5 CHARACTERIZING SUCCESSFUL SMES
5.4 Strategic choices
Strategic choices refer to decisions related to firm performance (see Chapter 2). In particular, four strategic choices of SMEs were explored here: internationalization, innovativeness, specialization, and networking (cf. e.g. Niittykangas et al. 1998).
Internationalization refers to the markets of the firm; innovativeness is related to the products of the firm; and specialization and networking are associated with the firm’s way of doing business. In business idea thinking (Normann 1976), the firm’s competitive advantage is bound up with the firm’s choices in these areas. The importance of the internationalization of the firm may vary depending on the location of the firm. For Finnish high-tech firms, for example, internationalization is usually a critical condition in achieving success due to the small size of national markets.
Internationalization and the role of local markets
The firms’ internationalization was analyzed in terms of market areas, export and import, units abroad, and foreign ownership of the firm (Figure 5.6). More than three quarters of the SMEs (76%) could be regarded as internationalized, if measured by some of these criteria. Almost one quarter of the SMEs were purely domestic firms operating in Finland only.
Market areas. On average, 36% of the firm’s sales came from local markets (Northern Savo), 44% from other domestic markets (other Finland), and 19% from export markets (abroad). About 10% of the firms had no sales in local markets, and 5% had sales in local markets only. For most firms, local markets played a minor role in generating turnover. The local markets’ share in the firm’s total sales was either
low, 5-20%, or high, more than 60%. One out of 20 firms had no sales in other domestic markets, whereas some firms had sales in other domestic markets only. Of total sales, other domestic markets typically accounted for 10-40% or for more than 80%. Two fifths of the SMEs did not export. Typically, exports accounted for 5-20%
of the firm’s total sales, though there were firms exporting more than this, up to 100%.
Table 5.5 shows the distribution of sales by market areas.
5 % 10 %
3 9 %
5 2 % 59 %
0 % 20 % 4 0 % 60 % 8 0 % 100 %
foreign ownership units abroad import firms indirect export
export firms
% of all firms in the sample Figure 5.6 Internationalization of the SMEs
Table 5.5 Market areas of the SMEs
Market area Lower
quartile
Median Upper quartile
Local markets < 5% 20% >70%
Other domestic markets <15% 40% >75%
Export markets 0% 5% >30%
Export and import. SMEs with direct exports had exported for 12 years, on average.
The most long-lived SME with direct exports had been exporting since 1926. Half of the SMEs with direct exports had started their direct exporting 1985-1994.
More than half of the export firms (59%) sold their products directly to foreign customers (Figure 5.7). One third (37%) exported through foreign import firms, wholesale firms, retail shops, agents, brokers, or commission agents (direct export with an intermediary abroad). One quarter (28%) exported projects. One fifth (21%) exported through domestic export firms, agents, commission agents or associations, and in some cases foreign import firms, wholesale firms, retail shops, agents, brokers, or commission agents. One tenth of the export firms (11%) exported through the firm’s foreign sales office, branch office, production unit or subsidiary.
Moreover, half of the SMEs (52%) had indirect exports, i.e. they were subcontractors for exports. Among the SMEs with indirect exports, most (76%) had direct exports as well. On the other hand, among SMEs with direct exports, i.e. export firms, two thirds also had indirect exports. In other words, indirect exports seemed to be concentrated heavily on those SMEs which had direct exports as well (χ2=17.537;
df=1; p<.0005).
% of export firms Way of export Seller Border Buyer 59% Directly to the
customer
37% Direct export with a foreign intermediary 28% Project export 21% Direct export with
domestic (and foreign) intermediary
11% Direct export through own unit abroad Figure 5.7 The ways of direct export
Export firms often imported their raw materials (χ2=17.534; df=1; p<.0005). Among import firms, 82% were also export firms. The firm’s raw materials were imported regularly by 39% of all firms and by 52% of export firms.
Units abroad. One tenth of the SMEs had a subsidiary or a joint venture abroad. Most of these were set up for the sales or marketing of the firm’s products.
The rest were production or assembly units. Some of the units had very independent roles and they manufactured and sold the products in t he markets located near them.
Foreign ownership. Five per cent of the SMEs had foreign owners. In half of these firms the proportion of foreign ownership was no more than 20%. In firms with foreign owners, exports accounted for a significantly higher share of the firm’s total sales than in other firms: on average, exports accounted for 50% and 17%, respectively, of all sales.
