Looking to improve productivity? Think small.

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Looking to improve productivity? Think small.

McKinsey & Company | June 26, 2024

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For many people, small business is a part of their everyday life: the corner bodega, the dog walker, the food truck, the plumber. In the US, people trust small businesses more than any other institution. “They are the one thing, literally, that we interact with every single day, and they make a big difference to the lives of people.

As the United Nations marks Micro, Small and Medium-sized Enterprises Day on June 27, McKinsey looks at its McKinsey Global Institute’s (MGI) first-time report on this small, but mighty, business sector. The analysis ranges from sole proprietors to mid-size companies of 200+ employees. It goes broad, spanning 16 countries, and deep, covering 200 plus subsectors.  In this post, the researchers share what they learned from their research.

But micro, small, and medium-size enterprises (MSMEs) are only half as productive as large companies, and even less so in emerging economies. If we can raise their productivity to top-quartile levels relative to large companies, that is equal to 5 percent of GDP in advanced economies and 10 percent in emerging economies. They have an important role to play in long term prosperity, resilience, and growth. You can’t really lift productivity systematically unless you take the MSME sector with you.

Creating and increasing linkages between small and large companies is actually a win-win situation. A lot of large companies would think about it as a bit of a philanthropic act: “You’re doing it from the goodness of your heart.” But actually no. There’s a true business case for working with smaller companies. You reduce the risk in your supply chain; small companies have local insight and resources; greater flexibility; and access to certain skills. That’s incredibly powerful.

More than a set formula, there are universal principles. One of them is to think about: which intangible is really the critical one? Is it capital? Is it technology?  Skills? Access to global markets? Because each business is quite different in terms of these things.  The second is really being thoughtful about the power of those networks. Because almost nowhere is it the case that small businesses can flourish without very meaningful relationships with productive larger businesses.  Sometimes they are highly functioning as collectives of small businesses: that is, with each other. But often, they are interacting with a larger company, as a consumer or a buyer.

From the perspective of associations, policymakers and large companies, there’s a lot you can do. It’s basically a combination of better access to the intangibles. Leaders should focus on creating the “economic fabric” where both MSMEs and large companies can perform well.

3 key takeaways from the article

1. Small businesses have an important role to play in long term prosperity, resilience, and growth. You can’t really lift productivity systematically unless you take the MSME sector with you.  McKinsey’s study, spanning 16 countries, and deep, covering 200 plus sub-sectors sheds some light on these.  
2. Creating and increasing linkages between small and large companies is actually a win-win situation.  Which intangible is really the critical one? Is it capital? Is it technology?  Skills? Access to global markets? Because each business is quite different in terms of these things.  The second is really being thoughtful about the power of those networks. Because almost nowhere is it the case that small businesses can flourish without very meaningful relationships with productive larger businesses.
3. From the perspective of associations, policymakers and large companies, there’s a lot we can do. It’s basically a combination of better access to the intangibles. Leaders should focus on creating the “economic fabric” where both MSMEs and large companies can perform well.

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Topics:  Productivity, Micro, Small and Medium Enterprises, Growth, Development