5 CHARACTERIZING SUCCESSFUL SMES
5.5 Success and survival factors
Study of the success factors of the SMEs was approached by structured and open-ended questions. Both the most important success factors and the underlying
dimensions of SME success were analyzed. Moreover, the most important survival factors were elicited on the basis of open-ended questions.
Structured success factors. The high-scoring success variables related to (1) customer relations; (2) supplier relations; (3) personnel, know-how, and quality; (4) flexibility; and (5) planning (see Table 5.7). The most important success variables were related to customer relations: good knowledge of customers and their needs, long-term customer relations, good reputation of the firm, fast and reliable delivery, and good inter-personal relations with customers and suppliers. The quality of raw materials and reliable suppliers were also important. Other high-scoring variables were related to personnel, know-how, and quality: personnel with advanced knowledge, good knowledge of products, continuity of key persons, cooperative personnel, and high quality products. In addition, flexibility, and planning were considered success factors by all successful SMEs. In total, 36 out of 55 success variables (65%) scored a mean of 5.19 or above on the scale of 1 (not at all important) to 7 (very important).
Other structured success variables were considered success factors only by some of the successful SMEs. Chapters 6 and 7 investigate the success factors in detail by groups of SMEs, and reveal the differences between groups.
Table 5.7 The most important structured success factors
Rank Success factor Mean Median Standard
deviation
1 Good knowledge of customers and their needs 6.54 7 .82
2 Long-term customer relations 6.44 7 .80
3 Good reputation of the firm 6.36 7 .78
4 Good knowledge of products/services 6.26 6 .84
5 Personnel with advanced knowledge 6.25 6 .85
6 Fast and reliable delivery 6.23 6 .91
7 Quality of raw materials and reliable suppliers 6.22 7 1.33
8 Continuity of key persons 6.18 6 .93
9 Cooperative personnel 6.16 7 1.09
10 Ability to respond flexibly to customers’ needs 6.09 6 .88
11 Good inter-personal relations 6.06 6 1.26
12 Simple and flexible organization 6.03 6 1.02
13 High quality products 6.02 6 .92
14 Planning 5.98 6 1.05
The least important structured success factors are shown in Table 5.8. These factors seemed to be mainly firm-external factors. The least important success factors were external owners, private and public consulting services, public financial support, weak competition, and acquaintance with an influential distribution channel. Also, good terms of payment, difficult-to-imitate products, and difficult-to-imitate knowledge-based production system were considered less important success factors by all the SMEs studied. However, flexible use of family members as a work force was valued in
family firms. Also, internationalization was valued as a success factor in export firms, as was strong growth in demand by those firms operating in high-growth markets.
However, it should be noted that there was much variation in the importance of these factors among the firms. In other words, some of these factors may be extremely important success factors for some firms.
Table 5.8 The least important structured success factors
Rank Success factor Mean Median Standard
deviation
55 External ownersa 2.54 2 1.86
54 Private consulting 2.83 3 1.54
53 Public consulting support 3.05 3 1.75
52 Public financial support 3.18 3 1.95
51 Weak competition 3.36 3 1.60
50 Acquaintance with an inf luential distribution channel 3.75 4 2.07
49 Good terms of payment 3.84 4 1.71
48 Flexible use of family members as work forceb 4.14 5 2.45
47 Difficult-to-imitate productsc 4.17 4 1.85
46 Difficult-to-imitate knowledge-based production systemd 4.35 5 1.85
45 Internationalizatione 4.38 5 2.08
44 Small number of owners 4.47 4 1.85
43 Low delivery and transportation costs 4.60 5 1.81
42 Multifunctional production equipments 4.66 5 1.72
41 Strong growth in demandf 4.68 5 1.56
a. In SMEs with several owners: 2.56 / 2 / 1.84, respectively.
b. In family firms: 5.28 / 6 / 2.01, respectively.
c. In SMEs whose products were unique or rare in the markets: 4.70 / 5 / 1.95, respectively.
d. In SMEs whose products were unique or rare in the markets: 4.55 / 5 / 1.98, respectively.
e. In export firms: 5.44 / 6 / 1.55, respectively.
f. In SMEs operating in high-growth markets: 5.45 / 5 and 6 / 1.30, respectively.
The exploratory factor analysis of the structured success statements revealed the underlying dimensions of SME success. Factoring was done with the SPSS Principal Component Analysis, and the rotated matrices were calculated using the Varimax method. A factor analysis of the 55 structured success statements yielded 12 factors with eigenvalues over 1.0. Seve n factors with eigenvalues of 1.65 or above were used for subsequent analyses, based on the results of a screen test and interpretability (see Appendix 3). Each factor was named according to the variables with highest loadings.