Innovativeness and technology
The firm’s innovativeness and technology were analyzed in terms of unique products in the market, the life cycle stage of the products, the firm’s R&D orientation, newness
of production technology, managerial know-how, and the risk of failure (Figure 5.8).
In this report, products refers to both physical products and services.
32 %
83 % 50 %
38 %
0 % 20 % 40 % 60 % 80 % 100 %
newer technology than that of competitors
R&D-oriented new products in the
market unique or rare products
in the market
% of all firms in the sample
Figure 5.8 Innovativeness and technology of the SMEs
Unique products and the life cycle stage of products. In 4% of the SMEs, the products were considered unique in the markets. In one third (34%), the products were rare in the markets. Half of the SMEs (54%) had products which were quite similar to those of their competitors. In one tenth of the SMEs (8%), the products were regarded as identical to those of their competitors.
For an average firm, 60% of the products were ones with a relatively stable sales volume, 23% were products with more than 10% annual growth in sales, 10%
were new products in the markets, and 6% were products with a falling sales volume.
Half of the SMEs had one or more new products in the markets. For most of them, new products accounted for 5-10% of all products and services in terms of turnover. More firms with new products in the markets than others were export firms (r=.34; p<.01). More than half of the firms had products with more than 10% annual growth in sales. Typically, such products accounted for 10-30% of all products. More than four fifths of the firms (84%) had products with a relatively stable sales volume.
Such products usually accounted for more than 30% of all products, and for one fifth of the firms, all their products belong to this category. One third of the firms had products with a falling sales volume. Such products usually accounted for 5-10% of the firm’s products. More firms which had new products in the markets than others had unique products in the markets (r=.43; p<.01).
R&D orientation. One third of the SMEs (37%) strove to be the first in the market so as to achieve an adequate advantage over competitors and to be able to seize the opportunities of emerging markets for a new product. Almost half (46%) were
focused on improving the quality of existing products, to add to their value. One tenth (10%) strove to be the second in the market so as to avoid the high risk and high research and development costs characteristic of pioneers. A few firms (3%) produced existing products so as to avoid all risks and costs related to research and development.
R&D-oriented SMEs not only had a high proportion of new products in the markets, but also more often had unique products in the markets (rs=.40; p<.01) than other firms.
Newness of production technology. In more than half of the SMEs (58%), production technology was as new as that of the most important competitors. For one third (32%) it was newer, and for one tenth it was older than that of the most important competitors. Firms having newer production technology than that of their competitors were more R&D-oriented (rs=.30; p<.01) and they produced products which were unique in the markets (rs=.36; p<.01).
Managerial know-how. In three quarters of the SMEs (74%), managerial know-how was thought to be as good as that of their most important competitors. In 16% of the firms it was thought to be higher, and 10% of the firms thought it was lower than that of their most important competitors. Firms with higher managerial know-how than that of their competitors used newer production technology than their competitors (rs=.34; p<.01).
Risk of failure. In three quarters of the SMEs (74%), the risk of failure was seen to be as high as in Finnish firms in general, whereas in 5%, it was thought to be higher than in Finnish firms in general. Interestingly, more than one fifth of the firms (22%) considered the risk of failure to be lower than in Finnish firms in general.
Specialization
The specialization of the firm was analyzed by products, customers and competitive power of the firm (Figure 5.9).
Products. Half of the SMEs produced a few products or operated in a few product areas characterized by the same raw material, the same production technology or machinery, or the same professional skills. These product areas were clearly defined. One tenth (8%) produced a few products or operated in a few product areas, but in the production they were not able to use the same raw material, the same production technology or machinery, or the same professional skills. Also, their product areas were clearly defined. One third had focused clearly on one product or product area in production, and for them the sale of this product or these products constituted most of the firm’s total sales. The rest of the SMEs (10%) produced several products or operated in several poorly defined product areas. It was typical of these
that the products and product areas changed often, and the firm’s total sales came from these several small flows.
