Business Development Efforts and Performance Improvements in SMEs Case Study of Business Development Projects Implemented in SME

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Lappeenrannan teknillinen yliopisto Lappeenranta University of Technology

Helena Forsman

Business Development Efforts and Performance Improvements in SMEs

Case Study of Business Development Projects Implemented in SMEs

Acta Universitatis Lappeenrantaensis 209

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Lappeenrannan teknillinen yliopisto Lappeenranta University of Technology

Helena Forsman

Business Development Efforts and Performance Improvements in SMEs

Case Study of Business Development Projects Implemented in SMEs

Thesis for the degree of Doctor of Science (Technology) to be presented with due permission for public examination and criticism in the Auditorium of Lahti Sport Centrum at Lappeenranta University of Technology, Finland on the 19^th of May, 2005, at noon.

Acta Universitatis Lappeenrantaensis 209

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Supervisor Professor Hannu Rantanen

Department of Industrial Engineering and Management, Lahti Lappeenranta University of Technolgoy

Reviewers Professor Teija Laitinen

Department of Accounting and Finance University of Vaasa

Professor Mika Hannula

The Institute of Business Information Management Tampere University of Technology

Opponent Professor Mika Hannula

The Institute of Business Information Management Tampere University of Technology

ISBN 952-214-043-0 ISBN 952-214-045-7 (PDF)

ISSN 1456-4491

Lappeenrannan teknillinen yliopisto Digipaino, 2005

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ABSTRACT

Helena Forsman

Business Development Efforts and Performance Improvements in SMEs Case Study of Business Development Projects Implemented in SMEs

Lappeenranta 2005 209 p.

Acta Universitatis Lappeenrantaensis 209 Diss. Lappeenranta University of Technology

ISBN 952-214-043-0, ISBN 952-214-045-7 (PDF), ISSN 1456-4491

Under the circumstances of the increasing market pressure, enterprises try to improve their competitive position by development efforts, and a business development project is one tool for that. There are not many answers to the question of how the development projects launched to improve the business performance in SMEs have succeeded. The academic interest in the business development project success has mainly focused on projects implemented in larger organisations rather than in SMEs. The previous studies on the business success of SMEs have mainly focused on new business ventures rather than on existing SMEs.

However, nowadays a large number of business development projects are undertaken in existing SMEs, where they can pose a great challenge. This study focuses on business development success in SMEs that have already established their business.

The objective of the present study is to gain a deep understanding on business development project success in the SME-context and to identify the dimensions and factors affecting the project success. Further, the aim is to clarify how the business development projects implemented in SMEs have affected their performance. The empirical evidence is based on multiple case study.

This study builds a framework for a generic theory of business development success in the SME-context, based on literature from the areas of project and change management, entrepreneurship and small business management, as well as performance measurement, and on empirical evidence from SMES. The framework consists of five success dimensions: entrepreneurial, project preparation, change management, project management and project success. The framework provides a systematic way for analysing the business development project and its impact on the performance and on the performing company. This case evidence indicates that successful business development projects have a balanced, high performance concerning all the dimensions. Good performance in one dimension is not enough for the project success, but it gives a good ground for the other dimensions. The other way round, poor performance in one success dimension affects the others, leading to poor performance of the project. In the SME-context the business development project success seems to be dependent on several interrelated dimensions and factors. Success in one area leads to success in other areas, and so creates an upward success spiral. Failure in one area seems to lead to failure in other areas, creating a downward failure spiral.

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The study indicates that the internal business development projects have affected the SMEs’ performance widely also on areas and functions not initially targeted. The implications cover all the success categories: the project efficiency, the impact on the customer, the business success and the future potentiality. With successful cases, the success tends to spread out to areas and functions not mentioned as the project goals, and with unsuccessful cases the failure seems to spread out widely to the SMEs’ other functions. This study also indicates that the most important key factors for successful business development project implementation are the strength of intention, business ability, knowledge, motivation and participation of the employees, as well as adequate and well-timed training provided to the employees.

Keywords: Business development, Performance, Project success, SME UDC 65.011.8 : 65.017.2/.3

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ACKNOWLEDGEMENTS

Professor Hannu Rantanen has guided and supported this thesis patiently even when the researcher herself was unmotivated. I would like to express my warmest gratitude to him. I would also like to thank professor Timo Pihkala, who has offered guidance and valuable feedback during my research process. In the final stage of the research work I have received valuable feedback from the reviewers – professor Mika Hannula and professor Teija Laitinen – to whom I am deeply grateful.

I am indebted to the interviewees of the case companies for their time, their ideas and suggestions to enrich the interpretation. They urged me towards the practical relevance and the scientific contribution of the study. Due to the promised confidentiality I am sorry not to be able to show my appreciation for them by name.

I gratefully acknowledge the financial support from Tekniikan edistämissäätiö (Technological Foundation, TES) and Lappeenrannan teknillisen yliopiston tukisäätiö (Research Foundation of Lappeenranta University of Technology). Their support made it possible to finalise my thesis.

Several persons have helped me in the different stages of the research process by fruitful discussions, insightful comments, or by providing their personal network for my use. I wish to thank Tapio Järvelä and Heikki Kauppinen from Riihimäki - Hyvinkää Chamber of Commerce, Anne Wickstöm from Ekes Oy, Anneli Mäkinen from Helsinki Business College, Pirjo Puhakka from Ibero Liikelahjat Oy, PhD Juhani Nieminen and Kaisu Sjögren from Aike Oy, Sirkku Verta-Lemmetty from the City of Hyvinkää and many, many other people for their valuable help.

My husband Markku has encouraged me to commence, to continue and to finish this thesis. Without his support and compassion my thesis would not have been possible in practice. I am also grateful to my sons Jarkko and Lauri, who have been patient and showed sympathy when their mother has submerged herself in the

“world of her science”. Two women have strongly affected me and my attitudes, giving a model for a forward-looking view of life. I dedicate my thesis to them – my mother Elli Linkolehto and my deceased grandmother Maria Kortekangas.

