Insight
11.3.24
How do SMEs steer their business? Results of our study
By Dr. Karolina Sauer-Sidor, Andreas Sauer, Joerg Erlemeier.
For any inquiries, please reach out to Dr. Karolina Sauer-Sidor.
What are the challenges small and medium enterprises (SMEs) are facing? What are their priorities for the short, mid, and long term? What are the growth and digitization priorities? These are just some questions from our study performed in seven countries in the Summer of 2024 among 1238 respondents.
In the EU-27 alone, there are approximately 25.8 million SMEs with 88.7 million people employed, bringing 53.1% value added in the EU, especially in tourism, construction, manufacturing, professional services, mobility/transport/automotive, and retail. They are critical to the European economy as well as the society and are the backbone of the European’s industrial ecosystem. SMEs represent 99.8% of all enterprises and 65.2% of the total employment in the non-financial business sector. [1] In the UK there are 5.5 million SMEs with 16.7 million people employed and 53% of value added.[2]
However, SMEs do not have the same opportunities as large organizations in terms of access to innovation, expertise, partners, and capital. As our study shows, they are facing several challenges in their business, such as cost pressure, high competition, digital & tech advancements, changing customer needs, and acquisition & retention of talent.
SMEs have a lower level of productivity compared to large companies, and they are more challenged by overall economic challenges than larger companies, indicated by a decline in value added of -1.6% in 2023 (large companies -1,1%) due to inflation rates. [3]
The objective of this market research is to examine what is top of mind for SMEs in Europe based on insights from selected European countries.
The study was performed in the Summer of 2024 in seven European countries: Austria, France, Germany, Italy, Poland, Spain, and the UK, and includes feedback from 1238 decision makers from small and medium enterprises up to 500 employees. The companies represent different industries across these countries, and respondents come from varied roles in the organization.
Challenges
SMEs are facing multiple challenges in their business. The top 5 challenges are cost pressure and inflation as number 1, followed by increasing competition, digitization, technological advancements, changing customer needs, and acquiring and retaining talent. However, other external challenges, such as security, economic uncertainty, and regulatory compliance, have been mentioned by at least 1 out of 5 SMEs. Internally, commercial challenges, growth opportunities, and building expertise have also been named by at least 1 out of 5 SMEs. Each SME faces 3.7 challenges on average.
The multitude of challenges faced by SMEs highlights a complex and multi-layered environment. They also indicate the need to action on multiple dimensions in the business.
In the UK, 50% see cost pressure and inflation as a challenge, making it the highest ranking across all challenges. Polish SMEs regard digitization and technological advancements as the number one challenge – higher than all other countries.
Performance
45% of SMEs have reported that their revenues remained flat over the last three years, and 15% have experienced a decrease in revenues, highlighting a need to focus on growth opportunities. Germany and the UK were the countries with the highest share of companies that have reported an increase in revenues (49% and 48% respectively).
Companies achieving a revenue increase named new client acquisition, market expansion, new line of business, digital media, commercial capabilities, partnerships, and product innovation, as the most successful top-line initiatives over the last years.
46% of respondents have experienced a cost increase over the last three years – in the UK, the share of companies experiencing a cost increase was the highest at 68%.
While SMEs are experiencing pressure on their revenues and costs, 40% managed to increase their profitability over the last three years, while 43% remained flat, and 14% experienced a decrease.
Several organizations were able to simultaneously increase revenue, decrease or maintain costs, and increase profitability, have taken a holistic approach addressing multiple areas of the business. Some examples how SMEs have mastered this challenge:
“Digitization of a company and its processes… introduction of programs in marketing, telephone, and digital channels”
– A Managing Director of a manufacturing enterprise in Spain shared they were able to increase profits and revenues while maintaining costs.
“The most successful initiative of the last two years was the expansion of digitization as well as the increase of our presence in social media and advertising.”
– The Head of Digital and IT in a German coal/steel/mining industry shared that their organization was able to increase revenue, profits and decrease costs in the last years.
“In the last two years, our most effective initiative was to implement a simplification program of operational efficiency, strengthening our competitiveness in the market, reducing costs, and improving the efficiency and customer service.”
– An owner in the agriculture, forestry, and fishing industry in Spain whose business, while experiencing an increase in cost, was still able to increase profits further through a strong operational efficiency program and an increase in revenue.
SMEs highlighted different initiatives that have contributed to their performance over the last years – digital, growth, and people initiatives have been named by several SMEs.
“Implementation of a fully automated production line with AI”
– Managing Director of an aerospace enterprise in Poland highlighted.