The interpretation was done using the top variables that loaded .40 or higher.
The seven underlying dimensions of SME success accounted for 59.0% of the total variance. The first factor represents a firm’s proactiveness, flexibility, and distinctiveness: this explained 34.8% of the total variance. Factor 2 represents planning and risk management, especially in financing. The third factor consisted of variables related to motivated personnel and high-level customer service. In the fourth factor, chain management issues dominated. Factor 5 represents variables related to
product knowledge. The sixth factor draws attention to leveraging external advisers and public financial aid. Factor 7 represents relationship management and customer closeness.
Unstructured success factors. An analysis of the responses to the open-ended question on the most important success factors showed that customer relations were valued most (see Figure 5.12). Responses to an open-ended question also revealed some success factors which were not included in the 55-item questionnaire. These responses were collected under themes that emerged from the data.
The most frequent theme was intimate customer relationships, indicating closeness to customers, mutual trust, and high-level customer service, for example.
The second most frequent was skilled personnel. The third was right total quality: not too high and not too low. Here, quality referred to the total quality, i.e. the quality of product (service), work, and operations. The fourth theme was innovativeness and research and development. The fifth was planning, goal-orientedness, and persistence.
The most critical factors for SME success:
1 Intimate customer relationships 2 Skilled personnel
3 Right total quality 4 Innovativeness and R&D
5 Planning, goa l-orientedness, and perseverance 6 Entrepreneur’s professional skill
7 Entrepreneur’s personal contribution 8 Advanced technology
9 Strict cost control
10 Reliable and flexible delivery 11 Focusing on core business 12 Flexibility in business 13 Interfirm cooperation
Figure 5.12 Unstructured success factors
Survival factors. The responses to the open-ended question on the most important survival factors were analyzed using the same method as for the responses to the open-ended question on the most important success factors. Clearly the most frequent survival factor was the personnel’s contribution and flexibility (Figure 5.13). The second most frequent survival factor was good relationships with external stakeholders, especially with financiers, customers, and suppliers. The other most important survival factors were early reaction to problems and decision making without delay, good financial position, and belief in the future.
The most critical factors for SME survival:
1 Personnel’s contribution and flexibility 2 Good relationships with external stakeholders
3 Early reaction to problems and decision making without delay 4 Good financial position
5 Belief in the future
6 Entrepreneur’s personal contribution 7 Cost reductions
8 Acquisition of new customers and increased efforts in marketing 9 Goal-orientedness and an ability to distinguish essentials 10 Risk management
11 Widely applicable and advanced technology Figure 5.13 Survival factors
5.6 Summary and conclusions
Characteristics of the entrepreneurs. The entrepreneurs of successful SMEs were typically middle-aged men (40-60 years old) who had a mid-level qualification. Before starting as an entrepreneur of their present firm, they had varied work experience, most frequently in sales and marketing or production, including managerial tasks. Success followed long-term work and investments in business: most entrepreneurs have been entrepreneurs for more than a decade. Management with substantial industry experience has been found to distinguish high-growth firms from low-growth ones (Siegel et al. 1993).
Most entrepreneurs in successful SMEs were founders of the firm, but there were also paid professional managers. It has been found that there are no differences in firm performance between founder-managed and professionally managed high-growth firms (Willard et al. 1992). On the basis of the age distribution of entrepreneurs, it can be concluded that in many successful SMEs the management of the firm will change during the next ten years, and this may have important impacts on the future development of the region.
It seems that SME success is not related to the gender of the entrepreneur. In Finland, taking into consideration all industry sectors, female entrepreneurs constitute fewer than one third of the total, and this proportion is clearly lower in manufacturing than in the service sector. Also, many previous studies have shown that male entrepreneurs dominate particularly in growth firms (e.g. Koskinen 1996: 169).
However, previous research has not, with the exception of some contradictory findings, been able to provide convincing evidence of gender impact on firm performance (see also Cliff 1998; Brush 1992).
Higher education and longer work experience seems to be related to SME success. As many previous studies have suggested, the higher the entrepreneur’s education, the better the firm performance (see also e.g. Barkham 1992; Macrae 1991;
Dunkelberg & Cooper 1982; Yusuf 1995). The findings support previous ones showing that entrepreneurs with prior work experience, especially in marketing, are more characteristic of growth firms than of others (Wynarczyk et al. 1993). The findings also underline the importance of prior managerial experience for firm performance (see also Macrae 1991; Dunkelberg & Cooper 1982).