Launonen, May 2005

Helena Forsman

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CONTENTS ABSTRACT

ACKNOWLEDGEMENTS

LIST OF FIGURES 11

LIST OF TABLES 13

LIST OF ABBREVIATIONS 15

1 INTRODUCTION 17

1.1 Background 17

1.2 Objectives of the study 20

1.3 Key definitions and scope of the study 20

1.4 Structure of the study 23

2 BUSINESS DEVELOPMENT IN SMES 25

2.1 Definition of an SME 26

2.2 Characteristics of SMEs 27

2.3 Business success in SMEs 32

2.3.1 Elements of business success 32

2.3.2 Growth as a source of business success 35 2.3.3 Strategy and planning as a source of business success 37 2.4 Challenges of business development in SMEs 38

2.5 Summary 41

3 PROJECT AS A TOOL OF BUSINESS DEVELOPMENT 43

3.1 Project and project management 43

3.2 Development projects 48

3.3 Change in organisations 51

3.4 Project success and success factors 54

3.5 Project failure 60

3.6 Summary 64

4 BUSINESS SUCCESS AND PERFORMANCE 67

4.1 The concept of performance 67

4.2 Performance measurement 70

4.3 Performance measures 73

4.4 Business performance and project success 77

4.5 Challenges of performance measurement in SMEs 80

4.6 Summary 83

5 THEORETICAL FRAMEWORK FOR BUSINESS

DEVELOPMENT PROJECT SUCCESS IN THE SME CONTEXT 85 5.1 Characteristics of a business development project 85

5.2 Construction of the framework 86

5.2.1 Entrepreneurial success dimension 87

5.2.2 Project preparation success dimension 88 5.2.3 Change management success dimension 89 5.2.4 Project management success dimension 90

5.2.5 Project success dimension 91

5.3 Summary 92

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6 METHODOLOGY AND RESEARCH STRATEGY 93

6.1 Research methodology 93

6.1.1 Qualitative or quantitative research? 93

6.1.2 Case study research 97

6.1.3 Methodological choices in this study 101

6.2 Research design 102

6.2.1 Research process 102

6.2.2 Case selection and data collection 104 6.2.3 Analysis and interpretation of data 107

7 CASE STUDIES 111

7.1 Introduction 111

7.2 Case A: Employee motivation as a source of productivity

improvements 112

7.2.1 Entrepreneurial dimension 112

7.2.2 Project preparation dimension 114

7.2.3 Change management dimension 115

7.2.4 Project management dimension 117

7.2.5 Project success and impact on performance 118

7.2.6 PIP-profile 121

7.2.7 Summary of case A 122

7.3 Case B: Integrated service package development 125

7.3.7 Summary of case B 135

7.4 Case C: Targeting at rapid growth and internationalisation 138

7.4.7 Summary of case C 149

7.5 Case D: New business venture with a new business concept 152

7.5.7 Summary of case D 162

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7.6 Cross-case analysis 165

7.6.1 Project success and performance 166

7.6.7 Summary of the cross-case analysis 175

8 DISCUSSION AND CONCLUSIONS 181

8.1 Results of the study 181

8.2 Contribution of the research 185

8.3 Validity and reliability of the research 186

8.3.1 Construct validity 187

8.3.2 Internal validity 188

8.3.3 External validity 188

8.3.4 Reliability 189

8.3.5 Limitations and problems of the research 190

8.4 Outlines for future research 191

9 SUMMARY 193

REFERENCES 197

APPENDICES

Appendix 1 – Definitions of terms

Appendix 2 – Summary of the research data and informant feedback Appendix 3 - Interview guidelines used in the case study

Appendix 4 – Structured interview (Questionnaire) Appendix 5 – Case comparisons

Appendix 6 – Summary of the structured interview (questionnaire)

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LIST OF FIGURES

Figure 1.1 The structure of the study 24

Figure 2.1 Enterprise as a system 25

Figure 2.2 Strengths and weaknesses of small business 31

Figure 2.3 Model of small firm performance 33

Figure 2.4 Structure – conduct – performance 34

Figure 3.1 Goals-and-methods matrix 47

Figure 3.2 Management of business development projects 50

Figure 3.3 The spectrum of PSO-projects 52

Figure 3.4 The Iron Triangle of project management 56

Figure 3.5 Time frame of success categories 57

Figure 3.6 Ten key factors of the project implementation profile 58 Figure 3.7 Strategy-tactics effectiveness matrix 61

Figure 4.1 Three domains of performance 68

Figure 4.2 Performance, productivity and profitability 69 Figure 4.3 Levels able to examine the performance measurement

system 71

Figure 4.4 The linkage between performance objectives and

improvement objectives 71

Figure 5.1 Development project as microcosm of an enterprise

system 85

Figure 5.2 The business development project in goals-and-methods

matrix 86

Figure 5.3 Success dimensions of a development project 87 Figure 6.1 Dynamic balance between qualitative and quantitative

data 96

Figure 6.2 Replication approach in multiple-case study 99 Figure 6.3 The main phases of the research process 102 Figure 7.1 Status of the entrepreneurial dimension in case A 113 Figure 7.2 Status of the project preparation dimension in case A 115 Figure 7.3 Status of the change management dimension in case A 116 Figure 7.4 Status of the project management dimension in case A 118 Figure 7.5 Perceived project success in case A 119

Figure 7.6 PIP-profile in case A 122

Figure 7.7 A general view of the success dimensions in case A 125 Figure 7.8 Status of the entrepreneurial dimension in case B 127 Figure 7.9 Status of the project preparation dimension in case B 128 Figure 7.10 Status of the change management dimension in case B 129 Figure 7.11 Status of the project management dimension in case B 131 Figure 7.12 Perceived project success in case B 132

Figure 7.13 PIP-profile in case B 134

Figure 7.14 A general view of the success dimensions in case B 138 Figure 7.15 Status of the entrepreneurial dimension in case C 140

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Figure 7.16 Status of the project preparation dimension in case C 142 Figure 7.17 Status of the change management dimension in case C 144 Figure 7.18 Status of the project management dimension in case C 145 Figure 7.19 Perceived project success in case C 148

Figure 7.20 PIP-profile in case C 149

Figure 7.21 A general view of the success dimensions in case C 152 Figure 7.22 Status of the entrepreneurial dimension in case D 154 Figure 7.23 Status of the project preparation dimension in case D 156 Figure 7.24 Status of the change management dimension in case D 157 Figure 7.25 Status of the project management dimension in case D 159 Figure 7.26 Perceived project success in case D 160

Figure 7.27 PIP-profile in case D 162

Figure 7.28 A general view of the success dimensions in case D 165 Figure 7.29 PIP-profile of the successful projects 174 Figure 7.30 PIP-profile of the unsuccessful projects 174 Figure 7.31 A general view of the successful cases 176 Figure 7.32 A general view of the unsuccessful cases 176 Figure 8.1 Framework of business development project success in

SMEs 184

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LIST OF TABLES

Table 3.1 Features of projects 44

Table 3.2 Different versions of projects and their tasks 46

Table 3.3 Four success categories 56

Table 3.4 Success factors of change management 59

Table 3.5 Eight steps to successful change efforts 63

Table 4.1 Total market value of the company 74

Table 4.2 Dimensions of performance 75

Table 4.3 EFQM and PMPA models 79

Table 4.4 SME performance measurement against the topology 82 Table 5.1 Success factors of the entrepreneurial dimension 88 Table 5.2 Success factors of the project preparation dimension 89 Table 5.3 Success factors of the change management dimension 90 Table 5.4 Success factors of the project management dimension 90 Table 5.5 Success categories of project success 92 Table 6.1 Relevant situations for different research strategies 96 Table 6.2 Process of building theory from case study research 98 Table 6.3 Application possibilities of case study 98

