Electro-technical industry firms

Case I2A: successful, non-threatened

Present situation. The firm manufactured electric distribution centres for office and industrial buildings. Its customers were electricity contractors and industrial firms in Finland and in the St. Petersburg region in Russia. The firm manufactured and installed the products using materials delivered by suppliers. The firm’s strengths were high quality, the flexibility of a small firm, specializing in office and industrial buildings only, and striving to establish partnerships with customers. No electric distribution centres were manufactured for dwelling houses because the quality of the products was too high for such purposes and thus the firm could not compete in prices in that sector. Demand was dependent on the general development of the economy.

Life cycle. The firm was founded at the beginning of the 1990s by several founders.

They had been employees of a big multinational company which closed a local production unit during the general economic recession and so the employees had lost their jobs. The founders had extensive experience and know-how in the field. The business had been built up on the business relations established in the former employer’s service. The firm invested in R&D over the years. At the beginning, it had one product only but later as the result of active research and development, it expanded its range to three products. Also, each product was to some extent customer tailored. The firm’s cooperation partners were mainly the same as in the former firm but some new partners had also been selected on the basis of their ability to offer high quality. Customer need seemed to be constant. Moreover, the field was very conservative and changes happened slowly.

The founders had been selected according to their professional skills, i.e. the best person for each function was selected. At the time of the interview, they were in charge of these functions, and hence, each function was run by the person with the best know-how. In this way, each function had been developed as cost efficiently as possible. Otherwise, as in one-man firms, it would not have been possible to take care of each function as thoroughly as it was in the case of this firm. In addition to having

skillful personnel, the firm had been very unprejudiced towards product development.

Moreover, quality thinking had been extended beyond the requirements of the official quality systems and certificates.

The firm had clear goals and had grown in a controlled way, though more growth would have been possible. Actually, there had been no need for marketing because there had always been more work than the firm could handle. Long-term and confidential customer relations were maintained since the time of the previous firm.

Personal relationships played a major role in this development. Characteristic of the firm was the avoidance of big debts. At the time of the firm’s founding, the founders had put some money into the business, and later, investments had been financed by cash flow.

The main factors contributing to the firm’s success can be summarized as follows:

• the profitability of the business was known prior to start-up

• an entrepreneurial team with strong know-how, division of labour, and strong feeling of togetherness

• own innovative high quality products, and investment in research and development

• focusing on a narrow product segment

• existing customer base and good knowledge of customer needs and markets

• customer closeness, long-term cooperation, and partnerships with customers

• clear business goals and controlled growth

• cost minimizing and avoidance of big debts, good financial position

• flexibility

Case I2B: successful, threatened

Present situation. The firm manufactured electric distribution centres for machines.

Each product was designed for a certain machine and the firm produced repetitive series of products. Its customers were industrial firms in the field of machine manufacturing. The firm designed and assembled the products. Among its important cooperation partners were component and casing manufacturers. The firm was not just a passive subcontractor but pursued an active cooperation partnership with machine manufacturers. It designed the distribution centres together with the customer closely following the development of the machine. Some competitors required specific descriptions of the function of the product, but many customers did not have their ideas in a formal written form and some even did not have the ability to put them into such a form. The firm tried to ensure that the threshold for customers to approach the firm was as low as possible. Another strength of the firm was quality, which was understood in a wide sense, e.g. keeping to agreed timetables, which was not typical of the firms in the field. Demand for the firm’s products was dependent on the economic fluctuations i n the metal industry.

Life cycle. The family firm was founded in the late 1980s by several people who were relatives. Each of them had different strengths which were important in the business.

The entrepreneur’s initial aim had been to employ himself and some relatives. His brother’s employer had had difficulties obtaining distribution centres in the market.

The idea of founding their own firm had developed since the brothers produced some distribution centres for the firm. They strongly believed that other manufacturers might also be interested in such products. The customers were selected randomly: often the entrepreneurs had just seen a distribution centre as a part of some machine, so they contacted and discussed with the machine manufacturer, and the discussion led to a deal. The firm had invested especially in the personnel’s know-how. Cooperation partners were sought on the basis of need, with price, quality, reliability and flexibility being important selection criteria. It was thought that customer need would be constant since no alternative products or solutions were anticipated.

At the time of founding, the firm was a new firm in highly saturated markets.

Some years later, the firm faced the general economic recession. The firm would have needed more customers but it was extremely difficult to find new customers since potential customers were struggling for their own survival in an environment characterized by rapidly decreasing demand. Naturally, these firms had no interest in discussing changing the supplier with a young novice small firm, as there would be no significant financial benefits for these firms, and changing the supplier would not have solved their real problems.

The firm’s major problem was too low a production volume to cover the fixed costs, though the profit margin in a single product level was good. The firm had to make a strategic choice whether to expand into new market areas or to widen the product range. Since production management would have become technologically much more complicated in the case of new products, the firm decided to expand its geographic market areas. This decision to focus on a narrow product range turned out to be successful, because it improved the firm’s efficiency.

