Presentation at the ERC State of Small business Britain conference 2023 at the Shard , London by Tera Allas

1. CONFIDENTIAL AND PROPRIETARY
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Tera Allas CBE, Director of Research and Economics,
McKinsey & Company
ERC State of Small Business Britain Conferenc
21 June 2023
Future-proofing
SMEs to succeed in
coming transitions

2. McKinsey & Company 2
Today’s discussion
The huge transitions ahead create both challenges and
opportunities for SMEs
Capturing the opportunities is not easy and requires new
capabilities
We can help by understanding and supporting SME leaders in the
“messy reality” that they face

3. McKinsey & Company 3
Today’s SME leaders are
having to deal with
unprecedented
complexity and
uncertainty, with major
global transitions
underway
Geopolitics:
supply chain
reconfiguration
Technology:
life- and
industry-
changing
advances
Future of work:
complex “war for
talent”
Climate
change:
physical
hazards, energy
and land
systems redrawn
Ageing
population:
shift in consumer
and
societal
patterns
Rise of Asia:
Different
consumption
and competition
Macro-economic
volatility and
uncertainty
Broadly stable, continuing forces Forces changing in shape and impacts Near-term perturbations

4. McKinsey & Company 4
The UK is in a great position to benefit from fast-growing trade in
services, much of which can be delivered digitally across borders
Share of global services trade, 2022
%
12.7
6.9
6.0
5.6
5.0
4.6
4.4
China
United
States
Germany
United
Kingdom
India
France
Ireland
2.4
3.9
7.8
5.3 5.2
3.7
3.2
1.7
Transport
Tourism1
Total
goods
Total
services
Finance
and
insurance
Telecom
and IT
Business
services
IP charges
Global compound annual growth rate of gross exports, 2007–17
%
Source: International Monetary Fund; Organisation for Economic Co-operation and Development; United Nations Conference on Trade and
Development; World Trade Organization; McKinsey Global Institute analysis

5. McKinsey & Company 5
The net zero capex revolution creates opportunities for
UK-based companies in a wide range of different sectors
7
3
3.0
1.0
0
3.5
1 27
5
4
2 6 36
8 35
9 21
10
4.0
11 12
1.5
13
0
24
14 15 16 17
4.5
18 19 20 22 23
2.0
25 30
26 28 29 31
2.5
32 33 34
0.5
Financial, insurance activities
Mining, extraction of fuels
Information, communication
Proportion of final demand met from imported capital goods and services, %2
Manufacturing
Transport, storage
Global market share of UK-based companies as suppliers of capital goods and services, %1
Agriculture, forestry, fishing
Retail, wholesale
Construction
Real estate activities
Professional and admin services
Energy, water, waste utilities
1. UK’s share of the value added content in global gross fixed capital formation by source sector, 2015; 2. Global average share of foreign value added in final demand by source sector, 2015; 3. Based on total value added content in global
gross fixed capital formation by source sector in 2015 and global growth rate of gross fixed capital formation from 2015 to 2020 in current US dollars, converted to pounds using 2020 market exchange rate; excludes public sector and sectors
smaller than £100 billion; 4. Based on additional and reallocated capex in net zero pathway from 2021 to 2030 using UK’s current market share
> £10bn
£1-5 bn
Up to £1bn
£5-10 bn
Estimated UK business
opportunity, 2021-20304
Estimated global
capex by source
sector, 20203
£1,000 billion
Source: OECD Trade in Value Added database; World Bank; Office for National Statistics; Network for Greening the Financial System (NGFS); McKinsey analysis
Average =
2.5%

6. McKinsey & Company 6
Automation, powered by AI, could provide a significant
productivity boost across all sectors
1. Percent of hours worked that could be automated by adapting currently demonstrated technology; based on analysis of 2,100 tasks across 850 US occupations,
translation into UK occupations, and the distribution of UK occupations across industrial sectors (using census 2021 data for England and Wales).
Estimated technical automation potential with and without generative AI, by sector in the UK, 2023
% of hours worked1
Average potential
60%
Adoption by 2040,
late vs. early scenarios
15% vs. 90%
Productivity growth
in mid-case scenario
1.6% p.a
Source: The economic potential of generative AI, McKinsey, June 2023; ONS; McKinsey analysis
35
65
Manufacturing
Information, communication
10
Mining, quarrying
Financial services
Agriculture
Transport, storage
Energy utilities
Professional services
Retail, wholesale, hospitality
61
62
Recreation, personal services
56
58
Construction
47
Education
65
63
62
61
61
59
57
57
23
16
49
17
23
48
19
44
39
15
18
43
24
37
16
45
19
Water, waste
47
11
46
26
30
Health, social care
40
37 16
Admin services 68
50 18
53

7. McKinsey & Company 7
Generative AI has the potential for enormous productivity gains
within individual tasks – but economy-wide impacts are uncertain
Occupation level example
14%
improvement in customer service
workers’ productivity at a Fortune
500 company
Task level example
60%
improvement in coding task
productivity using ChatGPT
Economy level example
<1%
of jobs have a workload which
is 60%+ automatable by AI
Source: Experimental Evidence on the Productivity Effects of Generative Artificial Intelligence, MIT Working Paper, March 2023; Generative AI at Work, NBER
working paper, April 2023; Generative AI could raise global GDP by 7%, Goldman Sachs, 2023.