Table 6.4 Summary of the cases 105

Table 6.5 Coding principles of categorisation 108

Table 7.1 Summary of the entrepreneurial dimension in Case A 113 Table 7.2 Summary of the project preparation dimension in case A 114 Table 7.3 Summary of the change management dimension in case A 116 Table 7.4 Summary of the project management dimension in case A 117

Table 7.5 Perceived project success in case A 120

Table 7.6 Important factors for project implementation in case A 124 Table 7.7 Summary of the entrepreneurial dimension in case B 126 Table 7.8 Summary of the project preparation dimension in case B 127 Table 7.9 Summary of the change management dimension in case B 129 Table 7.10 Summary of the project management dimension in case B 130 Table 7.11 Perceived project success in case B 133 Table 7.12 Important factors for project implementation in case B 137 Table 7.13 Summary of the entrepreneurial dimension in case C 140 Table 7.14 Summary of the project preparation dimension in case C 141 Table 7.15 Summary of the change management dimension in case C 143 Table 7.16 Summary of the project management dimension in case C 145 Table 7.17 Perceived project success in case C 147 Table 7.18 Important factors for project implementation in case C 151 Table 7.19 Summary of the entrepreneurial dimension in Case D 154 Table 7.20 Summary of the project preparation dimension in case D 155 Table 7.21 Summary of the change management dimension in case D 157 Table 7.22 Summary of the project management dimension in case D 159

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Table 7.23 Perceived project success in case D 161 Table 7.24 Important factors for project implementation in case D 163

Table 7.25 Perceived project success 167

Table 7.26 Perceived performance of the business development

projects 168

Table 7.27 Summary of the entrepreneurial dimension 170 Table 7.28 Summary of the project preparation dimension 171 Table 7.29 Summary of the change management dimension 172 Table 7.30 Summary of the project management dimension 173

Table 7.31 Summary of the key factors 178

Table 7.32 Common indicators for measuring or assessing project

success 178

Table 8.1 Case study tactics for four tests 187

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LIST OF ABBREVIATIONS

BPR BSC

Business Process Reengineering Balanced Scorecard

EFQM European Foundation of Quality Model PIP Project Implementation Profile

PMPA Project Management Performance Assessment Model PM system Performance measurement system

R&D

ROI Research and development Return on Investment SBU Small business unit

SME Small and medium sized company TQM Total Quality Management

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1 INTRODUCTION

1.1 Background

It has been recognised by the government that the economic success in Finland is linked to the vitality of the SME-sector. The small and medium sized enterprises, further abbreviated to the SMEs, have been described as the catalysts for the future economy. Becoming the most competitive and dynamic knowledge-based economy in the world will ultimately depend on how successful the enterprises, especially the small and medium sized ones, there are (Observatory of European SMEs 2002, 5).

The huge majority of the companies (99,7 %) in Finland are SMEs, i.e. enterprises with fewer than 250 employees (Statistics Finland 2002). The SME-sector’s role as a notable employer has been emphasised during the last years - over 60 % of the Finnish employees work for the SMEs (Statistics Finland 2002). The SMEs play a significant role in the national economy. There is a special need to accelerate the SMEs’ growth and to improve their competitiveness. The need for the SMEs to remain competitive and to produce the high quality products and services is important not only at the national employment level, but also at the industry level, where the SMEs are often the suppliers for the larger companies. On the other hand, the changes in the large companies may cause significant repercussions in the SMEs.

The competition for the future is different from the competition for the present.

Today the speed is of the essence: the product life cycles are getting shorter, the development times are getting tighter, and the customers are expecting almost an instantaneous service (Hamel & Prahalad 1996, 37). Today, the business is done at the global level more than ever before. It means that the competition is tightening also in the local markets (Pasanen 2003, 15). Under the increasing market pressure the enterprises are forced to improve their competitive position e.g. by discovering the new potential arenas for the growth, by decreasing the costs, and by improving the quality and the productivity.

The current literature suggests that the SMEs may differ from the larger companies by a number of the key characteristics. Some of them are putting the greater strains on the SMEs inducing that the business development may be more

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challenging in this context (Hudson, Smart & Bourne 2001, 1105 – 1106; see also Ghobadian & Gallear 1997; Julien 1993; Storey 2000):

The resource limitations associated with the SMEs highlights the importance of the productivity.

The lack of money may cause the liquidity risk.

The reliance on a small number of the customers means that the SMEs must ensure the high level of the customer satisfaction and the flexibility to respond quickly to the changes in the market.

The flatter structure of the SMEs means that the employees have several job roles and more responsibility. The multi-skilled employees are necessity to the enterprises.

The enterprises try to strengthen their competitive position by the development efforts, a business development project as one tool for that. The development efforts in the organisations have often been examined from the two perspectives:

the development work consists of the continuous, gradually progressive improvements based on Kaizen-philosophy or the development work consists of a radical, single-shot reform based on the reengineering (cf. Hammer & Champy 1994, 43; Lanning 1996, 15 - 19). It is ordinary that the business development projects are placed on the middle ground between these two perspectives.

Nowadays it is common that one development project is followed by another project, forming the continuous development work by a series of the projects. This means that the distinction between the “conventional” business and the project activity targeting the business development is not very clear (Lanning 1996, 22;

Salminen 1995, 1). This also means that it is not easy to separate the project success from the business success, because it is challenging to distinguish, which of the results are the consequences of the implemented development project and which are caused by other factors such as the changes in the business environment, in the competition and in the prices or changes caused by other projects, etc.

During the 1990s several international studies have emphasised the speed of change and its radicality. At the same time there were reports of problems in the implementation of development projects, and of alarming low success rates of projects (cf. Beer & Nohria 2000, 133; Buchanan & Boddy 1992, 2 – 3; Kotter 1995, 59 - 60; O’Sullivan 2002, 77 – 78; Schaffer & Thomson 1992, 80 - 81). It is not an easy task to define project success. The simplest way would be to measure

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whether the goals set for the project are met, but this does not take into account the possibility of ill-defined goals. Some of the goals may be measurable and some of them may be not. Furthermore, the different parties involved in the project perceive success or failure differently. A project is hardly ever a disaster or a failure for all the stakeholders during all the phases in the project life cycle (de Wit 1988, 164 - 165; Pinto & Slevin 1987, 269). So, the success is also time dependent; a project may be perceived as a success one day and as a failure the next.

