How to put the ‘M’ back in ‘SME’

The ‘start-up boom’ might grab the headlines, but it masks the problem of a declining number of medium-sized companies in Australia.

According to the Australian Bureau of Statistics, the number of firms with 20 to 199 employees has fallen by one-third over the past decade.

Out of 2.2 million Australian companies, only 2.3 per cent (51,000) are medium-sized today, yet they still account for 25 per cent of all jobs and 46 per cent of all Australian companies that are exporting. In addition to employing over 3 million Australians, medium-sized companies are the segment of our economy deriving the most value from overseas markets.

There are two strategies to fix the problem of the shrinking medium-sized sector: We can increase the number of start-ups, and help them grow bigger, or we can figure out how to reverse the decline of medium-sized companies.

Policymakers have mostly focused on the first strategy. Getting more people to “give it a go” by increasing the numbers of co-location spaces, incubators, accelerators and meet-ups has resulted an increasing number of micro-businesses (1 to 4 employees), some of which are successfully transitioning into small companies (5 to 19 employees).

Increasing the numbers of start-ups is essential for the long-term health of our economy, but it will not move the economic needle for years.

The Kauffman Foundation has noted that more money is being invested in US start-ups than ever before, but fewer companies are actually scaling. The same can be said for Australia. Investing in start-ups as a solution to our near-term economic problem is unrealistic. Start-ups are not the “silver bullet” for the Australian economy.

The second strategy, teaching CEOs of small companies how to grow to 20 employees and more and reversing the number of declining medium-sized businesses, will lead to quicker results.

But this won’t be easy. In a recent paper, the Department of Industry’s chief economist Mark Cully noted that medium-sized companies are 10 times more likely to revert to small businesses than grow into large companies. The paper highlighted that the major contributing factor was a lack of management capability, with only 33 per cent of medium-sized businesses having a written strategic plan.

So how can we help leaders grow their small and medium companies? Often, it starts with getting them to clarify their end-game, then challenging them to think bigger.

Once they suspend disbelief and begin to play around with what would be required to double or triple turnover in three years, they see how focusing on more profitable customers, or opportunities in overseas markets, or new products or services can lead to growth.

When the CEOs and executives begin to believe it’s possible, they are motivated to develop a growth strategy. Their mission, values and vision become clearer, they understand who their ideal customers are, and they have more clarity about what kinds of people are necessary to achieve the plan.

But how do we encourage the CEOs of more small and medium companies to do this?

Helping them overcome the fear of failure is the big one. Most company owners want to grow, but their biggest fear is losing what they have. Unfortunately, not trying to grow is just as risky.

More leaders of companies that have grown need to share their knowledge and talk about what they did and why.

If we can increase the pool of Australia’s medium-sized companies, we know the near-term result will be more jobs, more export revenue and more growth for the Australian economy.

Dr Jana Matthews

Australian Financial Review

24th October 2017