By Kulwant Singh and Ishtiaq Pasha Mahmood

THE government and many business consultants encourage local businesses to look beyond Singapore to expand into larger overseas markets. This call to go overseas has been taken up by many firms. HSBC's recent survey on small and medium-sized enterprises reported that 44 per cent intend to diversity their products or services, and 37 per cent, their markets.

Our experience is that many managers in Singapore view diversification as a solution to a broad range of internal and market problems, and as one of the best means of achieving growth. In our view, diversification is none of these. Instead, diversification is one of the most difficult and unrewarding strategies that small-and medium enterprises can adopt.

The reasons are simple. SMEs, by definition, lack size, resources and deep management abilities. They often face major difficulty setting up the value chain necessary to establish their product or service in the market, to deliver promised value to customers. These firms usually lack the resources, competencies and management to implement the strategies that will enable their operations to support their aspirations. Under these circumstances, and until they have grown large and profitable, most SMEs focus on relatively narrow ranges of products and services.

Consider then, the challenges that SMEs have to overcome, in order to succeed through diversification. They would have to satisfy customers in more than one business by developing different products and services, for which they will have to develop and maintain a broad set of competencies. This challenge will be made worse by the need to simultaneously exceed the value offered by multiple competitors across these businesses, and while adapting to vastly different environments. In effect, SMEs would have to develop and implement more than one strategy, using multiple sets of competencies to satisfy multiple sets of customers ahead of multiple sets of competitors, across multiple environments. This is a prescription for failure, and explains why many SMEs which diversify fail.

What should SMEs do? The obvious solution is that SMEs should try to succeed, rather than diversify. They should marshal their resources to develop competencies that will allow them to excel in satisfying customers through a focused set of products and services that offer greater value than competitors can. SMEs should focus on what they do best and excel at that business.

What of the challenge of growth? A common cry is that of mature and slow growing markets, or of small markets in Singapore. Diversification is again the solution. Expanding to China, which is geographic diversification, is routinely suggested, to be point of approaching a panacea. This underlying logic can be summarized as follows: 'Even one per cent of most markets in China is bigger than Singapore; surely it is possible for a reasonably competent firm to capture a one per cent market share.'

It seems highly unlikely that SMEs that are unable to succeed in Singapore can succeed in a market as competitive as China. The attractiveness of China's rapid growth is more than offset by the very high levels of competition within the country - there are hundreds and thousands of firms competing for the same one per cent market share in most markets. Markets with limited competition are even more difficult, because they are accessible only to privileged firms. Singapore firms have had a history of not succeeding in China, because of competition and the challenges of operating in a vastly different environment. The idea that SMEs can do so, while also diversifying their products and services, seems to be highly implausible.

What should SMEs do? We suggest that each SMEs should focus its business around its competencies, and strive for peaks of excellence in that business. Excellent performance is more likely to lead to growth for SMEs that diversification, which is based on the premise that expansion will bring excellence.

And what if Singapore is too small? For most markets, Singapore is only too small for firms that have achieved great success, to the point of capturing very large shares of their markets. For these firms, success enables local growth, to the point where they can consider expanding to another geographic region. For most of these SMEs, our recommendation is that they go to a market that is geographically close to Singapore and that offers a similar business environment. In most cases, this market is Malaysia, which despite obvious differences, approximates Singapore's institutional environment more than any other country. And surely Malaysia cannot be too small for most SMEs?

So what of the recommendation we referred to above, for Singapore firms to expand abroad? A critical part of the original recommendation appears to have been lost: firms were encouraged to venture abroad, if they could spare the resources. This seems to be especially relevant for SMEs.

The writers are, respectively, deputy dean and associate professor at NUS Business School.

This article was first published in The Business Times.