Defining the key success factors of projects is as difficult as defining the project success. It is difficult to identify whether an individual factor has a direct effect on to the project success or whether it is a group of factors that affects the project success. An additional problem is the uniqueness of a project. The success factors or the failure factors might not be applicable for all kind of projects, and the factors may vary along the project life cycle. During the recent years, several lists of success factors or failure factors have been generated. Many authors have discovered the success factors of projects from the area of project and change management (cf. Baker, Murphy & Fisher 1983; Lanning 2001; Salminen 2000).

Some researchers have emphasised the importance of linking the projects to the strategy implementation (cf. Kenny 2003; Pinto & Slevin 1987; Turner 1999).

Shenhar, Dvir, Levy and Maltz (2001) have linked the project success to an organisation’s effectiveness.

The academic interest in the business development project success has mainly focused on projects implemented in large organisations rather than in SMEs.

However, nowadays a great number of business development projects are undertaken in SMEs, where they can pose a great challenge. One unsuccessful development project may result even in a fatal breakdown of the business in an SME. There are not very many answers to the question of how the business development projects launched to improve the performance in SMEs have met success and what the key factors for the success are. Nor are there answers to the question of how to discover the business development project success. This study aims at finding the answers for the above-mentioned questions.

Previous studies on the business success and performance of SMEs have focused on new business ventures rather than on existing SMEs (Pasanen 2003, 15). This study focuses on SMEs that have already established their business.

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1.2 Objectives of the study

The issue in this research is the business development efforts in small and medium sized enterprises. The development projects seem to fail very often. Many different sources support the existence of the need to find out the success dimensions and key factors of business development projects producing improvements in the performance of SMEs.

The objective is to gain a deep understanding of business development projects in the SME-context and to identify factors affecting the business development project success. The more specific research questions are:

1. How to measure or assess the impact of the business development project on the performance in SMEs?

2. How have the business development projects implemented in SMEs affected their performance?

3. Which are the success dimensions and key factors of the business development projects in terms of project success?

The main aim is to structure and model the success dimensions and key success factors that contribute to and can be used in evaluating the business development success in SMEs. This study aims at deepening the knowledge in the problem area by offering both theoretical and empirical insights. This is done by studying successful and unsuccessful business development projects implemented in SMEs.

Those who can benefit from this research are SMEs and the external partners collaborating in business development efforts with the SMEs.

1.3 Key definitions and scope of the study

The key concepts of the research need exact definitions and it is also important to specify the scope explicitly. This chapter defines the scope of the study and under the same context introduces the key terms. A more extensive list of the definitions is given in Appendix 1.

This study focuses on the business development success in the SME-context, and is restricted to examining business development projects aiming at improving the performance of the performing company. In this study the definition of a business

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development project has been adopted from Salminen (1995), who defines a business development project as a project targeting for more effective business operations, whose goal is better performance from someone’s (interest group’s) point of view. Typical engineering projects and repeated delivery projects have been left outside this study, as both of them are characterised by a high extent of proceduralisation leading to easiness to define the goals and methods for the project implementation (cf. Turner & Cochrane 1993).

There exist several types of projects that can be classified as business development projects (cf. Salminen 1995; Turner & Cochrane 1993). Boddy and Buchanan (1992, 14 and 152) present that project implementation consists of several aspects, including the context, content, process and control. This study concentrates on issues connected to the context, process and control. The technical content is in a minor role. The study focuses on the general features and patterns of the execution of business development projects, not on the special features and special content of an individual project type.

There is no universally accepted definition of project success. The common way of defining the success is to measure whether the goals set for the project are met.

Guimaraes (1997, 199) has defined the project success in three ways: 1) the goals and objectives accomplished by the project, 2) the benefits derived from the project and 3) the impact of the project on the company’s performance. In the present study the definition of project success has been adopted from Guimaraes (1997). Further, in this study project success covers project efficiency and project effectiveness. The efficiency is related to achieving the goals on the schedule within the budget and the effectiveness refers to the ability to create performance improvements and positive perceptions in the performing company and its customers (cf. Salminen 2000; Shenhar et al. 2001).

A project is hardly ever a disaster or failure for all the stakeholders, and the impact of the project may vary along different time perspectives. The project success and the impact of the business development project on the performance have been examined from the very short-term to the very long-term perspective. The relevant time frame for exploring the project success of the very long-term is around 3 – 5 years after the completion of the project (Shenhar et al. 2001, 717). For that reason, one selection criterion for the studied projects was that they were completed several years ago. In this study the project success and the performance

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improvements have mainly been examined from the point of view of the performing organisation. The empirical data consists of projects perceived afterwards as successful or as unsuccessful. Due to the central role of the owner-manager in the SMEs, she or he has been regarded as a primary stakeholder and the key person to define the project success or the project failure.

The project success and the project success criteria are two separate items. The success criteria consist of the measures by which the project success or the project failure will be judged. Measuring the success involves an evaluation of the degree to which the objectives have been achieved. In this process, the objectives become the success criteria (de Wit 1988, 168). Cooke-Davies (2002, 185) has defined that the success factors are those inputs to the system that lead directly or indirectly to the success of the project. In the present study the definition of the success factors has been adopted from Cooke-Davies. In the empirical part of the study, some of the success factors were discovered to be the key success factors. The key success factor has had a decisive influence on the project success. The decisive influence was discovered by two means: the informants, the people involved in the project, assessed the influence of the factors as very important for the successful project implementation, and rest of the empirical evidence supports that view.

Performance is the company’s ability to produce the targeted output, satisfying the needs of different interest groups (Laitinen 2003, 366). In the empirical part of this study, the improvements or the impairments of performance caused by the implemented business development project are mainly based on subjective measurement conducted with quasi-perceptual and perceptual measures and utilising the multi-informant system. The perceptual measures are based on subjective instruments of performance, e.g. overall performance (cf. Dess &

Robinson Jr. 1984, 271). The quasi-perceptual measures are measurement instruments in which the content of the measure is defined according to an operational definition, but the measurement units are defined as perceptual (Ketokivi & Schroeder 2004, 251). Objective, operationally defined data of the company’s performance collected from secondary, independent sources are used to complement the findings (cf. Doty & Glick 1998; Venkatraman & Ramanujam 1986).

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Further, this study focuses on small and medium sized enterprises what have already established their business. The definition of the SME has been adopted from the European Commission (Official Journal of the European Union 2003). So, the present study focuses on companies that have fewer than 250 employees and whose annual turnover does not exceed 50 million euros, and/or the annual balance sheet total does not exceed 43 million euros. However, the enterprises concerned in the empirical part of this study are much smaller, employing no more than 160 persons. Micro enterprises, with less than 10 employees, have been left outside this study.

