Small- and medium-sized companies (SMEs) represent about 95% of enterprises in Europe1, with a high amount of small companies ranging between 22% - 66% as well as high importance all over the globe2. Nevertheless, the sector of SMEs has been ignored and poorly understood for many decades3. Eventually, a research conducted by the economist David Birch published in 1979 revealed that especially SMEs are responsible for economic growth in general and are the prime source for job creation, accounting for up to 60% of the overall employment4. As a result, the OECD considers them to be the core for economic growth and the dominant form of businesses worldwide in the future, acknowledging the importance of SMEs within global economy5. Knowledge about small- and medium-sized enterprises has become even more important due to the fact that the interest of small firms to operate on foreign markets increased in the last decades6.
This essay depicts the characteristics of small- and medium-sized companies, compares it to multinational companies (MNCs) to determine advantages as well as disadvantages and, finally, examines certain opportunities for SMEs offered by globalization and internationalisation.
First of all, SMEs according to quantitative measures are companies with less than 250 employees7. But they also differ from larger companies by particular qualitative characteristics. On one hand, management and capital are usually in the hands of the owner or a small group of owners, who drive the company by their ambition8. Therefore, SMEs often lack sufficient resources, because they’re not capable of raising as much capital as larger firms, which constraints them in their strategy as well as their expenses in certain areas e.g. promotion9. On the other hand, SMEs operations are basically located in a domestic or local market with a minor size of business compared to others10. As a consequence of the limited scope of operations, small- and medium-sized companies can’t diversify their risk and are more dependent on single customers11.
Compared to multinational companies (MNCs), the deficiency of SMEs concerning resources appears to be the most obvious disadvantage of small- and medium-sized companies. Resources include capital intensity, market power of existing products, a comprehensive distribution of facilities and access to technical expertise12. Especially a lack of information and expertise can lead to suboptimal management decisions within an SME13. The difficulty for SMEs to gain appropriate and sufficient financial resources, which may represent a barrier to growth, has to be emphasized equally14. For instance, about 40% of external financing of SMEs has to be conducted by short term trade debt15.
Particularly larger companies that execute a cost leadership strategy require and require a remarkable amount of capital to achieve economies of scales16. For that reason, SMEs in general aren’t able to achieve economies of scale, which means being able to offer standardized products at a given level of quality for the most competitive price17. Likewise, the effect of experience in producing a certain good or service and operating in a specific environment shouldn’t be neglected18. Learning effects and degression of overhead costs are improving efficiency without sacrificing quality standards, making MNC even more competitive in their cost leadership strategy19.
Moreover, the high capital endowment of MNCs enables them to spend high amounts on
R&D expenditures, which is generally considered the source of innovation and knowledge for a company20.
Another aspect is the influence on the market and on market participants as suppliers, distributors or customers. SMEs in contrast to MNCs aren’t in the position to dictate terms to suppliers or acquire own distribution channels so that they’re at the mercy of their suppliers and distributors21. In conclusion, as the economist Robert W. Vossen noted, the disadvantages of SMEs are the advantages of MNCs and vice versa22.
Considering the disadvantages of SMEs, the success as well as the amount of small- and medium-sized companies within the economy can’t be explained by conventional microeconomic approaches that focus on the view that size and success are determined by allocative and technical resources23. Accordingly, the prevailing assumption of the key factors for production, namely, land, labour and capital to achieve economies of scale to be more competitive than smaller firms24 isn’t the sole valid perspective for a competitive advantage. The economist Michael Porter also rejects these theories as the only reasonable perspectives and stresses the importance of rivalry on domestic markets and geographic concentration of companies and other factors to achieve a competitive advantage25. Unarguably, a company has to develop and possess a competitive advantage that generates perceived value to the customer to exist in an economic background. Furthermore, SMEs, representing a large amount of sustainable enterprises in the economy, have a competitive advantage that obviously deviates from the common cost leadership strategy.
Small- and medium-sized companies apparently have to focus on a differentiation strategy instead of a cost leadership strategy to be successful26. Large companies concentrate on large scale production to achieve economies of scale and ignore niche markets27. To reach an efficient cost ratio, MNCs have to standardize products, disregarding local responsiveness as the cost of standardization28. As a matter of fact, niche markets, customization and innovation can be considered as the most important aspects of successful SMEs. They can operate as specialist suppliers for bigger companies in a specialist market that isn’t attractive for large scale production by larger companies29. This trend can also be observed in manufacturing, where MNCs outsource activities to specialized niche contractors that can operate at lower cost than the MNC itself could30. That's why more and more MNCs tend to decentralize to focus on product and process quality and reliability which emphasizes the importance of horizontal integration in this area as well as local responsiveness31. Moreover, studies stressed that the perceived value of product quality is remarkably higher than of price policy and low cost which are only subordinate32. This represents the opportunity for SMEs to focus on specialized qualitative solutions with minor regard to the costs.
1 See Burns 2001, p.6
2 See Bagnasco / Sabel 1995, p.2
3 See Zoltan / Carlsson / Karlsson 1999, p.6
4 See Bridge / O'Neill / Martin 2009, p.11
5 See McGaughey 2007, p.3
6 See Veciana 1994, p.24
7 See Burns 2001, p.8; see Burns 2011, p.16
8 See Bridge / O'Neill / Martin 2009, p.185f
9 See Burns 2001, p.9; see Bridge / O'Neill / Martin 2009, p.231
10 See Bridge / O'Neill / Martin 2009, p.185ff
11 See Burns 2001, p.10
12 See Burns 2001, p.56f
13 See McGaughey 2007, p.3
14 See Burns p.330f; see Burns 2011, p.18
15 See Zoltan / Carlsson / Karlsson 1999, p.32
16 See Daniels / Radebaugh / Sullivan 2013, p.459
17 See ibidem, p.451
18 See Burns 2001, p.58
19 See Daniels / Radebaugh / Sullivan 2013, p.467
20 See Bridge / O'Neill / Martin 2009, p.18
21 See ibidem, p.186f
22 See Burns 2001, p.57
23 See Zoltan / Carlsson / Karlsson 1999, p.12
24 See Bridge / O'Neill / Martin 2009, p.17
25 See Bridge / O'Neill / Martin 2009, p.150
26 See Daniels / Radebaugh / Sullivan 2013, p.452
27 See Bridge / O'Neill / Martin 2009, p.13
28 See Daniels / Radebaugh / Sullivan 2013, p.468
29 See Bridge / O'Neill / Martin 2009, p.13
30 See Burns 2001, p.62
31 See Bagnasco / Sabel 1995, p.6
32 See Veciana 1994, p.43
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