In our many policy discussions in ASEAN, there are repeated calls to help the region’s MSMEs scale – especially now that we are on the cusp of realizing an integrated, digital economy. A dynamic MSME sector will be crucial as we confront global disruptions from climate change, geopolitical uncertainties and rising pressure on our region’s food and energy security. A wider base of agile MSMEs can strengthen our collective economic resilience and create conditions that make ASEAN an attractive destination for long-term investment.
But what does it really mean to “scale?” What does it look like? Here is a case told to us by an entrepreneur.
A medium-sized, family-owned livestock company in the provinces discovered it could earn more by offering cut-up meat rather than whole livestock. The challenge was that some parts had lower demand, while others were in high demand. Many customers wanted pork chops and pata front, while pata back and the jowls were harder to sell. Slaughtering an animal to produce only two pata fronts and a limited number of chops made little sense. So the owner turned to digital technology to find a solution and scale up the business.
He enlisted a newly founded consultancy led by a software engineer. The consultant proposed a system that would track which customers ordered what, how often and in which locations. The data would help the farmer-trader optimize inventory and determine whether it would be better to expand sourcing to neighboring farms. The system could solve the problem – but it would cost millions to set up, and it would require employees to take on the data-gathering work. The deal fell through, and both companies walked away empty-handed. It’s not a happy success-story ending, but it offers important lessons.
The entrepreneur who told us the story is the solutions provider. He previously worked as a software engineer at one of the region’s biggest delivery apps, where his job was to sift through large volumes of data and identify ways to make the service more useful and profitable. After retiring, he decided to take his knowledge and skills and strike out on his own. One of his earliest prospects was the livestock company.
“My mistake was thinking that the clients who need my services would have the same resources and mindset as my former employer,” he said. “It never occurred to me that I should scale down – to meet them at a level that they were comfortable with. I assumed that lowering my standards was the same as lowering the quality.”
Here we have two MSMEs with different barriers to scaling, each approaching the business differently. In an ideal world, there would have been a meeting of minds. If things had worked out, this would have been a strong example of how digital technology can help an MSME scale – and how that scaling can contribute to food security. Sadly, while both entrepreneurs wanted growth, they could have benefited from a more structured approach to upscaling, perhaps even mentoring.
Starting a business is easier than scaling it up. That is common knowledge, yet many MSMEs learn this lesson the hard way – and for medium-sized companies, it can be even harder. Micro and small firms may lack the resources to scale, but they are typically more nimble than larger companies. Mid-sized companies often suffer from inadequate resources and may develop a less agile mindset: success at a small scale can lead to systems – sometimes patchwork workarounds – that work on that level. Letting go of older ways can feel risky. And while being resourceful to fill gaps isn’t inherently wrong, workarounds are often too limited to sustain growth. On top of this, scaling usually requires substantially more capital and personnel – often more than entrepreneurs initially expect.
So why is scaling important? On a broader level, a steady flow of MSMEs moving from micro to small, small to medium and medium to large continuously refreshes the business landscape. It spreads opportunity and also challenges larger companies to keep moving, learning and innovating.
We often say MSMEs are the backbone of our economies. Yet they are often the least able to access markets, financing and the technology and expertise they need. Medium-sized companies, in particular, need greater access to these. If we want prosperity for all, we must put in place the essentials that will enable them to scale.
I recently spoke at a forum where it was made clear that capital is willing to be mobilized to help MSMEs. Everyone understands the importance of doing so. But as the case of the livestock farmer-trader and the software upstart illustrate, capital is only one part of the equation. Both entrepreneurs needed mentoring to fully deliver on what they could do for each other. The farmer needed to understand that scaling is a leap of faith. The solutions provider needed to better understand the market and meet it where it is.
Growth may be messy and difficult – but that doesn’t mean we should stop pursuing it. Many entrepreneurs begin with fresh ideas and boundless energy, only to be stalled and discouraged when the path to growth becomes full of obstacles. Know that other entrepreneurs have faced these challenges before – and many have managed to overcome them. Go Negosyo’s program with the Department of Trade and Industry – the KMME – has helped many MSMEs navigate that awkward stage. Hundreds of them have stories of both failure and success. And among them are MSMEs that were past winners of the ASEAN-BAC’s ASEAN Business Awards – proof that scaling is possible even on a regional level.
MSMEs bring the ideas and dynamism; government responds with the right policies; financial institutions develop the right instruments. We need all three.