1.4 Structure of the study

This study consists of nine chapters. The first chapter offers a general overview of the problem area of the study and presents the objectives and scope of the research. A literature review is given in Chapters 2, 3 and 4, covering the most relevant theories and concepts for this study. These sections are also used as a basis for creating a theoretical framework for the business development project success in the SME-context (Chapter 5). Chapter 6 introduces the research methods and describes the qualitative case study research, the selection of the cases and the collection of the empirical data. It also presents the interpretation of the data. Chapter 7 consists of the analysis of the four cases and cross-case analysis. The findings based on the analysis are presented in Chapter 8. This chapter also discusses the effects on the theoretical framework, gives a summary of the results, presents a contribution, and discusses reliability and validity issues. The limitations of the study and the directions for future research are also pointed out.

Finally, Chapter 9 provides a short summary of the study. Figure 1.1 illustrates the structure of the study.

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Figure 1.1 The structure of the study

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2 BUSINESS DEVELOPMENT IN SMES

The word enterprise has been used in a range of contexts and meanings (Bridge, O’Neill & Cromie 2003, 14). For someone, the word enterprise refers to starting, running and developing a small business. For others, it is a set of the personal qualities and attitudes of entrepreneurs making it possible to recognise opportunities instead of problems. The European Commission defines an enterprise to be an entity engaged in an economic activity, irrespective of its legal form (Official Journal of the European Union 2003).

Salminen (2000, 41) describes an enterprise as a controlled system consisting of a detector, a selector and an effector. The detector is the function by which a system acquires information about its environment, which is then used as the basis of the selection of a behavioural response by the selector. Finally, the behaviour is executed by the effector. The measurement system of an enterprise gathers information about the changes in both the environment and the performance of the enterprise. This information is then used together with the values and the preferences of the enterprise and its management to produce decisions about the required actions. As a result, the outputs of the enterprise – the products, the services, the operational performance and the financial performance - are changed (Salminen 2000, 41). Figure 2.1 depicts the system view of the enterprise.

Detector Measurement

system

Selector Management

decision

Effector Implementation

of actions

Output Enterprise performance Enterprise

Feedback

DEVELOPMENT PROJECT

Figure 2.1 Enterprise as a system (Salminen 2000, 41)

This study has adopted the view introduced by Salminen (2000), describing an enterprise as a system where business development projects are implemented.

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2.1 Definition of an SME

The definition of small and medium sized enterprise (SME) has varied. Because of the diversity of small business, every simple definition is subject to criticism. The ideal definition depends on one’s perspective and the purpose of the research (Nooteboom 1994, 328). The number of employees and the financial turnover are commonly used attributes. When categorising enterprises with these attributes, it is useful to notice the difference between various industries. While a consumer service firm is considered as big with 50 employees, in manufacturing it may not be considered as a big firm. According to Nooteboom (1994, 328), the characteristics of a small firm can also arise in the relatively independent units of large firms.

The Employment and Economic Development Centre (TE-Centre Finland 2002) has defined the small firm as an enterprise with fewer than 50 employees. Its turnover is no more than 7 million euros and the total assets are no more than 5 million euros. A medium sized enterprise has fewer than 250 employees. Its turnover is no more than 40 million euros and the total assets are no more than 27 million euros.

Further, bigger companies’ share of the ownership is limited. They can hold a share of the ownership of the SME by no more than 25 %.

The European Commission (Official Journal of the European Union 2003) has divided the SME-sector into three categories, micro, small and medium-sized enterprises as follows:

The SME employs fewer than 250 persons, its annual turnover does not exceed 50 million euros and/or the annual balance sheet total does not exceed 43 million euros

The small enterprise employs fewer than 50 persons, and its annual turnover and/or annual balance sheet total do not exceed 10 million euros The micro enterprise employs fewer than 10 employees, and its annual turnover and/or annual balance sheet total do not exceed 2 million euros

To gain a better understanding of the real economic position of SMEs and to remove from that category group such enterprises whose economic power may exceed that of genuine SMEs, a distinction was drawn between the different types of enterprises, depending on whether they were autonomous (autonomous enterprise), whether they had holdings which did not entail a controlling position (partner enterprises) or whether they were linked to other enterprises (linked

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enterprises). To be an autonomous enterprise, the general limit of holding is 25 % (Official Journal of the European Union 2003).

The definition of an SME proposed by the European Commission (Official Journal of the European Union 2003) has been adopted in this study.

When using the size of personnel, defined by the European Commission as a criterion for SMEs, 99.7 % of all Finnish companies were small and medium sized firms in the year 2002 (Statistics Finland, 2002). This means that there are altogether over 220,000 SMEs in Finland. The employing power of SMEs is high.

About 800,000 people - over 60 % of the total workforce - work for SMEs.

2.2 Characteristics of SMEs

The typical characteristics of SMEs are connected to small scale, personality and independence (cf. Nooteboom 1994, 327 – 331; Julien 1998, 15 - 17). Hudson et al. (2001, 1105) summarise a number of key characteristics for SMEs:

Personalised management, with a little devolution of the authority

Severe resource limitations in terms of management and manpower, as well as finance

Reliance on a small number of customers, and operating in limited markets Flat, flexible structures

High innovatory potential Reactive, fire-fighting mentality Informal, dynamic strategies

According to Messeghem (2003, 199) and Julien (1993, 158), the major characteristics of SMEs involve simple organisational structures, the prime role played by the owner-manager as a driving force, an essentially local market, implicit strategy and a little planning and control. Their resources are limited and their strategic options are comparatively simplistic and narrow (Robinson Jr. &

Pearce II 1984, 128). However, by using networks, SMEs can compensate for their lack of resources. The external networks of SMEs are not well-defined and the companies’ intelligence gathering systems are typically unsophisticated and non- comprehensive (Schindehutte & Morris 2001, 87).

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As advantages of the small scale, SMEs typically have a motivated, committed management and labour. They also have the capacity to customise their products and processes, being able to respond to varying customer requests (Martinsuo &

Karlberg 1998, 7). SMEs, with their centralised decision-making, organic organisation and relatively non-specialised production factors, are able to change quickly (Julien 1993, 161).

The personal characteristics of the owner-manager have been under increasing interest. Some attempts have been made to explain business success or failure in terms of personality traits of the entrepreneur (cf. Glancey, Greig & Pettigrew 1998; Stewart Jr., Watson, Carland & Carland 1998). Nooteboom (1994, 329 - 330) highlights that one of the most important characteristics of the small business is its diversity. The sources that produce diversity lie in the variance of the backgrounds, motives and goals of the entrepreneurs.

The terms, entrepreneur and small business owner are often used as synonyms.

The most common definition for the entrepreneur or for the small business owner is that she or he is a person who has started a business. Some researchers (cf.

