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Competitive Challenges Faced by Small and Medium Enterprises (SME)

Updated on September 5, 2014
C.V.Rajan profile image

C.V.Rajan is a retired Engineer. Backed by 3 decades of industrial experience, he writes on several aspects of business, management and HR.

Small and Medium Enterprises (SMEs) are increasingly being challenged by competitive pressures from several quarters in the present time where globalization of operations and Business Process Outsourcing are the orders of the day.

At one end, huge business enterprises, who happen to be the customers of SMEs are ruthlessly demanding cost reduction combined with quality enhancement, technological advancement and shortened deliveries. This they do with utter disregard to the fact that whatever advancements they demand can potentially increase the cost to the SMEs. The threat of losing orders from high-profiled customers many times forces SMEs to concede to the bulldozing demands on price cuts and face erosion of profitability in the bargain for sustenance and survival.

Can you survive with simple machines and semi-skilled manpower?
Can you survive with simple machines and semi-skilled manpower? | Source

At another end, where the SMEs are not dependent on large business houses for survival, but have their own niche markets, the threat or challenge to the business comes to them in several forms. They include rapid technological changes, frequently changing customer tastes, preferences and loyalties, fly-by-the night competitors, and threat from third world countries where low manpower costs and low establishment costs give them an unequal competitive advantage.

Huge Loads on Small Shoulders

Thus many inherent advantages of SMEs like a small and compact organizational structure, "low cost, low profile" way of operation, quick decision making by virtue of having lesser layers of managers etc are being confronted with newer and larger demands. The demands on quality, service, supply-chain management, business process management, business intelligence and analytics etc that only large corporations can handle by ruthlessly investing on high-tech infrastructure in Information Technology and high end software and systems like ERP, are now thrust mercilessly on SMEs.

Competitive Advantage - the "must have"

Obviously, in order to survive in the market and also grow in strength, the SMEs have to develop their competitive muscles at several business limbs. Cost cutting is the foremost demand, because on any day, "cheaper cost" is the first thing that attracts a customer, that is tangible and easy to convince; any evil effects of lack of quality, or service or response of the "cheapest supplier" are going to show up only later, but that's no consolation for one who has already lost the order.

The next competitive advantage is one's distinctiveness. In what way do you claim you are not the run-of-the-mill variety? By what technology/ innovation, superior quality, outstanding service or lean manufacturing technique are you going to offer something novel, different and better to your customer than your competitor?

The next competitive advantage to win business is the SME's positional advantage. What are your core, proven and well established strengths that the competitor does not possess? In what way, you are a strategically better partner to do business with, in comparison to a competitor? Is it your geographical location or is it your enterprise wide computing network that makes geographical locations irrelevant? Is it your well established systems that can smoothly integrate without much ado to the systems and practices of your customer or something else?

The matter does not end there. What you "sell" today as a competitive advantage may get duplicated by your competitor tomorrow. This means, the SME has to be constantly alert to make the advantage sustainable. "Sustainable competitive advantage" is the prolonged benefit of implementing some unique value-creating strategy not simultaneously being implemented by any current or potential competitors, along with the inability to duplicate the benefits of this strategy.

Will the SME find too many constraints in adopting  latest technology?
Will the SME find too many constraints in adopting latest technology? | Source

What do SMEs need for getting Competitive Advantage

Decentralization of powers, providing operating freedom to the level where it matters and creating profit-centers are some of the widely practiced techniques to improve efficiency followed even in SMEs. But the negative effects of these may show up by way of creation of "islands of systems and practices" with little scope of exchange of crucial data on common and interrelated cost elements between them.

What Paul saves by cost cutting in his "island" may be negatively impacting the performance of Peter and eroding profitability in another "island" of the same company and this may go on and on, without coming to the knowledge of the Chief Executive. Each department may be investing on computers, software and database systems, efficient on their own, but without scope of sharing common and strategically crucial data between them.

Result? The crucial cost inputs in deciding competitive pricing of a product or service may get skewed up in the absence of "discernible and relevant" inputs from stake-holding departments. The Chief executive may have to spend more time in fishing out pertinent data from the multifarious outputs and may have to rely heavily on "average costs" rather than "specific costs" in arriving at pricing decisions.

This is where ERP (Enterprise Resource Planning) comes in to picture. ERP's thrust is to bring in "unity amidst diversity" of operations, database and information processing. But can ERP, which is widely adopted by huge corporate houses with multinational operations can really be adoptable to SMEs? Will the cost of such a large scale IT resource can ever justify usage at the level of a SME? Only time can tell.


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