Multiple entrepreneurship, i.e. serial and portfolio entrepreneurship, seems to be characteristic of many successful SMEs. This was an interesting finding in the light of the study by Stuart and Abetti (1990) who found that prior entrepreneurial experience had, compared with the other factors studied, the most significant impact on the early performance of the firm. However, the proportion of portfolio entrepreneurs was lower than that found by e.g. Storey et al. (1987) in their study of the proportion of portfolio entrepreneurs among high-growth firms (cf. also Westhead
& Wright 1998a; 1998b; Rosa & Scott 1999). Compared with the Finnish SME population in general, the proportion of serial and portfolio entrepreneurs in this sample is high. Moreover, multiple-firm entrepreneurs were often both portfolio and serial entrepreneurs at the same time.
Characteristics of the SMEs. The SMEs studied represent the most important industry sectors and all regions in Northern Savo. On the other hand, successful SMEs could be found in each selected industry sector, so clearly SME success is related not only to high-growth industry sectors. Previous studies have emphasized the association between firm growth and the growth rate of an industry sector/markets. It should be noted that the growth within an industry sector can be fragmented: sales in one subsegment may grow rapidly, while it may fall in another. Many of the SMEs operated in narrow market segments of their industry (Pasanen 1997). Though many studies of favourable environments for entrepreneurship have pointed out the important role of the demand in the region (e.g. Johannisson 1993a), the demand of local markets may have less importance for the firms studied than for firms in general.
Naturally, the role of local demand is much more significant for firms in the sector of business services and for other firms which are bound up with the volume of local demand.
Most successful SMEs were small firms with one establishment. In terms of the number of employees, most firms represented those size categories which have been found to create the most net new jobs in the long run (see Cambridge Small Business Research Centre 1992; Hakim 1989). Moreover, the majority of the remaining firms were just reaching such size. On the other hand, it can be expected
that one quarter of the firms will need to create formal structures for managing the firm if the firm is to grow (see Fombrun & Wally 1989).
There was a wide range of firms in terms of age, though most were established SMEs. However, it has been found that age does not distinguish high-growth firms from others (e.g. Smallbone et al. 1993b). Also, the findings support the claim that younger firms have a higher growth rate (e.g. Cambridge Small Business Research Centre 1992; Variyam & Kraybill 1992). This can be explained by, for instance, the fact that a young firm has to reach the scope of operation which enables efficient use of resources. On the other hand, however, it has never been possible to define the optimal size of a firm, in spite of the intensive research focused on this issue.
Typically, the firms were founded by more than one founder, of which at least one was still involved in the firm’s operation. Often the founders were local people.
The findings support the reported positive association between the number of founders and firm performance (e.g. Bruno et al. 1987; Barkham 1992; Feeser & Willard 1990;
Woo et al. 1989; Dunkelberg et al. 1987; Westhead et al. 1995). Also today, the firms had more than one owner, and most firms were led by an entrepreneurial team. It can be seen that an entrepreneur in an SME has to be an all-rounder who understands and can manage the whole range of business activities. It has been found that team enterprises succeed better than other firms (Rosa & Scott 1999). Team entrepreneurship provides better conditions for high performance enabling the division of labour and the specialization of the members of an entrepreneurial team (see e.g.
Timmons 1999: 278. In such a case, the capabilities and special knowledge areas of the team members complement each other (Westhead et al. 1995).
It is important to make a distinction between team entrepreneurship and family entrepreneurship, because of the differences between family-owned and -managed firms and those not family controlled (see e.g. Chua et al. 1999; Morris et al. 1997).
Compared with other firms, family firms were rarely growth-seeking (see e.g.
Donckels & Hoebeke 1992). Almost half of the firms were family firms, but in most of them no transition of the business from one generation to the next had yet been made.
Particularly in these firms, the role of founders may be crucial for firm development (see Kelly et al. 2000).
The successful SMEs had clear goals and objectives. Two thirds were growth-seeking, indicating their high proportion in the sample. The SME barometer in Finland showed that only 7% of Finnish SMEs were growth-seeking (Ministry of Trade and Industry 1998; cited by Kauppalehti 1999a). On the other hand, there was much variation in firms’ growth-seekingness between regions in Finland: in Northern Savo, the proportion of growth-seeking firms was slightly higher (9%) than the national average.