“Introduction of new niche products and services that are profitable for us.”
– The Head of Digital and IT in a French SME in the service industry shared.
Several organizations still highlighted the impact of COVID-19 on their business in the last years.
“Clearly the survival of the long COVID times and the following growth.”
were named as the most successful initiative by a Managing Director of a German construction business.
With the cost pressure, high competition, changes in customer needs, and technological advancements, the pressure on profitability remains high.
Priorities
For the next 12 months but also 2-5 years, the top three priorities are growth opportunities, customer experience, and product & service innovation. Growth opportunities have been ranked first by 28% of respondents for the next 12 and 25% for the next 2-5 years, well ahead of second and third – customer experience and innovation were rated first by 13% and 12%, respectively.
In the short term, further important priorities are cost management, new business partnerships, and commercial capabilities. In the long run, expansion into new markets and improving digital presence gain in importance.
“Over the next 2-3 years, we see the greatest opportunities for our company to expand into international markets, particularly in Asia and Africa. We also plan to invest in new products and technologies to remain competitive and serve the needs of our customers. Improving partnerships and customer experience will also be a priority for us to ensure sustainable growth.”
– An owner of a real estate and housing business in Germany shared.
“Artificial intelligence is the technological innovation that we must implement in our company to improve our sales and create a more satisfactory customer service, this is the opportunity of the near future.”
– The Head of Sales and Marketing in the textile and clothing industry in Italy highlighted.
Deep Dive: Growth
In growth, SMEs rank new customer acquisition as the most important priority – 52% ranked acquisition as one of their top 5. Other key priorities include expansion into new markets, innovation of existing products, introduction of new products and services, increase of brand awareness, and the build-up of new capabilities.
“In the past two years, the most successful initiative in my business has been the implementation of a multi-language support system, enabling me to cater to a diverse user base and expand my reach globally. This initiative has led to increased user engagement by 30%, expanded customer base by 25% in non-English speaking markets, improved customer satisfaction ratings by 20%, enhanced my ability to provide personalized support and responses, established partnerships with international businesses and organizations.”
– The Head of Digital and IT of an aerospace enterprise in the UK shared.
To achieve growth, SMEs are selecting a multitude of levers – customer acquisition, increase of brand awareness, new product innovation and improvement of existing products, market expansion, build-up of capabilities, and digital and non-digital channel improvements and expansion.
Deep Dive: Customer Experience
Customer experience has been ranked as one of the top three priorities for SMEs. SMEs especially prioritize the improvement of experience in channels e.g. websites, stores, call centers – 52% of all respondents see this as a priority. Beyond the improvement in processes such as production, delivery or purchasing is key and prioritized by 46%. In third place is the improvement of experience in products or services – for example product quality which is on the agenda of 37%. This highlights a multidimensional approach to customer experience across the full customer journey.
“We see the biggest opportunity in strengthening interaction with customers and improving their experience. By using big data and artificial intelligence, companies can better understand customer needs and offer personalized services and products.”
– A Managing Director of a beauty business in Germany highlighted in the survey.
Deep Dive: Digitization
Digitizing the business is on the agenda of many SMEs. Within digitization, there are several priorities – the top three are security, AI and Generative AI, and data management, but also process automation, digital marketing, and customer analytics were named as a priority by more than 30% of respondents. The priorities span across all major areas of the business. While digitization and technological advancements and building expertise in digital/analytics is a challenge, it also is seen by SMEs as one of the biggest opportunities for the next years:
“The biggest opportunity lies in fully digitizing our supply chain operations and integrating advanced automation technologies. By leveraging AI, IoT, and blockchain, we can enhance efficiency, reduce errors, and provide real-time tracking and visibility to our customers.”
– The Owner and Managing Director of a logistics and transportation business in the UK highlighted.
Deep Dive: Execution
With regards to the execution of the business priorities for the next 12 months, only 48% of respondents are well on track to implement their plans. 28% have a plan but are behind in execution, 20% are still building their plan, and 4% do not have a plan.
As it relates to mid to long-term priorities over the next two to five years, the gap to successful execution is even larger. Only 44% have a plan and are on track with execution. 28% are late with execution, 22% are building a plan, and 6% do not have one yet.
“The most successful initiative of our business in the last two years was the introduction of a new project management system. Through that, we could significantly increase the efficiency of our team, shorten the duration of projects, and increase the quality of our services. This has led to higher customer satisfaction and an increase in company revenue.”
– The Owner of a real estate business in Germany emphasized the company was able to increase revenues and profitability while decreasing costs over the last few years.