Stewart Jr. et al. 1998, 204; Carland, Hoy, Boulton & Carland 1984, 358) have specified a portrait of an entrepreneur and a small business owner. An entrepreneur is an individual who establishes and manages a business for the principal purposes of profit and growth. She or he is highly driven for success and characterised principally by innovative behaviour. An entrepreneur will employ strategic management practices in business and she or he has a high propensity for risk- taking. The small business owners are less risk oriented, and they are not as highly motivated to achieve as the entrepreneurs are. The small business owner establishes and manages a business for the principle purpose of furthering personal goals. The business is the primary source of income and will consume the majority of one’s time and resources. The small business owners do not have the same degree of preference for innovation and risk-taking. The owner perceives the business as an extension of her or his personality, intricately bound with family needs and desires (Carland et al. 1984, 358).

Some researchers have defined the characteristics of SMEs by comparing them with large companies. Storey (2000, 10 - 12) introduces three central respects in which small enterprises are different from large companies: uncertainty, innovation and evolution. Environmental uncertainty has been defined to include absence of

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sufficient information about changes in the environment and/or inability to predict external changes and their impact (Duncan 1972, 318; Milliken 1987, 134). Van Gelderen, Frese and Thurik (2000, 170) have conceptualised uncertainty for three levels: the industry level, the firm level and the individual level. The industry level uncertainty refers to the changes and unpredictability of the economic environment. On the firm level, it refers to resource uncertainty and on the personal level the uncertainty is connected to the adequacy of entrepreneurial capabilities.

According to Pasanen (2003, 44), changes in the environment cause more uncertainty in SMEs than in larger companies, because SMEs’ resources for acquiring information about the market and changing the course of the enterprise are more limited. Some researchers (cf. Boynton, Gales & Blackburn 1993;

Sawyerr, McGee & Peterson 2003, 283) have found that managers can respond to uncertainty by finding information from external sources and by personal networking, and by doing so they can influence the financial performance of their firms. Brüderl and Preisendörfer (1998, 224) continue that the network of a founder improves the survival and growth of newly established businesses.

The second key area of difference between small and large enterprises is their role in innovation. The conventional role that the small enterprises play in innovation is their niche role. It is the ability of the smaller enterprise to provide something marginally different, in terms of a product or a service, which distinguishes it from the more standardised products or services provided by large enterprises (Storey 2000, 11 - 12). Georgellis, Joyce and Woods (2000, 8) add that the extent the small businesses will be successful in the innovation depends on whether they possess the following three competencies: a capacity to innovate, a capacity to plan ahead and a willingness to take risks.

According to Acs, Morck, Shaver and Yeung (1997, 11), radical innovations are more likely to take place in small firms than in large firms, because of the advantages that the small firms offer in protecting the property rights. The refinement and commercialisation of innovations are more likely to take place in the larger firms because of the availability of resources. The high rates of innovation made by SMEs therefore require property rights protection and low entry barriers.

The entry barriers that limit expansion are systemically higher for smaller firms than for larger firms. Martinsuo and Kalberg (1998, 8) claim that SMEs play an

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important role in innovation, but they have difficulties accessing new technology, financing and other resources.

The third area of difference between large and small enterprises is the much greater likelihood of evolution and change in the smaller enterprise (Storey 2000, 12). The small enterprises that become larger undergo a number of stage changes, which influence the role and style of the management and the structure of the organisation (Churchill & Lewis, 1983). The structure and organisation in the small enterprises are more likely to be in a state of change as the firm moves from one stage to another.

After defining the core characteristics of small business, Nooteboom (1994, 333 - 334) continues that much else follows, including small business strengths and weaknesses. The strengths and weaknesses suggest appropriate core strategies;

innovation yielding new products where scale effects are not yet in force or/and niche markets with customised products, where scale effects do not appear (Figure 2.2). The small firms tend to be strong where the large firms tend to be weak and vice versa. An advantage of the smallness is the greater potential flexibility and closeness to the customer. The disadvantage is a lack of economies of scale, scope and experience (Nooteboom 1994, 335 - 344).

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CHARACTERISTICS STRENGTHS Intertwined ownership and

management Motivated management / commitment Integration of tasks for worker;

variation and improvisation Motivated labour

Few hierarchical levels; short

communication lines No bureaucracy; internal flexibility; little filtering of proposals

Few and simple procedures; personal,

direct, oral internal communication Low cost and little distortion of internal communication

Personal and close relations with

customers Capacity for customisation

Craftsmanship Unique or scarce competencies

Tacitness of knowledge Appropriability

Idiosyncratic perception Originality of initiative

CORE CHARACTERISTICS Small scale Personality Independence

CORE STRATEGIES Innovation or niche strategies New and / or customised products

External networks

Idiosyncratic perception Unopposed misapprehensions Tacit knowledge Limited capacity for absorption of new

knowledge / technology Craftsmanship Technical myopia

Few products and markets Little spread of risk, limited synergy Small volume of production Diseconomies of small scale

No staff functionaries Lack of functional expertise

Lack of managerial time Ad hoc management, short term perspective Much authority and many

functions in one hand Vulnerability to discontinuity of management and staff Few layers of hierarchy Limited career opportunities Low level of abstraction

product – or technique orientation Errors in marketing and strategy Possible lack of finance Lack of means for growth

WEAKNESSES

Figure 2.2 Strengths and weaknesses of small business (Nooteboom 1994, 334)

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2.3 Business success in SMEs

In general success is related to the achievement of goals and objectives. The different stakeholders may have different goals and aspirations for the enterprise, and they may change over time. Because of the central role of the entrepreneur in a small enterprise, Jennings and Beaver (1997, 67 - 68) suggest that it would be appropriate to regard an entrepreneur as the primary stakeholder and to consider how she or he might define success or failure. The entrepreneur’s values and expectations may affect the main goals of the enterprise greatly.

2.3.1 Elements of business success

Some researchers have argued that success is driven by the entrepreneurial orientation (cf. Covin & Slevin 1991; Lumpkin & Dess 1996; Wiklund & Shepherd 2004). According to Lumpkin and Dess (2001, 431), the concept of entrepreneurial orientation consists of five dimensions: autonomy, innovativeness, risk taking, pro- activeness, and competitive aggressiveness. Autonomy is defined as an independent action by an individual or a team aimed at bringing forth a business concept or a vision, and carrying it through to completion. Innovativeness refers to the willingness to support creativity and experimentation. Risk taking means a tendency to take bold actions, such as venturing into unknown new markets. Pro- activeness is an opportunity-seeking and forward-looking perspective. The fifth dimension, competitive aggressiveness, reflects the intensity of a firm’s efforts to outperform the industry rivals. (Lumpkin & Dess 2001, 431).

