Report Highlights Public/Private Sector Strategies to Close the Gap between Minority Business and the Broader Business Community
Impressive gains made by minority-owned businesses over the past few years stand to be squandered unless new growth strategies are adapted to compete in a rapidly changing business market, according to a study by The Boston Consulting Group (BCG).
The report, The New Agenda for Minority Business Development, sponsored by the Ewing Marion Kauffman Foundation, Kansas City, Missouri, argues that minority businesses are not maintaining pace with the larger U.S. business community and that a change of "mindset" is required to ensure sustained growth. The study further states that it is necessary for minority businesses to work with corporations as well as government agencies to better adjust and take advantage of the changing global marketplace.
"Encouraging minorities to start new businesses will still be a priority. But a second and equally important objective is to ensure that existing minority businesses are taking the necessary steps to achieve substantive growth," said Carl J. Schramm, President and CEO of the Kauffman Foundation. "This issue has never been more relevant or important than it is today."
Minorities currently represent approximately 28 percent of the U.S. population and own 15 percent of all U.S. businesses. Though the ownership figures may seem low at first glance, they represent significant progress. Between 1982 and 1997, for example, the number of minority-owned firms increased at a rate of 8.5 percent per year - three times that of U.S. business overall, according to the Census Bureau. Revenues from minority-owned firms increased at an annual rate of 10 percent per year.
But what was considered "business as usual" just a few years ago no longer exists. The same global dynamics that are changing the face of business in general - from the outsourcing of manufacturing and services to new trends in "supply-chain" management - make change necessary for minority businesses. The most important change is size.
"The pace required to compete in today's global economy is furious and minority-owned firms must improve their capabilities in many areas to become and remain competitive," said James Lowry, a senior vice president of BCG and the report's author. "It's critical we understand that significant growth - in size and revenue - must remain a primary goal for the future. Past models are no longer sufficient to ensure an expanded role for minority entrepreneurs in the U.S. free enterprise system. A collaborative effort between corporations, government, foundations, major universities - and minority entrepreneurs - is required to ensure these businesses grow beyond current performance plateaus."
The study points out that while there is an increase in the number of large minority-owned firms targeting specific high-growth niches, such as finance and real estate, the numbers are still small, and these firms are struggling to provide high-quality goods and services for major corporate clients, and cope with global supply chain management pressures.
Key to closing the gap, and positioning minority businesses for dramatic growth, say the researchers, is the urgent need for minority-owned businesses - working with their supporters - to pursue more opportunities in growth industries and to employ more innovative growth strategies such as strategic alliances and partnerships, mergers & acquisitions, increased use of capital markets and quicker response to trends in supply chain management.
The report highlights numerous tactics for improving the state of minority business development:
- Diversify or expand into growth industries. Minority-owned businesses account for a larger percentage of low-growth businesses, such as personal services, food stores and restaurants, than the general business community. These low-growth business sectors represent nearly 30 percent of all employment in minority-owned firms vs. 17 percent in non-minority firms. Further, BCG estimates there are only 20-25 minority-owned businesses with revenues exceeding $500 million. Minority entrepreneurs need to focus on opportunities in high-growth industries such as information technology and pharmaceuticals.
- Grow beyond the "sole proprietor" business ownership model. A disproportionate number of minority firms operate as sole proprietorships. For example, 82 percent of minority-owned firms are sole proprietorships versus 71 percent for non-minority firms. To move to the next level, these firms must shift from a "100 percent CEO" model to a model incorporating strong managers who will provide the capabilities necessary for sufficient growth.
- Focus on better utilizing value-added products and services. Revenues per employee in many minority-owned firms are substantially lower than comparable majority-owned firms. In the manufacturing sector, majority-owned firms generate 1.5 times more revenue per employee than do minority-owned firms, whose products also tend to have a lower value added component - and therefore lower margins. This gap exists, in part, due to majority-owned businesses more effective use of technology, computer-aided design (CAD) and other automation to enhance employee productivity.
- Expand the use of mergers, acquisitions and strategic partnerships. Because many minority businesses are smaller with fewer resources, they often have made limited use of alliances and partnerships with majority companies and among themselves. Minority-owned firms that have formed these alliances frequently have improved performance and experienced growth.
- Utilize the capabilities of the financial markets. Historically, minority-owned businesses have avoided pursuing private and equity financing, often because of limited options. Financiers now understand that funding minority-owned businesses can offer lucrative investment opportunities, allowing minority-owned firms to take advantage of new opportunities to access the financing necessary to grow their businesses.
- Respond to major trends in supply chain management. There are clear opportunities for minority-owned firms to take advantage of alliances and other relationships with major corporations to leverage the power of more sophisticated supply chain management strategies needed to compete in today's global marketplace.
A new agenda for growing minority businesses requires support from multiple players including major corporations, government at all levels, foundations, academic institutions and most importantly, the minority businesses themselves. The report concludes that these combined efforts are now needed to capture the full potential of America's fastest growing population demographic. The creation of a new cadre of business and civic leaders and entrepreneurial partners will foster increased economic development (particularly in inner cities) and enable minority-businesses to fully compete in the global marketplace.
The report defines minority-owned business as a business that is at least 51 percent owned and controlled by one or more members of the following minority groups:
- African Americans
- Hispanic Americans (Mexican, Cuban, South American, Puerto Rican or other Hispanic or Latino Americans)
- Asian and Pacific Islander Americans (Asian Indian, Chinese, Filipino, Japanese, Korean, Vietnamese or other Asian Americans)
- Native Americans and Alaskan Native Americans