Life cycles

The above description is based on cross-sectional data, i.e. it describes the firms’

situation at the time of data collection. The study also took the time dimension into account, and the dynamics of firms, i.e. their life cycles, were studied. The investigation focused on the changes in the firms’ business base, turnover, management, ways of operating, environment, threats, and survival of the firms.

Changes in the business base. Four fifths of the SMEs (79%) had stayed close to their original business. On the other hand, in almost one fifth (17%) the business had changed significantly, and in a few SMEs (3%) the present business was completely different from the original one. Among these SMEs whose business had changed significantly or even completely, the change appeared as firm expansion within the same industry sector in almost all cases.

Periods of significant change in turnover. During their life cycle, almost half of the SMEs (46%) had faced periods of growth and recession equivalent to more than 20% of their annual turnover. In addition to these firms, another 37% had faced only such periods of growth. If the firm’s life cycle encompassed several periods of

significant change, there were likely to be periods of significant recession among them.

Of the factors affecting significant firm growth, two thirds (66%) were firm-internal factors (Table 5.4). It should be noted that the categories presented here were created on the basis of a qualitative classification, i.e. the respondents had no structured response alternatives. The major firm-internal growth factors related to (1) the expansion of markets and investments in marketing; (2) investments in production;

(3) research and development, and innovations; (4) acquisitions; and (5) specialization.

Table 5.4 The growth factors of the SMEs by the origin of growth

Source of growth %^a Growth factors %^a

Firm-internal 66% • Expansion of markets and investments in marketing 31%

• Investments in production 14%

• Research and development, and innovations 7%

• Acquisitions 7%

• Specialization 5%

• Other firm-internal growth factors 2%

Interfirm 4% • Cooperation arrangements 4%

Firm-external 30% • Strong growth in demand 15%

• Big single order 4%

• New customers or groups of customers 4%

• Other firm-external growth factors 7%

a. of all growth factors

The first category consisted of starting and expanding export, investments in marketing, expanding product range, and founding a new establishment and expanding an old one. Investments in production consisted of investments in production equipment, production facilities, and the development of production systems.

Acquisitions also consisted of the purchases of production units. They were not included in the first category because they were related to the purchase of an extant business, not to the creation of a new business. Specialization consisted of focusing on a narrow market segment and outsourcing the peripheral businesses, i.e. other than the core business of the firm. In the case of outsourcing, specialization is often related to concluding long-term cooperation agreements. The category ‘other firm-internal growth factors’ encompassed factors such as financial investments made by the owners, satisfaction and firm excellence perceived by customers, and entrepreneur’s willingness to grow.

A merger or an acquisition was identified in the history of one fifth of the SMEs. In more than half of these cases, the purchased or mergered firm was an actual or a potential competitor of the firm studied, located at the same level in the supply

chain of the same or substitute products as the firm studied. In one quarter of these cases, a merger or an acquisition led to vertical integration of the firms. In 16%, the purchased or mergered firm operated at a lower level in the supply chain, i.e. it had been a customer of the firm studied. In 7% of the cases, the purchased or mergered firm operated at an upper level in the supply chain, i.e. it had been a supplier for the firm studied. Only in one case was there no business connection between the firm studied and the purchased or mergered firm.

Of the factors affecting significant firm growth, 30% were firm-external factors. The most frequently mentioned firm-external growth factor was strong growth in demand, which was a growth factor for 15% of the SMEs studied. The next most frequent firm-external growth factors were big single random orders, and the appearance of new customers or customer groups. In these cases, new customers or customer groups had appeared without any particular marketing effort by the firm.

Other external growth factors were general economic growth in the market area, structural changes in the industry sector, mitigation of legislative restrictions, and luck.

Interfirm cooperation agreements were distinguished from firminternal and -external factors because the initiativeness of the parties was not known, and therefore the origin of cooperation agreements could not be determined. However, interfirm cooperation may be considerably more important for firm growth than the figures show, since it can be related to other growth factors such as specialization and exports.

