Characteristics of the SMEs

Next, successful SMEs were analyzed in terms of their industry sector, location, scope of operation, age and founding, ownership, management, goals, and life cycle stage.

Industry sector. More than four fifths of the SMEs (83%) were manufacturing firms, with the rest (17%) being service firms. The sectoral distribution of the SMEs studied is presented in Table 4.1. Among manufacturing SMEs, the biggest segment in terms of the number of firms who responded were SMEs in the metal industry, including SMEs in the production of base metals and metal products, machines and devices, electro-technical products, and vehicles. Further, the second biggest segment consisted of SMEs in mechanical woodworking and furniture production. The next biggest segments of manufacturing firms were SMEs in the food industry and in the textile, clothing, leather, and shoe industry. In terms of the number of personnel, these four segments were the biggest manufacturing industries in Northern Savo (Pasanen 1997).

The sectoral distribution of SMEs indicates that the SMEs studied represent certain relative proportions of all successful firms in their industry sector in the region.

It can be concluded that compared with the sectoral distribution of all SMEs in the region, SMEs in the metal industry were slightly overrepresented in this study, whereas SMEs in the tourism sector were slightly underrepresented. One fifth of the

respondents (21%) in manufacturing industries were classified as “top firms” in the region by Kera Ltd. No such classification has been made for firms in the service sector.

Location. The SMEs were located in 21 out of 24 municipalities of Northern Savo. The locational distributions of firms studied and all firms in the region (Statistics Finland 1993a: 40) in each of the five localities in Northern Savo were somewhat identical. Firms in the Kuopio region were slightly overrepresented in the sample, which can be explained by the special characteristics of the firms, e.g. the high proportion of growth firms in the sample. The locational decisions of firms in the business service sector often favour bigger centres of population, because such firms are usually more dependent on local demand. In the service sector, 83% of the firms studied were located in the Kuopio region, whereas in the sector of manufacturing, 47% of the firms studied were located in this region.

Scope of operation. Two thirds of the SMEs (68%) had one establishment.

SMEs with two or three establishments constituted 17 %, and those with more than three establishments 15% of all SMEs. The average number of full-time personnel was 41 (median 13 employees, and mode 7 employees). This indicates the skewness of the distribution of the SMEs by their size, i.e. that there were more smaller-sized SMEs than larger-sized ones in the sample. Half of the firms employed 7-33 persons. More than four fifths were small firms, i.e. firms with fewer than 50 employees (Figure 5.1).

4.2%

14.0%

20.3%

23.1%

28.7%

9.8%

more than 249 employees 50 - 249 employees

20 – 49 employees

10 - 19 employees 5 - 9 employees fewer than 5 employees

Figure 5.1 Size of the SMEs

Six firms had grown beyond the definition of an SME, i.e. they had more than 249 employees at the time of data collection. On the other hand, one tenth employed fewer than five employees; almost all these firms had four employees. However, the six firms with more than 249 employees and the firms with fewer than five employees were included in the analyses since they had fullfilled the size criteria in 1995-1996.

One third of the SMEs employed part-time employees, with two thirds of these having fewer than five part-time employees.

Firm age and founding. The firms were 20 years old on average, with a median of 14 years. Firm ages ranged from 3 to 120 years. According to their age, more than 90% of the firms can be regarded as established SMEs, i.e. more than four years old, rather than new ventures. However, one third of these firms were so-called

‘adolescent firms’, i.e. 5 to 12 years old (see Biggadike 1979; Bantel 1998; Smallbone et al. 1993b). There were more younger firms than older ones (Figure 5.2), and almost one tenth were younger than five years old. It is worth noting that industrial traditions are younger and therefore weaker in Northern Savo than in many other parts of Finland (Pasanen 1997).

21.7%

31.5%

37.8%

9.1%

more than 29 years

13 - 29 years

5 - 12 years less than 5 years

Figure 5.2 Age of the SMEs

Firm longevity can be regarded as a performance measure, and the lower probability of survival of new firms compared with older ones is known as the ‘liability of newness’

(e.g. Stinchcombe 1965; Aldrich & Auster 1986: 194). On the other hand, each firm

has a limited life cycle, and the probability of going out of business increases with time. There was a positive moderate correlation between firm age and size (r=.44;

p<.01). Also, the growth rate of younger firms was slightly faster than that of older ones.