In terms of the life cycle stage, the majority of the SMEs studied were in the stage of growth or expansion. However, there were also SMEs at the beginning of their life cycle, and also some in the mature stage. From the regional point of view, the distribution of successful SMEs in terms of the life cycle stage seems to be well balanced. All in all, successful SMEs can be said to constitute a heterogeneous group of firms with a large variety of characteristics.
Life cycles. Most of the successful SMEs had stayed close to their original business, which is consistent with findings of previous studies (e.g. Feeser & Willard 1990). During their life cycle, most SMEs had faced periods of growth and/or recession equivalent to more than 20% of their annual turnover. Annual growth of more than 20% has been used as a criterion for defining rapid-growth firms (e.g.
Fischer et al. 1997). In contrast with traditional life cycle models, the present findings show that a firm can have several separate stages of high growth during its life cycle.
Growth was seen to be based mainly on firm-internal factors, of which the most important ones were related to the expansion of markets and investments in marketing, and investments in production. These were identical with the most important development areas of SMEs reve aled by the SME barometer in Finland (Pesola 1997a:
4).
The most common firm-external growth factor was strong growth in demand.
However, the time of investigation, shortly after a deep general economic recession, may have increased the role of this growth factor. A merger or an acquisition was identified in the history of one fifth of the SMEs. In almost all cases, a business connection was found between the firm studied and the purchased or mergered firm.
Acquisitions are often considered a risky growth strategy (e.g. Duchesneau & Gartner 1990), but these SMEs had not made mergers and acquisitions in order to diversify.
Of the factors affecting a fall in the firm’s turnover, four fifths were firm-external factors related to the general economic recession. Firm-firm-external causes of recession were strongly emphasized, when compared with e.g. the findings by Slatter (1984; cf. also Boyle & Desai 1991; Heany 1985; Finkin 1985). This may be partly explained by the special characteristics of the sample, i.e. successful SMEs, and the time of investigation (after the general economic recession in the 1990s).
During their life cycle, half of the SMEs had faced at least once a situation where the firm’s existence had been threatened. Typically, firm-external rather than internal factors were seen as the causes of threat (cf. Boyle & Desai 1991). There were two common alternative ways of adaptation: firm development with investments, or adaptation through retrenchment activities. There were significant changes in the principles and practices of management and in the ways of doing business during the firm’s life cycle. During the last decade, the turnover of the firms had mainly grown,
and in most cases the growth had been stable. Also, for the majority of the firms, the demand in the markets had grown during the last decade.
In other words, the success in terms of firm growth was seen mainly to be based on firm-internal factors. On the other hand, the difficulties in terms of falls in turnover and threat were seen mai nly to be based on firm-external factors. This is consistent with the main body of results of previous studies (e.g. Storey 1994: 105;
Jenkins & Johnson 1994: 3; Vanhala et al. 1994: 105). However, in their study of new venture failures, Zacharakis et al. (1999) showed that entrepreneurs acknowledged that firm-internal causes contributed to their venture’s failure. Hence, it is worth noting that there are several factors which may affect SME growth and decline.
Strategic choices. Most successful SMEs were characterized by internationalization, innovativeness and R&D orientation, specialization, and cooperation and networking (see also Hitt & Ireland 2000: 48-52). Often, these qualities combined with each other in the same firm. Three fifths of the SMEs exported, and two fifths imported. The most common way of direct export was selling directly to foreign customers. Half of the SMEs had indirect exports, and interestingly, most of these were export firms as well. The proportion accounted for by export markets in the firm’s total sales was positively associated with other forms of internationalization. Units abroad and foreign ownership were rare.
Few firms had products identical to those of their competitors. Half of the firms had products which were new in the markets. Almost all firms actively developed their products. The production technology of firms were as new as that of their most important competitors. Also, the managerial know-how was thought to be as good as that of their most important competitors.
The SMEs were specialized by their product range (cf. Kauranen 1996;
Lehtonen 1997). Also, they usually served one or a few clear-cut customer segments.
Specialization was also indicated by the fact that the firms in general considered that their competitive power in their main markets was at least quite good.
The SMEs were interested in interfirm cooperation, which was also thought important for the firm. Half of the firms used subcontracting. Positive cooperation experiences were most frequently related to cooperation with customers and suppliers,
The SMEs were interested in interfirm cooperation, which was also thought important for the firm. Half of the firms used subcontracting. Positive cooperation experiences were most frequently related to cooperation with customers and suppliers,