With a cautious steps, the firm started exporting in the fourth year of operation. Soon, it received big orders from abroad and so production volumes increased rapidly. Consequently, the growing volumes of purchases led to lower purchase prices of components. Naturally, suppliers were highly interested in a customer with growing volume of purchases, and particularly in the prevailing unfavourable general macro economic conditions. The firm’s competitiveness in the market improved, and it gained new important customers also in the domestic market.

Foreign customers started to require products with a new technology, and this speeded up the firm’s product development. The firm adopted new technology, and this created a new competitive advantage. As a consequence, the firm had more new important customers. Moreover, due to its bigger size, the firm was considered a credible

cooperation partner. Growing production volumes also promoted international marketing. At the end of the 1990s, the firm built new premises financed by cash flow.

At the very beginning, there was no thorough planning in the firm. Stochastic factors played a certain role in the firm’s success. For instance, according to the entrepreneur, new geographic market areas and several important customers were selected by chance.

The main factors causing the crisis can be summarized as follows:

• a new firm in saturated markets

• lack of strategic planning at the beginning

• inadequate demand due to the economic recession and stiff competition

• inadequate incomes to cover the fixed costs due to low production volumes

• inability to find new customers

The main factors affecting the recovery can be summarized as follows:

• expansion into new geographic market areas by starting exporting

• a narrow product range enabling efficient production

• big orders from abroad leading to growing production volumes

• product development and application of new technology

Case I2C: failed

The situation before failure. The firm designed, produced and installed electric cable conduits and their supporting systems. Most customers were big industrial firms in Finland. They were considered to be more reliable payers than small firms. The firm’s strengths were skilled personnel and work of high quality. The firm stood out from competitors by its pricing method, which was unique in the field. The firm was dependent on the economic trends of the manufacturing industry.

Life cycle. The firm was founded in the mid-1980s by one person. He was a former employee of a company which ceased business in this area and focused on its core business. The founder had extensive experience and know-how in the field. He started up the firm on the basis of business relations with former customers who encouraged him to set up a firm. Product development was continuous, leading to the launching of new components and new fixing methods. The major cooperation partners were customers with whom the firm also had maintenance contracts. It was thought that the customer need would be constant, since no other technical solutions were in sight.

In the late 1980s, the firm sought bigger premises but found none, so new premises were built using a big loan in foreign currency. However, during the repayment period of seven years, two unexpected devaluations of the Finnish mark occurred, leading to a considerable increase in the amount of the principal and the interest. At the same time, demand in the field dropped due to the economic recession at the beginning of the 1990s. Also, values of securities collapsed.

The size of the customer markets had been quite limited, and the field had been highly sensitive to changes in general economic development. Moreover, four new firms had entered the field and they had succeeded in taking contracts from under the firm’s very nose. The firm’s turnover rose during the first five years but then, in the early 1990s, collapsed suddenly by more than 80%. The four new competitors did not pay their taxes, and so could sell at a 20% cheaper price. Later, the legislation was changed so that firms had to present in advance certificates showing that they have paid their taxes, but unfortunately this was too late for the firm. It was not able to fulfil its financial commitments.

At the same time, during the bank crisis in Finland at the beginning of the 1990s, the firm’s bank failed. No new financing could be found as banks were reluctant to finance such a firm. Though prospects in the field were good, the lack of securities and a modest level of turnover in previous years did not convince financiers.

The main factors affecting the firm’s failure can be summarized as follows:

• a big loan in foreign currency and two unexpected devaluations of the Finnish mark

• the collapse in values of securities

• the collapse in demand in the field due to the general economic recession

• the four new competitors’ tax evasion, and unhealthy competition

• a standard product and dependency on a small number of potential customers

• focusing on a very narrow customer segment sensitive to fluctuations in the economy

• the failure of the bank

• unavailability of new financing

A comparison of the three i nnovators with continuous growth in the electro-technical industry

The successful firms were founded by several founders, whereas the failed firm was founded by one founder. In the non-threatened and the failed case, the entrepreneur had previously worked for a firm operating in the same business which had then ceased doing so. The firms were built up on previous business relations. The successful firms were led by an entrepreneurial team, whereas the failed firm was led by one man. In the successful firms, there was an efficient division of labour between the members of an entrepreneurial team.

All firms operated in a narrow product segment, and the products were customer-tailored. The successful firms had products that were assembled in production plants and then delivered to customers, but the products of the failed firm were assembled at the customer’s premises. The market area and the number of potential customers were much more limited in the case of the failed firm than in the

other cases. The failed firm operated in domestic markets only. The failed firm had no subcontractors, whereas the successful firms used subcontractors.

The failed firm had many debts, whereas the successful firms financed their investments by savings and cash flow. The failed firm had not taken into account the possibility of external shocks, and was highly dependent on external factors. In contrast, the successful firms’ strategic behavior was cautious and risk-controlled.

All firms operated in an environment characterized by stiff competition but the failed firm had to face unhealthy competition due to some competitors’ illegal practices. Also, the demand environment of the failed firm was highly sensitive to changes in economic trends. Moreover, the currency devaluations and the bank’s failure had a strong impact due to the large amount of borrowed capital. A detailed comparison of the cases is presented in Appendix 8.