Digital Transformation Drives SME Success
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Digital Transformation Drives SME Success

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Antonio Gozain By Antonio Gozain | Senior Journalist and Industry Analyst - Wed, 11/30/2022 - 10:40

Micro, small and medium-sized enterprises (MSMEs) are essential to Mexico’s economy, contributing massively to GDP and job creation. However, SMEs face several challenges to stay afloat in a difficult economic environment. While it remains challenging for SMEs to succeed, increasing degrees of digitization can help these players thrive, experts say.

Over 99 percent of all companies in Mexico are SMEs, according to INEGI. These players contribute 52 percent of the country’s GDP and generate 72 percent of the jobs, writes Israel Zamora, Mexican Senator, in an article for Forbes. The COVID-19 pandemic hit SMEs hard but a slight recovery was seen a year later. INEGI’s latest Business Demography Study (EDN) estimated that between October 2020 and July 2021, 1.2 million SMEs were born and 1.6 million closed their doors, an improved rate compared to the numbers from May 2019 to September 2020, when 619,443 businesses opened and 1.1 million SMEs shut down. Most businesses going under in 2020 belonged to the private non-financial services sector (24.92 percent), followed by retail (18.98 percent) and manufacturing (15 percent).

Despite their relevance, for every 100 SMEs that start operations, 34 close their doors within the first year of operation, 60 close before five years of operation, 28 survive beyond the 10-year mark and only 10 companies reach 20 years of operation, according to Zamora.

“SMEs are the engine of the Mexican economy,” wrote Sebastian Kreis, Co-founder and CEO of  Xepelin in an article for MBN. “However, it is not a secret that running a small business is very difficult.”

A study carried out by the Mexican Entrepreneurs’ Association found that the main three challenges to entrepreneurship are access to financing alternatives (57 percent), tax structure (51 percent) and bureaucracy (40 percent). In addition, SMEs that failed mainly attributed their problems to lack of market knowledge (34 percent) or poor business management (32 percent).

Globally, SMEs face common hurdles, regardless of the economic situation in their countries. Among these, the most common is lack of funding. While larger companies often have enough cash flow to keep up with payroll and expenses, SMEs can find themselves in less stable situations. If one big client fails to make a payment, a small business could not be able to cover its bills, highlights Walden University.

While financing remains an issue, there are several global firms investing in SMEs, especially in the technology sector. To access these funds, companies must have “a deep understanding of the problem that they are trying to solve, which is key to developing a successful business in general. They must also present compelling unit economics while understanding the magnitude of any impact or change in their operations. Finally, clear storytelling is key,” says Antonia Rojas Eing, Partner at ALLVP. Communication with investors, clients, talent and stakeholders is key, she adds.

The fintech boom in the Mexican market has also opened a wider range of options for small-business owners to finance their entrepreneurship ventures. “Traditional financial institutions have decided that it is simply too hard to serve SMEs and have largely left behind this important segment,” says Kreis. To bridge this gap, several fintech companies have arrived in Mexico to offer their innovative services, focusing on SMEs. From cloud-based, accessible software to organize financial information to corporate credit cards and fast, accessible loans, SMEs now have a wide product offering through fintech companies.

Several other challenges are disrupting the industry, though, including the Ukraine war and inflation. In these cases, technology is key to disrupting the business world and democratizing it. “It is essential to build technology that increases financial inclusion. SMEs are what makes the country move. It is key for these businesses and entrepreneurs to adapt to new technologies,” says Iñigo Castillo Badia, Managing Director of Uniclick.

Another common challenge faced by SMEs is lack of time. Small-business owners are often responsible for most operations, from creating business plans to executing them, while answering phones and dealing with talent, vendors and paperwork. The smaller the business, the more tasks the owner will likely have. Marketing, advertising and leveraging digital tools are also difficult tasks. While traditional advertising is expensive and word of mouth moves slowly, digital tools provide unique opportunities for small businesses. Strategic investments in SEO, responsive design, social media and online advertising could make the difference for thousands of SMEs in Mexico. Entering the e-commerce world or creating an omnichannel strategy might also open the doors to success for small businesses, especially those focused on retail.

“A digital presence is essential but many businesses in Mexico do not prioritize it. Most businesses are not keeping up with digital trends, which could cause repercussions in the long term. Being active across different sales channels allows companies to stay competitive while they establish their digital presence,” says Jerónimo Serna, Co-Founder and COO of Brizko.

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