84 % 85 %
90 %
0 % 20 % 40 % 60 % 80 % 100 %
competitive power in the market specialization in
customers specialization in
products
% of all firms in the sample Figure 5.9 Specialization of the SMEs
Customers. Half of the SMEs had a few relatively coherent and mutually distinctive customer segments. One third had focused on serving one relatively coherent and clear-cut customer segment whose share in the firm’s total sales was very high. The rest (15%) had no clearly defined customer segments, and their customers could be regarded as fragmented. For half of the SMEs, the proportion of turnover due to the biggest customer was 10-40%. The cumulative proportion of turnover due to the three biggest customers was 20-65%, and that due to the five biggest customers was 26-75%
of the firm’s total turnover.
A positive association between good competitive power of the firm and new production technology (rs=.39; p<.01) was found. Such positive association was also found between good competitive power of the firm and high managerial know-how (rs=.29; p<.01).
Cooperation and networking
Cooperation and networking were approached by studying attitudes toward interfirm cooperation, the importance of interfirm cooperation, the content of cooperation, cooperation partners and experiences, and the role of subcontracting, in particular.
Attitude towards interfirm cooperation and the importance of interfirm cooperation. The SMEs were interested in interfirm cooperation, with almost half (47%) actively looking for new interfirm cooperation relationships. Almost the same proportion (45%) were interested in investigating cooperation possibilities if some other firm would approach them. A few firms (4%) tried to avoid cooperation so as to avoid dependency on others.
The SMEs considered interfirm cooperation important: one third (31%) thought it extremely important, and almost two thirds (61%) considered it useful. Six per cent of the SMEs thought that interfirm cooperation had no importance. There was a moderate positive association between attitudes towards interfirm cooperation and perceived importance of interfirm cooperation (rs=.35; p<.01), i.e. firms interested in interfirm cooperation scored high on the importance of cooperation. On the other hand, only some of the firms avoiding cooperation considered that cooperation had no importance for them.
Content, partners and experiences. Most firms used subcontracting (Figure 5.10). There was a moderate positive association between the number of different types of interfirm cooperation and the perceived importance of interfirm cooperation (rs=.32; p<.01). Also, a moderate positive association between the number of different types of interfirm cooperation and attitude towards interfirm cooperation (rs=.45;
p<.01) was found. This means that the more different types (contents) of cooperation the firm had, the more important the role of cooperation was thought to be and the higher the interest towards interfirm cooperation.
58 %
37 % 36 %
22 %
14 % 10 %
0 % 10 % 20 % 30 % 40 % 50 % 60 % 70 %
sub-contracting
marketing R&D production purchasing finance
% of firms
Figure 5.10 Types of interfirm cooperation
The most common cooperation partners were customers, suppliers and subcontractors.
In contrast, cooperation between the firm and deliverers, public organizations fostering SME development, and vocational schools was much rarer. There were many differences in cooperation experiences with different cooperation partners, as shown in Table 5.6.
Table 5.6 Cooperation experiences with different partners
Cooperation partner Positive experiencesa Negative experiencesa
1 Major customers 57 1
2 Suppliers 57 1
3 Subcontractors 48 1
4 Major financiers 41 3
5 Firms in the same field 35 6
6 Vocational schools 28 2
7 Universities and research institutes 26 3
8 Public organizations fostering SME development 25 8
9 Deliverers (delivery channels) 23 1
a. % of all SMEs
Positive experiences were especially characteristic of cooperation with major customers and suppliers. On the other hand, negative experiences were associated with cooperation with public organizations fostering SME development and firms in the same field. There was a positive though weak association between a high number of cooperation partners and positive attitude towards interfirm cooperation (rs=.23;
p<.01). In regard to the duration of cooperation relationships, the longest ones were related to cooperation with financiers and suppliers. The rank order of cooperation partners by their importance for the firm is presented in Figure 5.11.
1 Major customers 2 Suppliers
3 Major financiers 4 Subcontractors
5 Deliverers (delivery channels) 6 Universities and research institutes 7 Firms in the same field
8 Vocational schools
9 Public organizations fostering SME development
Figure 5.11 Rank order of cooperation partners by their importance for the firm
Subcontracting. Half of the SMEs were subcontractors. They were divided into two groups: those with a high proportion of subcontracting in terms of turnover, and those with a small proportion of subcontracting. For this reason, the lower quartile was 10%
and the upper one 81%. Three quarters of the SMEs bought subcontracting, and bought subcontracting generally accounted for 5-20% of the firm’s turnover.