8. McKinsey & Company 8
Today’s discussion
The huge transitions ahead create both challenges and
opportunities for SMEs
Capturing the opportunities is not easy and requires new
capabilities
We can help by understanding and supporting SME leaders in the
“messy reality” that they face

9. McKinsey & Company 9
Large companies are significantly more likely to have adopted
digital technologies than small and medium sized firms
UK enterprises that have adopted digital technologies or practices by size category, 2018
%
Source: European Commission Digital Economy and Society Index (DESI)
Large
Medium
Small

10. McKinsey & Company 10
SMEs who decide against adopting technology cite multiple
barriers, from employee skills to lack of perceived business case
Source: Opinium/Be the Business SME survey, June 2020
1. You mentioned that you are not planning to implement any technology solutions in the near future. Why is that? Please, select up to 3 responses.
Barriers to increasing technology adoption among SMEs1
%, N = 1,001
35 34
25
21
19 17 16
12 12 12
19
52
19
36
11
20
7 7
12
8
It’s difficult to
find/research
the right
solution
Employees
not
savvy/open
enough
Difficult to
convince
our clients/
suppliers
to use it
We are
happy with
our current
process
It would be
disruptive to
our business
We don’t see
value the
technology
can bring
Data security
concerns
We don’t
have enough
funding
Technology
solutions are
too complex
Lack of
internal
capabilities to
acquire/
implement
1 in 5
do not see the value that
technology could bring
Among small and medium
sized businesses
Small/medium Micro

11. McKinsey & Company 11
Leadership and management practices make a big difference to
company performance as well as technology adoption
Source: Are Better Managed Firms More Innovative, Adaptable and Resilient?, Li, Mizen, Riley Schneebacher, 2023; McKinsey analysis.
-3
-2
-1
Worst decile management practices
5th decile management practices
Best decile management practices
Average change in turnover
%
UK businesses’ response to COVID-19, by management practice decile
8
20
26
Average change in working from home
%

12. McKinsey & Company 12
Leadership and management skills and
practices are a key unlock for businesses
Exports
Investment
Innovation
Talent
Efficiency
Leadership
and
management
Be the Business has found that
engaging with external advise is
effective, e.g., in the form of:
 Mentoring
 Advisory boards
 Peer learning
For example, businesses who seek
external advice report improved:
 Revenues
 Jobs growth
 Financial situation

13. McKinsey & Company 13
Today’s discussion
The huge transitions ahead create both challenges and
opportunities for SMEs
Capturing the opportunities is not easy and requires new
capabilities
We can help by understanding and supporting SME leaders in the
“messy reality” that they face

14. McKinsey & Company 14
Whatever the right supply for business support,
there is also a complex issue on the demand side
Example
Management Expectations Survey experience of offering business support
Number of businesses
Source: Who Wants to Improve their Management? Evidence from a failed experiment, Meng, Mizen, Riley, Schneebacher (2023); Be the Business
The worst managed
firms were:
 More likely to say they
had the right blend of
management skills
 More likely to say they
don’t face any barriers
to improvement
 Least likely to seek help
12,414
4,835
1,495
45
7,579
3,340
1,450
Responded
to survey
Drop-off Requested
feedback
Drop-off Visited
website
Drop-off Signed up for
mentoring
39% 12% 0.4%

15. McKinsey & Company 15
To help SMEs future-proof their businesses, we need to understand
them holistically and support them on their pain points
Key principles emerging for effective SME support
Holistic view
 Profits and growth
are important
motivators
 But, for many,
work/life balance,
employee
wellbeing,
resilience, and
sustainability are
also key
Personalisation
 Different segments
driven by different
ambitions and pain
points
 Competition, a new
growth phase, or
external shocks can
be key triggers for
change
Simple journeys
 Aspire to get as
close to “one click”
as possible
 SME leaders are
very busy, pulled in
many directions,
and often suffer
from cognitive
overload
Behaviour change
 In addition to
incentives, need
inspiring stories,
role models, and
new skills that are
applied and
practiced in real life
Human touch
 Mindset change
takes trust, two-
way interactions,
and relationship
continuity

16. McKinsey & Company 16