitive manner (Martin and Nakayama, 2014). Social Factors The social factors definitely contribute to the creation of opportunities and threats to the SMEs operating in a nation. The general consciousness emerging within the global citizens and stakeholders regarding sustainability and environmental compliance, demand for quality and differentiated products and services and ethical functioning have made it mandatory for the SMEs to make major changes in the ways in which they conduct their businesses and manage the global stakeholder groups (Morrison, 2012). Technological Factors The latest technological advancements are being used by the large scale enterprises which gives them a competitive advantage over the SMEs. The adoption of latest information technology and modern communication systems has emerged as a primary requirement for functioning and competing on the global business environments (Yip, 2012). Information technology application is a main criterion that has to be fulfilled by all levels of companies to continue functioning in a profitable, competitive and sustainable way. Technological advancements are the most powerful forces that are currently driving the corporate world towards higher levels of competitiveness as well as a converging communality. The SMEs continue facing challenges regarding the implementation of technology in their business systems. The fast innovations made in the technological sector call for quick response from the companies in form of technology adaptations. This poses a great challenge to the SMEs because many such enterprises do not have the available resources and capabilities to implement advanced technologies in their respective businesses. This is especially true for the SMEs operating in the lesser developed countries (Abor and Quartey, 2010). On the other hand, the large scale multinational companies have high scale resources and capabilities available within their businesses which have made them successful in responding to the information technology requirements of the dynamic business environment. Legal Factors Engaging in international activities and performing in globalized and integrated platforms thus create beneficial scopes as well as significant challenges foe the SMEs from different country origins (Du Toit, Erasmus and Strydom, 2010). Since, the SMEs play crucial role in all kinds of economies and are identified to be key drivers of innovation, growth and employment in a nation, therefore, the state governments and economic agents are focusing on supporting and developing SMEs with high found interest and vigour. Providing the access to sufficient funding is a main strategy that can be employed by any nation or investor groups to support the financial conditions of an SME. Often, the SMEs need sufficient funding which if available can be used productively for the firm and the economy alike. However, the absence of appropriate financing sources and access to government funding pose as impediments to the survival, growth and success of such companies. Thus, there is a vital need identified for providing solutions to the financing needs of the SMEs, especially for the high growth and innovative SMEs operating in the contemporary knowledge based and globalised economies (Ohmae, 2014). Environmental Factors Environmental factors like carbon footprint, Greenhouse gas emission, pollution and use of finite natural resources are main concerns arising in the global business environment, As such; the SMEs are facing the pressure of developing environment friendly methods of functioning. The need for using green processes in the business also calls for high investments which are not always possible for the SMEs. This need for high investments in the adoption of green and eco friendly systems are drastically impacting the sustainability and growth prospects of the SMEs in different sectors. Strategies and future scopes for growth and development of SMEs The SMEs need to employ the strategy of higher levels of cooperation and collaboration among the particular SMEs operating in a region. This kind of collaboration would help these enterprises to leverage on the network advantages and help them to overcome the traditional barriers to growth. The Global Virtual Enterprise (GVE) is one such solution that can be employed for overcoming the trade-offs between the necessity to develop local resources and taking advantage of the global markets because this kind of an enterprise structure can extract the benefits of operating on a global platform while making the most beneficial and optimal use of the local competencies . This system can be aptly used by the SMEs to mitigate the challenges of functioning in the global markets because the problems of large scale functioning capabilities and restraints of assets, resources and capabilities within a particular SME can be removed through this kind of business alliance. The development of the Global Virtual Enterprise (GVE) can be a beneficial strategy employed for the growth and success of the SMEs. In this system, a temporary business alliance is created for the purpose of sharing the resources, skills, and core competencies of the businesses in order to enhance the efficiency and create better response mechanisms for the business opportunities in the external environment (Figure 1). Figure 1: The Global Virtual Enterprise (GVE) Model for SMEs (Source: Williamson and Lynch-Wood, 2006). It can be identified that the pre requirements for succeeding and implementing higher levels of collaboration and making use of suitable competitive factors, generally exist within the regional clusters of the Small and medium scale enterprises (SMEs). Thus the SMEs need to employ strategies to find an organizational system in which the benefits of the domestics as well as the international value chains can be extracted for making these enterprises more competitive on a global scale. Additionally, the generation of superior assets and capabilities and the identification of the core competencies of the enterprise can be another way to enhance the competiveness of the SMEs on a global scale. Developing techniques for enhancing responsiveness to the evolving trends and demands in the global markets and exploiting the distinct core competencies of these firms can further strengthen the ability of the SMEs to compete on a global scale (Koekemoer and Bird, 2014). These strategies should be employed by the SMEs operating in diverse sectors so that these organizations can take the advantage of the global markets and generate sustainable competitive advantage through the most optimal allocation of their available resources, capabilities and core business competencies (Kotler and Keller, 2012). Another possible business strategy that can be employed in the global operations of the SMEs is to develop the optimal trade-offs derived from the increase in revenue through differentiation and the low cost advantages gained from standardisation (Petrakis and Kostis, 2012). Conclusion and evaluation SMEs may belong to a broad spectrum of enterprises on the basis of the sector of activity, performance, scale of operations, geographical location, size and business types. However, all kinds of SMEs are facing varied challenges of surviving and growing in the intricately complex global business sectors. Some of the main characteristics that can be found in a successful organization are exploitation of valuable business opportunities through the access of external competencies, concentration of the business on multiplying and using the core competencies in the most value adding manner, developing a strong internal organizational environment based on trust and cooperation in a proactive and quick manner. These strategies along with the methods of leveraging on the distinguishing reactivity and flexibility of the SMEs against the large scale competing companies can also act as possible strategies for meeting the challenges as well as for tapping in the opportunities emerging in the globally integrated markets. References Abor, J. and Quartey, P., 2010. Issues in SMEs in Ghana and South Africa International Research. Journal of Finance and Economics, 39, 1, pp. 218-228. Ahiawodzi, A. K. and Adade, T. C., 2012. 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