High performing, entrepreneurial-oriented firms are successful in exploiting business opportunities. Before opportunities can be exploited, they must be recognised. According to de Koning and Brown (2001), the entrepreneurial orientation is positively associated with opportunity alertness. Shane (2000, 465) has discovered that people recognise the opportunities related to the information and knowledge, they already possess. He also has noticed that entrepreneurs can and will discover opportunities through recognition rather than through search.

Small business success has often been classified into three categories of antecedents: the individual characteristics of the owner-manager, firm

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characteristics and environmental characteristics (cf. Cragg & King 1988;

Rutherford & Oswald 2000). The individual characteristics include attributes like the age, education, managerial know-how, industry experience and social skills of the owner/manager. The firm characteristics refer to the strategy, structure, location, firm-specific policy, etc. The environmental characteristics are connected to the market conditions.

Glancey et al. (1998, 255) have introduced a model of entrepreneurial dynamics, revised from that suggested by Cragg and King (1988). The personal attributes of the entrepreneur determine the motivation and objectives, which in turn determine the firm’s performance. The process is mediated through the markets in which the entrepreneur operates and the managerial practices which he or she employs. The dynamic element is incorporated by the possibility that the business performance may reinforce or revise the entrepreneur’s motivation and objectives. The possibility of feedback on the performance and learning from experience as an important form of entrepreneurial human capital are encompassed in the model (Figure 2.3).

Markets in which firms operate

Entrepreneur’s characteristics

Managerial practices Entrepreneur’s

objectives

Business performance

Figure 2.3 Model of small firm performance (Glancey et al. 1998, 255)

Some authors (Chell 1985; Hofer & Sandberg 1987, 12) have criticised the small business research for trying to establish a direct relation between the personal characteristics of the entrepreneurs and the success or failure of their firms. E.g.

Birley and Westhead (1994, 27 - 28) could not find any empirical support for the strategies of picking the winners solely on the basis of the characteristics of the owner-manager and the business start-up reasons. Nooteboom (1994, 332) continues that those characteristics do not determine the outcomes directly. They are in interaction with contingency factors from the context in which the firm and the entrepreneur operate and with the strategies they take (Figure 2.4).

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Characteristics Entrepreneur / firm

Goals / values

Conduct Search Strategy / Structure

Product Price, etc.

Context / Structure Market Life cycle / stage

Institutions Technology

Performance Profit Growth Potential

Figure 2.4 Structure – conduct – performance (Nooteboom 1994, 332)

In addition to the various characteristics of an entrepreneur, it is necessary to recognise also the team with which she or he works. The values and goals affect the preferences. With the context/structure it is necessary to consider not only items of technology and market, but also institutions. Life cycle refers to the stage of the development of the product or the market in which the firm is involved and the developmental stage of the firm. Under conduct are included the strategy, the organisational structure with procedure and routines, the choice of product, the search referring to the acquisition of the knowledge and the use of the external networks to compensate for the internal lack of expertise. (Nooteboom 1994, 332 – 333).

Beal (2000, 28) provides a similar model. He emphasises that both external and internal alignment influence a firm’s performance. The external alignment means the alignment between the competitive strategy and the industry life cycle stages, and its effect on the performance. The internal alignment means the competitive strategy and the small business manager’s functional experience and its effect on the performance.

According to Jennings and Beaver (1997, 63), a popular belief is that superior performance and competitive advantage in the smaller firm is invariably equated with successful business development culminating in exceptional return on the

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investment, sales growth, volume, profit and employment. They continue that contrary to popular belief the owner-managers pursuit of personal financial fortune is not as significant as the desire for personal involvement, responsibility and independent style of life. The attainment of these objectives becomes one of the principal criteria for success.

2.3.2 Growth as a source of business success

Many scientists have shown an increasing interest in the growth of SMEs as a main source of improvements in the business success. Woodward (1976, 113 – 114) warns to aspiring for growth just for growth’s sake; it is not a synonym for success.

The huge number of conflicting explanations may reflect the problematic nature of the phenomenon. The SME growth may be a result of strategic choices made by entrepreneurs or structural characteristics of the external environment (Eisenhardt

& Schoonhoven 1990, 524 – 526; Hambrick & Mason 1984, 197 - 198). Also O'Gorman (2001, 60) divides the different kinds of explanations for growth into two generic categories - strategic choice explanations and industry structure explanations. The strategic choice explanation emphasises the fact that SME growth is a result of strategic and structural choices made by the entrepreneurs. The industry structure explanation highlights the fact that the entrepreneur has only a little influence on the growth, because for many SMEs the principal determinant of growth is the structural characteristics of the industry. The SMEs grow at different rates within the environment or the industry context. These differences in the performance suggest that the strategic choices made by the entrepreneurs impact on the organisational growth. The organisational growth and change are based on the assumption that organisations can and do grow and change under managerial guidance through various stages of industry evolution (O'Gorman 2001, 61).

Rather than keeping the strategic choice and the environmental approaches separate, it have been suggested that it might be useful to combine these approaches (Bourgeois III 1984, 593; Roper 1999, 245). Poutziouris (2003, 191) writes that while the most important factor for business growth is the overall market demand for products and services, the management capacity and the attitudes towards change, succession and growth play an equally significant role in determining the business success. According to Morrison, Breen and Ali (2003,

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423), a key distinguishing feature of the pro-growth small business is the balanced alignment of the owner-managers’ intention, the abilities of the business, and the opportunity environment. Also Barringer and Jones (2004, 84 - 85) highlight the importance of the managerial capacity and motivation to ensure the successful growth of the firm. Storey (2000, 122 - 154) argues that the growth of the small business is driven by the interaction of three key groups of variables:

The calibre of the owner-manager(s) and the entrepreneurial resources;

motivation, education, management expertise, skills, age and family history

Business profile; age, size, sector (high-tech/low-tech, export intensity), legal form and ownership regime

Strategic planning; market positioning, research and development, exporting, external financing, human resource management and development, succession planning, etc.

According to Storey (2000, 158), the rapidly growing enterprises constitute a tiny proportion of the small enterprise population. Most of the enterprises, even in ideal macroeconomic circumstances, do not wish to grow in the employment. Those enterprises that exhibit low or negative growth have significantly higher death rates than the fast-growth firms. The SME-enterprise barometer (PK-yritysbarometri 2000, 11) shows that fast growth is not a main target for most Finnish SMEs; less than a tenth of the small and medium sized enterprises want to gain fast growth.

