Download - Producitivity Challenges of Small and Medium Enterprises

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The Productivity Challenge:

Addressing Productivity Gaps between SMEs and Large Firms

Vikas Sharma

Director, Public Sector & Government Practice

Frost & Sullivan, Asia Pacific

Developed For:

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Productivity = Output

Input

Common Measures of Output

Common Measures of Input

No. of employees Man hours Manpower Cost Capital

Sales Revenue Value Add Production Volume

Production Value

Defining the mantra of business efficiency

What is Productivity?

GDP/Capita

Vs.

GDP/Hour

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Factors that influence Productivity


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Purposes of Productivity Measurement


Objective

TechnologyTechnology

Real Cost Savings

Real Cost Savings

Benchmarking Processes

Benchmarking Processes

Living Standards

Living Standards

EfficiencyEfficiency

Description

• To trace technological progress. “the currently known ways of converting resources into outputs desired by the economy”

• To measure the maximum output that is physically achievable with current technology, and given a fixed amount of input

• Firms generally practice allocative efficiency, where resources will be channeled to maximize profitability

• Measuring the absolute cost to produce one unit of product/service through the years

• Comparing value-added for one industry vis-à-vis from other industries

• Metrics used are consistent and resistant to change

• Value add per hour worked, income per person as a unit of productivity

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SMEs are the growth engines of the economy, accounting for >99% of all establishments

Importance of SMEs to the Economy

Contribution to total GDP (%)

Contribution to total Employment (%)

With their ubiquitous presence across industries

and integrated value chains, productivity improvements among SMEs will serve to

drive value across the economy

Across developed economies, SMEs account for the lion’s share of total employment

and total GDP

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SMEs face some unique business challenges compared to larger firms

Factors hampering SME Productivity

SMEs face an uphill task obtaining access to credit due to a lack of collateral and inadequate documents/accounting knowhow to secure low-cost and long-term loans. This is worsened by the long turnaround time for the disbursement of loans, putting stress on their limited financial reserves. Legislation and complex processes serve as high barriers for small businesses that may not have the necessary knowledge to navigate in the system.

Financing hurdles exacerbate a host of other problems including obstacles in building new capabilities through R&D to compete with larger firms, limited ability to expand operations or implement promising business ideas; as well as increase the firms’ vulnerability in the face of crises

All SMEs face challenges attracting high-calibre skilled manpower without the remuneration packages and stability of career development offered by larger companies. Micro and young SMEs have an even smaller talent pool, with even more limited managerial capability and skill sets. An owner-manager will typically also have to fill most job functions.

Lack of Financing

Manpower Concerns

1

2

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SMEs face some unique business challenges compared to larger firms


SMEs are simply unable to reach the operational efficiency reached by larger companies because they cannot access economies of scale.

Inability to access Economies of Scale

3

SMEs are unable to invest in private infrastructure. If not situated in CBD, they may lose out on several facilities

Lack of Infrastructure

4

In negotiating lending rates as well as terms of contracts, or in influencing policy change, SMEs have almost negligible bargaining power compared to larger enterprises

Lack of Bargaining Power

5

Given the sheer size and age of larger companies, SMEs are unable to amass knowledge at a similar scale. This includes explicit knowledge as well as tacit knowledge, regarding procedures, systems (for various functions, or for data management) and industry experience. Additionally, SMEs lack available resources to engage consultancy services to make optimal decisions.

Lack of Knowledge

6

It is difficult for SMEs to project their development over a long term period given their survival rate amidst tough competition. Decisions must always be made with a short-term perspective, which may not deliver best results

Short-term Vision

7

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Evidence suggests that when it comes to productivity – Size does matter!


Industries / Size of Operating Receipt

Food Services Biomedical

Value Added Value Added

Per Establishment ($) Per Establishment

ESTABs with < $1m $122,050 $194,444

ESTABs with $1m - < $5m $723,589 $984,529

ESTABs with $5m & above $5,555,556 $17,021,277

Example 1

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Example 2

6741 41

224449

245

102123

143

Labour Productivity By Size and Sector (RM '000)

SMEs Large Organisation

At the aggregate level, large Malaysian firms

exhibit >3 times productivity than Malaysian SMEs

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Example 3

At the aggregate level, large Canadian firms exhibit 27% higher

productivity than Canadian SMEs

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There is a plethora of assistance schemes available in Singapore that target SMEs

Addressing SME Productivity gaps

“10 percent increase in number of staff using technology increases productivity by 1.3 percent”“ICT adoption in company’s process increases productivity by 12 percent” – OECD

“10 percent increase in number of staff using technology increases productivity by 1.3 percent”“ICT adoption in company’s process increases productivity by 12 percent” – OECD

Increased use of Technology, in particular, has been shown to drive productivity growth

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IDA’s iSPRINT program is enabling SME productivity gains across industries


Retail Travel

Food & Beverage

SME success stories from various sectors

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For Who?

For Who?

• All SMEs incorporated in Singapore• At least 30% shareholding is local• Annual group sales less than $100 million, less than 200 employees

• All SMEs incorporated in Singapore• At least 30% shareholding is local• Annual group sales less than $100 million, less than 200 employees

For What?

For What?

• To encourage the use of technology to improve business operations• Increase efficiency/productivity• Increase in revenue• Increase in value add

• To encourage the use of technology to improve business operations• Increase efficiency/productivity• Increase in revenue• Increase in value add

How Much?How

Much?

Packaged Solutions Customized Solutions

Up to 70% of the qualifying cost: (a) basic package (b) SaaS (c) Immediate Packaged Solutions

Customer Relationship Management, Enterprise Resource Planning, Supply Chain Management

Software/Subscription cost, up to 12 months, Consultancy ServicesTraining

Consultancy Services, Manpower-Related Costs, Consultancy Services, Hardware/ Software,Training

iSPRINT – Can I qualify?

IDA’s iSPRINT program is enabling SME productivity gains across industries

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Vikas SharmaDirector

Public Sector & Government Practice

+65 91446844

[email protected]