Apart from growth factors, factors affecting a significant fall in turnover were also identified. Among the SMEs which had faced a significant fall in their turnover, more than four fifths claimed that it was based on firm-external, i.e. environmental, factors (Figure 5.5). Almost all of these factors were related to the general economic recession. Other external factors affecting a significant fall in turnover were related to surprises abroad, stiff competition in the field, and difficulties related to a big customer. Firm-internal factors affecting a significant fall in turnover were mainly single factors, i.e. each factor was typical of only one firm. Many of these were related to problems in the firm’s management. In other cases, the fall in turnover was a consequence of a variety of causes, and was related to some specific situations and decisions such as divestment of a part of the business, ownership arrangements, or strong investments in product development at the expense of the volume of the firm’s other operations.

1 General economic recession 2 Problems related to a big customer 3 Surprises abroad

4 Overcapacity in the field and stiff competition

Figure 5.5 Factors affecting the fall in turnover of the SMEs

Threat and survival. During their life cycle, half of the SMEs (49%) had faced at least once a situation where the firm’s existence, i.e. survival, had been threatened, while almost half (48%) reported that their existence had never been threatened. The threat was associated with significant falls in turnover; more than two thirds of the threatened firms had experienced significant falls in turnover, whereas two thirds of non-threatened firms had not, and in fact had faced only significant increases in turnover (χ²=18.386; df=1; p<.0005).

Most threats were related to firm-external factors than internal ones. On the basis of the responses to unstructured open-ended questions, the origins of the causes of threat could be located mainly in the firm’s environment. The most common external causes of threat were: (1) economic recession and collapse of market demand;

(2) loans in foreign currency during devaluations, or high interest rates; (3) a big client suffering economic troubles or bankruptcy and credit losses; and (4) stiff competition and excess capacity in the field. The most common firm-internal causes of threat were:

(1) managerial mistakes and wrong decisions; (2) inadequate financing; (3) low profitability; and (4) big investments.

Two common ways of adaptation was identified: (1) firm development with additional inputs; or (2) retrenchment. Two thirds of the SMEs had followed one of these paths, the same number of firms following each path. The most common developmental ways of adaptation were (1) financial arrangements and additional financial inputs by the owners; (2) additional efforts in marketing and export activities;

and (3) greater personal input by the entrepreneur into firm development. The most common ways of adaptation through retrenchment activities consisted of (1) minimizing all costs possible; (2) reducing the number of personnel; and (3) cutting down the firm’s scale of operation.

Changes in principles and practices of management and in ways of doing business. In four fifths of the SMEs (78%), the principles and practices of management had changed to at least some degree during the firm’s life cycle. In one fifth of the SMEs, they had changed significantly. On the other hand, in one fifth of the SMEs they had not changed at all. The changes in the principles and practices of management seemed to relate to some extent to changes in the firm’s original business base. The more changes in the original business base, the more changes in the principles and practices of manageme nt (r_s=.19; p<.05).

The most common changes in the ways of doing business were the following:

(1) focusing on the core business and increasing interfirm cooperation; (2) investing in marketing and sales; (3) investing in production development; and (4) expanding the scale of operation. One tenth of the firms reported that their ways of doing business have not changed significantly.

Recent changes in turnover. During the last decade, four fifths of the SMEs (79%) had grown in terms of turnover. In the case of 12% of the firms, the turnover had not changed, and the turnover had fallen in 8% of the firms. The turnover of two thirds of the firms had developed steadily. One fifth of the firms (22%) had experienced a leapwise development of turnover, and in the case of one tenth (11%) the change of turnover was fluctuating.

Recent changes in demand. During the last decade, two thirds of the SMEs had operated in markets with a growing demand. Among these firms, one quarter operated in an environment characterized by strong growth in demand. For one sixth of the firms, the demand had not changed, and for another one sixth, the demand had decreased. There was a positive association between the growth of the firm’s turnover and growth in demand in the market (r_s=.46; p<.01).