Two thirds of the SMEs were founded by more than one founder. Among these multi-founder firms, almost half (45%) were founded by two founders. In three quarters of the SMEs, at least one founder was still involved in the firm’s present operations. In 61% of the firms, the founder(s) came from the local region. In other cases, the founder(s) came from outside the region (19%), or some of the firm’s owners came from the region and some from outside it (18%). There was a moderate positive correlation between firm age and the number of founders (r=.30; p<.01), i.e.

older firms were founded by more founders than younger firms. On the one hand, this may refer to the importance of an entrepreneurial founding team for the firm’s longevity. On the other hand, to have the necessary start-up funding, the importance of an entrepreneurial team in founding might have been critical in the conditions of undeveloped financial markets.

Ownership, management, and goals and objectives. At the time of the study, more than two thirds of the SMEs (70 %) had at least two owners (Figure 5.3). Most frequently, the firms had 2-5 major owners (31%). Almost as frequently (28%) they had one owner only, and 26% of the firms had one major owner owning more than 50% of the firm. Among SMEs with several owners, 79% were led by an entrepreneurial team (team entrepreneurship), i.e. SMEs led continually and with a significant input by more than one owner.

Almost half of the SMEs (43%) were family firms. The definition of a family firm was based on the respondents’ own evaluation, i.e. they were asked whether or not they regarded the firm as a family firm at the moment of investigation. Most of them (63%) had not yet gone through a succession process, during which the firm is transferred from one generation to the next. Among these, succession by family members was seen to be possible in two thirds of the family firms. In one fifth of the family firms (18%), the transition had been made, and for one out of eight family firms (13%) the transition was just being made while the data were being collection. There was no correlation between family entrepreneurship and team entrepreneurship.

Family firms were slightly more frequently founded by one founder than other firms (χ²=3.624; df=1; p=.057).

Most SMEs (57%) had consciously determined specific goals and objectives.

In 40% of firms, the goals and objectives were not clearly specified, but they were seen to guide the decision making in the firm. Only a few firms reported that they had no goals and objectives. Growth was a primary goal for two thirds of the firms, whereas it was not for one third. Non-family firms were more frequently

growth-seeking than family firms (χ²=10.743; df=1; p=.001). Moreover, growth-seeking firms had more specific goals and objectives than other firms (χ²=17.196; df=1; p<.0005).

3.5%

7.0%

30.8%

4.9% 25.9%

28.0%

other 6+ owners

2-5 principal owners

1 principal owner (<50%)

1 principal owner (>50%) 1 owner

Figure 5.3 Ownership of the SMEs

Life cycle stage. The life cycle of an SME was divided into five stages: inception, growth, expansion, maturity, and decline. At the time of data collection, 6% of the SMEs were in the inception stage (Figure 5.4). Their products were new and required improvement, customer segments were vague, and the firms were searching for the most promising segments. More than two thirds of the SMEs (71%) were in the stages of growth or expansion. Typical of the growth stage was that products had been accepted by the customers, and the operations were modified by the customer segments. Also, the operations were efficient enough to increase the firm’s market share. In the stage of expansion, the firms’ products had occupied their own territory in the market, and the operations were well established. However, the boundaries of the firm’s territory were established, and due to increasing competition new market acquisition is a tough job. The mature stage was typical of one fifth (22%) of the SMEs. Due to the stiff competition in the market, these firms modified and improved their products and operations, and the firms were looking for new customer segments.

Few SMEs (1%) were in the stage of decline. Their profitability was under threat, since their competitors had launched products which outdid the firm’s products, and these firms were having to revise their course.

5 decline 1.4%

4 mature 22.4%

3 expansion 37.8%

2 growth 32.9%

1 inception 5.6%

Figure 5.4 Life cycle stages of the SMEs (adapted from Haahti 1989: 252)