ESSENTIALS FOR LEADERS AND THOSE THEY LEAD

Definitions of what constitutes a small business vary across countries and regions—for example, some microenterprises may employ fewer than ten workers and generate only modest revenues. But regardless of their size, small and medium-size businesses (SMEs) have been the backbone of most economies for decades, accounting for 70 percent of all jobs around the world. The COVID-19 pandemic took a heavy toll on these businesses. Although they have recovered somewhat, many SMEs may lack the resources, talent, and capabilities to expand over the long term. This week, we look at what it may take for this key segment of the world economy to thrive.

AN IDEA

Focus on subsectors

Small businesses account for more than 90 percent of all global enterprises, but their productivity is only about half that of large companies. New research led by McKinsey senior partners Marco Piccitto and Olivia White and colleagues reveals ways to narrow the productivity gap: doing so could equal 2–15 percent of GDP across advanced and emerging economies. The gap tends to vary most among subsectors—for example, in one country, “small businesses engaged in the manufacture of tobacco products are only 35 percent as productive as larger counterparts, while those manufacturing basic metals are 85 percent as productive,” the McKinsey researchers observe. “This granular view at the subsector level is important when setting aspirations for, and thinking about ways to boost, [small business] productivity.”

A BIG NUMBER

5

That’s the number of trends that banks may want to consider to better serve their small-business clients. Our survey of more than 1,200 US businesses with up to $50 million in annual revenue reveals that SMEs can be a notable growth engine and source of stability for financial institutions. For example, SMEs generally prefer to get all their financial needs fulfilled from a single source. “Typically, the larger a small business grows, the more complex its financial needs become and the more it becomes interested in comprehensive solutions,” note McKinsey senior partner Marukel Nunez Maxwell and partner Abhilash Sridharan, coauthors of our survey report. “To meet these needs, banks could offer bundled cash flow management tools and explore partnerships with specialized fintechs.”

A QUOTE

“Almost nowhere is it the case that small businesses can flourish without very meaningful relationships with productive larger businesses.”

That’s McKinsey partner Anu Madgavkar on the results of our latest analysis of small to midsize companies. Spanning 16 countries and more than 200 subsectors, the research reveals some “universal principles”—for example, identifying differentiators such as capital, skills, or technology—to raise productivity, Madgavkar says. But partnering with larger companies could be the most effective way for small businesses to perform better. “Often, they are interacting with a larger company, as a consumer or a buyer,” she says. “Understanding those kinds of networks is, I think, the most powerful idea that came from this research.”

A SPOTLIGHT INTERVIEW

Scaling may be one of the most persistent difficulties for small businesses—but discipline and structure enabled digital-coaching provider CoachHub to achieve it quickly. “From the beginning [in 2018], it was clear that we had to operate this business at scale to have the impact we wanted,” says cofounder and CEO Matti Niebelschütz in a discussion with McKinsey’s Alexander Baranov and Gisa Springer. “But even when you have a big vision, you begin with small steps.” That meant setting just three initial targets: building a minimal viable product, acquiring 30 coaches, and getting ten paying clients. Staying focused on those goals enabled CoachHub to expand within Europe over the next three years and eventually to 90 countries. “I’m a start-up guy at heart,” says Niebelschütz. “I like to build things and break them. But once we had several hundred employees, I realized that . . . I had to steer the business with our long-term objectives in mind.”

— Edited by Rama Ramaswami, senior editor, New York

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