This data highlights the significance of good planning and strong execution capabilities.
Deep Dive: Capabilities
Building expertise is a key enabler for the future of SMEs. Currently, many SMEs feel they are missing capabilities in several areas. Digitization expertise, such as process automation and artificial intelligence, is seen as the number one missing capability – identified as missing by 34% of respondents. Analytics, marketing, and management expertise are seen as missing by 27%, 27%, and 25%, respectively. At least 1 in 5 SMEs identified further areas such as operational, sales, finance, HR, or industry expertise as missing, highlighting the need for action on multiple dimensions.
“The biggest opportunity for my company for the next two to three years is the recruitment and retention of personnel”
– A Managing Director of the real estate business in France pointed out.
What can you learn from these insights?
With the multitude of challenges – both externally and internally, we have seen several organizations grow and innovate their business, increase their profitability, manage their cost base, and build capabilities. How did they do it? What is the recipe for success?
Growth – Innovation and Digitization – Execution – Financial Steering – Capabilities
These five ingredients have been part of the success for multiple small and medium enterprises that have been able to thrive over the last years.
In the next years, there is an opportunity to be seized for small and medium businesses. What are some of the key considerations?
- Take stock
Understand where your business stands – its strengths, weaknesses, and its position versus competition. Look from a different perspective, as if it was someone else’s business, you are looking at.
Some of the key questions to ask: How are we performing? How competitive are we? How are we executing? How are we getting ready for the future? Do we have a plan and how are we building new capabilities? What should be the top shortcomings to address?
- Set aspiration
Define your ambition in terms of financial, commercial, and operational performance: What do you aspire to achieve? What is the trajectory for my aspirations?
See the aspirations and opportunities other SMEs see for themselves:
“I have the vision that our company will become one of the best in Germany and beyond. Together with my colleagues, I will do everything to make this vision a reality.”
– A Managing Director in the biotechnology business in Germany highlighted.
“To become an enterprise known worldwide”
– A Managing Director in a French pharmaceutical enterprise highlighted.
- Set priorities, build a plan and execute
Build a detailed plan with a set of initiatives and activities. Prioritize top five priorities – a set of short, mid, and long-term priorities that will bring a good balance between growth, digital, operations, and capabilities. Below are some examples of opportunities small and medium enterprises see for themselves for the next years.
“Continuously building our existing customer base by acquiring new customers, successfully expanding our company's online and offline presence, succeeding in achieving an environmentally friendly and sustainable corporate culture, and increasing productivity with the help of artificial intelligence!”
– A Managing Director in the Technology industry in Austria.
“In the next 2 to 3 years, I see the biggest opportunities for my company in the digital transformation and the development of new markets. By investing in innovative technologies and adapting to changing customer needs, we can increase our competitiveness.”
– An Owner in the German service industry pointed out.
- Build a capabilities plan
Assess your internal and external capabilities. What are the strengths, and what are the gaps? Which capabilities can you build internally, and which ones externally? Then build a capabilities' and cooperation/partnership plan. A mix of internal and external capabilities can accelerate the build-up and help close the gaps.
“Strengthen cross-border cooperation with enterprises inside and outside the industry to jointly explore new business models and market opportunities.”
– The Head of Finance in the toy industry in the UK pointed out.
- Set performance management and tracking
Measuring progress and impact helps ensure that you are on track, it identifies delays and deltas vs. performance quickly and focuses attention on the right initiatives and activities. Identify a selection of financial, commercial, and operational KPIs and ensure regular – monthly at least – tracking.
Revenues, cash flow, and profitability are top of mind for SMEs. Operational tracking is also critical to strong performance management – as our survey shows there is a need to increase the scope of operational KPIs tracked and its frequency.
We are excited to build a digital business platform for small and medium enterprises to improve their financial, operational and commercial performance:
Perform at your best. Wherever, whenever. QUCOXX.
[1] European Commission: SME Performance Review Annual Report 2023/2024 https://single-market-economy.ec.europa.eu/smes/sme-strategy-and-sme-friendly-business-conditions/sme-performance-review_en
[2] Georgina Hutton. 8 May 2024. Business statistics. Summary ... Commons Library Research Briefing, 8May 2024. 8. Further resources on business diversity.
https://researchbriefings.files.parliament.uk/documents/SN06152/SN06152.pdf
[3] European Commission: SME Performance Review Annual Report 2023/2024 https://single-market-economy.ec.europa.eu/smes/sme-strategy-and-sme-friendly-business-conditions/sme-performance-review_en
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