Small businesses are integral to our daily lives, whether it’s the corner bodega, the dog walker, the food truck, or the plumber. In the United States, small businesses hold a special place, with people trusting them more than any other institution. As Anu Madgavkar, a partner at McKinsey Global Institute (MGI), puts it, “They are the one thing, literally, that we interact with every single day, and they make a big difference to the lives of people.”
Enhancing Productivity: Think Small
In celebration of Micro-, Small and Medium-sized Enterprises Day on June 27, MGI has released a groundbreaking report on the significant impact of small businesses. This comprehensive analysis spans sole proprietors to mid-size companies with over 200 employees across 16 countries and 200+ subsectors.
In this post, MGI experts Anu Madgavkar, Kanmani “KC” Chockalingam, and María Jesús Ramírez Larraín share their insights from the research.
Why Focus on Small Businesses Now?
According to Anu, productivity is a core research theme at MGI, and small businesses play a crucial role. They represent more than 90% of all businesses, contribute roughly half of the global GDP, and employ over two-thirds of the workforce. Despite their importance, micro, small, and medium-sized enterprises (MSMEs) are only half as productive as large companies, with even lower productivity in emerging economies. Elevating MSME productivity to top-quartile levels could add 5% to GDP in advanced economies and 10% in emerging economies, significantly boosting long-term prosperity and growth.
Key Takeaways from the MGI Report
María highlights a powerful insight from the findings: fostering relationships between small and large companies is mutually beneficial. Large companies often view partnerships with smaller ones as philanthropic, but these collaborations actually reduce supply chain risks, provide local insights, and offer greater flexibility and specialized skills.
KC emphasizes the diverse landscape of MSMEs, noting that productivity opportunities vary by country and sector. For instance, food products dominate in Mexico, chemicals in Brazil, ICT in India, and construction in Indonesia.
Universal Principles to Boost Productivity
Anu identifies two universal principles for enhancing MSME productivity. First, it’s crucial to determine the critical intangible asset for each business, whether it’s capital, technology, skills, or market access. Second, the power of networks is paramount. Small businesses thrive through meaningful relationships with larger companies, either as consumers or buyers, or by functioning as collectives of small businesses.
Strategies for Leaders to Support Small Businesses
María suggests that associations, policymakers, and large companies can enhance the economic fabric by improving access to the critical intangibles identified by Anu. She cites Japan’s tight integration between automakers and small suppliers as a successful model, providing access to talent, operational efficiencies, and cutting-edge technology.
KC shares examples of win-win strategies globally, such as Italy’s centralized branding and marketing for small winemakers and Australia’s public-private partnerships in specialized construction sectors like mining.
Do Small Businesses Stay Small Forever?
Anu points out that while some small businesses remain small, about 19% of today’s largest companies started as small businesses. Additionally, less-productive firms often exit the market, making way for newer, more productive small businesses.
In conclusion, small businesses are a powerhouse of economic activity and innovation. By focusing on productivity and fostering strong networks, we can unlock their full potential for sustained economic growth and resilience.
References
McKinsey Global Institute. (2023). Boosting Productivity in Small Businesses: Insights from MGI’s Latest Report. Retrieved from McKinsey & Company
Madgavkar, A., Ramírez Larraín, M. J., & Chockalingam, K. (2023). Understanding the Vital Role of Small Businesses in Global Economies. McKinsey Global Institute.
United Nations. (2023). Micro-, Small and Medium-sized Enterprises Day. Retrieved from United Nations