Half of the SMEs target at growth if they have a chance for it. Only 7 % of the SMEs do not target at the growth at all. The willingness for expanding is higher, when the size of the enterprise expands. Also Poutziouris (2003, 202) has found that only a minority of the small business owner-managers are growth inspired. Growth is often associated with higher risk-propensity, dilution of control through the extension of management teams and broadening of the equity ownership base. The elements that appear to be associated with growth are: motivation, education, having more than a single owner and middle-aged business owners. Amongst the strategy variables, the willingness to share the ownership, the ability to identify the niches, the introduction of the new products and the ability to create teams of managers, are generally related to growth (Storey 2000, 158). Beekman and Robinson (2004, 73) add that the successful growth companies appear to seek a few or a sole strategic supplier partner and concentrate on making that relationship work to their advantage.

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2.3.3 Strategy and planning as a source of business success

The influence of the strategy and planning systems on performance in the SMEs has been under increasing interest. The previous studies that have examined the relationship between strategic planning and business performance, have reported conflicting results - some finding a positive and significant impact (cf. Bracker &

Pearson 1986, 516 – 519; Peel & Bridge 1998, 854 - 855) and others finding no relationship (cf. Greenley 1986, 108). Robinson Jr. and Pearce II (1983, 202 – 205; 1984, 129 - 130) argue that formal strategic planning is a conceptual activity suited solely for large firms, but it has no effect on the financial performance of small firms. They suggest that the small firms lack the necessary staff and time to engage in strategic planning or marketing. Instead, the SMEs focus on operational aspects geared primarily to survival on a day-to-day basis. Kargar’s (1996, 30) findings support the view that the benefits of strategic planning are more of a process nature, which may be necessary, but not a sufficient condition for improving the financial performance. Meanwhile Bracker and Pearson (1986, 516) write on the basis of their research results that firms with a long planning history outperform firms with a short planning history. According to them, it takes time, expertise and experience to develop and to implement a sophisticated strategic planning system within an organisation. The level of sophistication of the planning process has an impact on the financial performance, especially on revenue growth and entrepreneurial compensation growth (Bracker & Pearson 1986, 517). The most common indicator of the existence of a formal planning process is the presence of a written long-range plan (Rue & Ibrahim 1998, 25).

In SMEs, the vision and strategy are not necessarily well defined or there is no clear strategy or vision at all. According to Tenhunen, Rantanen and Ukko (2001), the most important factor in the implementation process of performance measurement systems in SMEs are a precise statement of the corporate strategy, and support and commitment of the top management. Also Dollinger’s (1984, 364) research results highlight the importance of strategy. According to his results, strategic action is related to the performance of the firm and the compensation of the entrepreneurs. In spite of this, the strategic plans and the goal structure can be implicit. O’Gorman and Doran (1999, 64 - 65) found in their study on Irish SMEs that high-growth SMEs do not have more comprehensive mission statements than low-growth SMEs. According to them, expressing the mission in a formal statement is certainly an option, but with the Irish SMEs it was not clearly critical to the

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success. An important point is that the company must have a clear sense of direction. According to Jarvis, Curran, Kitching and Lightfoot (2000, 125) the reality is that the owner-managers of small firms pursue a range of goals, but the most important appear to be business survival and stability.

2.4 Challenges of business development in SMEs

According to Storey (2000) and Julien (1998), typical problems in SMEs are a lack of resources, money, technology and time. Also the SMEs’ short-term perspective may cause problems. Hannula and Rantanen (1998, 90) found in their research carried out in the Päijät-Häme and Pirkanmaa regions that the most common internal obstacles to productivity improvements in SMEs are the lack of time and a general lack of resources. Workers' shortcomings in knowledge and education were also found to be significant.

Many authors have recognised the lack of management skills as one main problem in SMEs (Winch & McDonald 1999, 49; Youssef, Mohamed, Sawyer Jr. & Whaley 2002, 303). While larger firms are likely to have experienced a major change at the some point in their company history, smaller firms, either because of their newness or their slow-growth histories, may not have. A SME may easily find itself with limited indigenous management skills - not only in change management itself, but also in the new skills that will be necessary to manage the enterprise after a change has taken place (Winch & McDonald 1999, 49). The SMEs will more likely to engage in informal management practices than to adopt sophisticated planning and control techniques (Martin & Staines 1994, 26). Berman, Gordon and Sussman (1997, 1) add that most small enterprises not only lack sophisticated planning processes, but also almost any planning processes. The SMEs are susceptible to business failure primarily due to the poor risk management associated with inadequately informed decision-making (Barnes, Coulton, Dickinson, Dransfield, Field, Fisher, Saunders &

Shaw 1998).

According to Youssef et al. (2002, 303), many SME-owners have little formal management training. The limited size of the management team means that the individuals are often responsible for a number of different functions with either little or no backup. A small number of de-motivated or uncommitted staff can disproportionately affect the outcome. The centralisation of the decision-making

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process within the SMEs means that the manager can either be the main stumbling block to change or the main catalyst for the change (Ghobadian & Gallear 1997, 127). The lack of extended hierarchy offers the top management the opportunity to build a strong personal relationship with the employees, but it also increases the potential for interpersonal conflict (Ghobadian & Gallear 1997, 127 - 129).

The SMEs typically have the less formalised internal and external information and communication systems. According to Winch and McDonald (1999, 50), the shorter internal lines of communication and the faster response times allow speedy problem solving and reorganisation. Martinsuo and Karlberg (1998, 7) continue that the SMEs’ decision-making process is effective, but disadvantages in SMEs are their limited capacity for marketing, strategy, acquisition of the new knowledge and technology, and finally sensitivity to external pressures and risks. Nooteboom (1994, 344) warns about risks due to the absence of specialised staff and the lack of outside criticism. Lang, Calantone and Gudmundson (1997, 20) discovered that when facing a threat or an opportunity, the small firm managers must gather the data outside of the organisation due to the lack of internal information systems.

The lack of resources causes problems for the SMEs in developing their products and utilising new technology. It is a potential barrier to innovation and adaptability (Acs et al. 1997). Hyvärinen (1993, 1) continues that SMEs can manage only one innovation project at a time. They have to choose the project very carefully so that it will not turn out to ruin the whole enterprise. Some SMEs never develop a new product or other innovation, and even small development projects can be problematic to them. According to Nooteboom (1994, 338), small firms participate less in R&D projects than large firms, but when they do participate, it happens with a greater intensity and a greater productivity than in large firms.

An SME is often strongly based on the owner’s know-how and expertise. The role of the owner is important. SMEs are often subcontractors for large firms and they operate in a great hurry in tight competition dictated by the markets. In a hardening and internationalising competition, new skills and knowledge are needed (Rantanen, Ukko & Rehn 2001). Especially the pursuit of growth requires that the owner can learn new skills and change from a doer to a manager – he or she must spend less time doing and more time managing (Churchill & Lewis, 1983, 38).

Pennings, Lee and Van Witteloostuijn (1998, 437 - 438) have discovered that the industry-specific human capital and the social capital of the owners contribute more