INTRODUCTION TO SMES BY ASSOC DR SUSANNE DURST

INTRODUCTION TO SMES BY ASSOC. DR. SUSANNE DURST SOUTH URAL STATE UNIVERSITY – 13 DECEMBER 2016 UNIVERSITY OF SKÖVDE – WWW. HIS. SE/EN Bild

AGENDA 1. Differences between small and large firms 2. Economic impact of SMEs 3. Defining SMEs 4. Working in SMEs Bild 2 2

KEY DIFFERENCES BETWEEN SMALL AND LARGE BUSINESSES Aspect Small Business (SB) Large Business (LB) Consequence Risk of failure High Low SB focus on survival/growth Market power Price taker Price maker SB focus on niche Management Owner–manager Employee– manager SB incentives more aligned Owner’s motivation Diverse Shareholder value Diverse business performance Brand No brand value Brand important LB focus on brand Strategy Flexibility Price SB more likely to pioneer innovation Internal organisation Informal Formal LB seeks to reduce ‘internal’ uncertainty Bild 3 3

KEY DIFFERENCES BETWEEN SMALL AND LARGE BUSINESSES (CONTINUED) Aspect Employee wages Small Business (SB) Low Large Business (LB) High Human resources Diverse (e. g. Attracts educated satisfied/exploited) workers seeking a practices career Formal training Low High Investment Low High Finance Limited choice Wider choice Political influence Low High Consequence Hire different types of workers SB job satisfaction higher but LB have better pay SB seen as ‘backward’ LB focus on investment LB have greater access to finance LB have more political power Bild 4 4

WORD ASSOCIATIONS How do small and large businesses see themselves? § Small businesses – customer focused § Large – reliable How is it seen by the other? § Small (by large) – lacks credibility, unreliable § Large – bureaucratic, price maker What are the key words? § Small – uncertainty, diversity, flexibility, failure § Large – reliability, brand, market power, influence Bild 5 5

WHY FOCUS ON SMALL BUSINESS? Small businesses are the most common size of businesses wherever you are in the world: in all countries large businesses represent less than 5 per cent of the enterprise population Contribute a great deal to employment and income of any economy: in the EU, two-thirds of employment is provided by SMEs Bild 6 6

SMES ARE NUMERICALLY DOMINANT GLOBALLY Bild 7 7

NUMBER OF SMES IN RUSSIA • There about 4, 6 mln small and medium enterprises, including 2, 9 mln private entrepreneurs • 1, 4 mln micro-enterprises (up to 15 employees, annual sales without VAT up to 1, 5 mln EUR); • 229. 000 – small companies (up to 100 employees, annual sales without VAT up to 10 mln EUR); • 25. 700 – medium companies (up to 250 • employees, annual sales without VAT up to 25 mln EUR). • SME employ 19 mln people (14% of the total population of Russia) that is about 22% from the general employment over Russia Source: RUSSIAN AGENCY FOR SUPPORT OF SMALL & MEDIUM BUSINESS Bild 8 8

ENTERPRISES, EMPLOYMENT AND GROSS VALUE ADDED OF SMES IN THE EU-27, 2012 (European Commission, 2013) Bild 9 9

DEFINING THE SMALL BUSINESS Difficult because there are different ways of classifying small business activity Self-employment – no agreed definition but does often involve four elements: § Control § Integration § Economic reality § Mutuality of obligation Bild 10 10

BOLTON’S (1971) CONCEPTUAL DEFINITION OF A SMALL BUSINESS • Owned and managed by the same individual(s) – focus on alignment of aspirations • Legally independent – focus on enterprises rather than establishments • Have a small share of the marketplace – price takers Bild 11 11

CURRAN AND BLACKBURN’S (2001) APPROACH Problems with Bolton’s qualitative approach § Small businesses are heterogeneous § Small in one sector may be large in another § How do you measure small businesses? Prefer ‘grounded approach’ (asking small businesses to self-define ‘smallness’) Bild 12 12

EUROPEAN UNION’S DEFINITION Bild 13 13

RUSSIA’S SME DEFINITION http: //www. doingbusiness. ru/definition-of-sme/support-contacts/sme-support/definition-ofsme-eu-vs-russia/item Bild 14 14

INTERNATIONAL PROBLEMS WITH MEASURING SMES Figures tend to only count ‘formal’ businesses § Micro-sized businesses less likely to be registered § May operate in the informal economy § Registration thresholds likely to be set higher than lower No standard measure of what is an ‘SME’ Yet despite these issues, SMEs are most common type of enterprise in the world Bild 15 15

GREATER LEVELS OF JOB SATISFACTION IN SMALLER BUSINESSES Violence and harassment, by business size, EU -27 (%) Figure 4. 4 Bild 16 16

WHY ARE SMALL BUSINESS WORKERS MORE SATISFIED? Large business workplaces have greater levels of formality (rules and procedures) Smaller business workplaces marked by greater levels of informality (e. g. owner-managers more likely to know their staff) In Europe: higher job satisfaction must be related to aspects such as work autonomy and the meaningfulness of the work. Experts confirm that it is particularly the "soft" side of the work relationship that is valued highly by employees in SMEs. Employees seem to value the face to face relationships in SMEs positively, and most managers at SMEs are not autocratic (EIM, 2011). Bild 17 17

REMUNERATION Employees in SMEs tend to receive lower wage levels than in large enterprises, even when a correction is made for enterprise, job and employee characteristics Possible explanations: • Labour productivity increases with firm size. • Larger firms have more financial resources. • SMEs can better monitor individual employees, whereas large enterprises pay a premium to avoid shirking. Bild 18 18

JOB SECURITY Job security is found to be a key element of job satisfaction. A prerequisite for job security is the continued existence of the enterprise. The risk of enterprise death is much higher in SMEs. Roughly half of all start-ups die within 5 years, and SMEs constitute a large majority of this group. SMEs and micro enterprises in particular are less likely to hire workers from temporary work agencies than large enterprises are (EIM, 2011). Bild 19 19

SKILL DEVELOPMENT In comparison to large enterprises, micro and small enterprises show a preference for fewer formal training activities. The most common training methods within SMEs are on-the-job training and selfdirected learning. Somewhat less common is the provision of training courses. For large enterprises, the most common training methods are on-thejob training and internal and external training courses. Enterprises with higher shares of full-time workers, highly educated employees or young employees are more likely to provide training. This is also the case for larger enterprises and innovative enterprises. Bild 20 20

RECRUITMENT AND SELECTION Large firms will mostly use strict criteria when recruiting new employees (for example, demanding a degree indicating that a certain educational level has been obtained), owner-managers from micro and small firms will more often rely on informal, word-of -mouth recruitment methods. For these persons, the actual level of an applicant's motivation, knowledge and skills may be more relevant than the presence of a particular diploma or certificate. Bild 21 21

AGE On average, micro enterprises tend to employ the highest share of older employees (aged 50 years or older) and the lowest share of young employees (aged younger than 25 years) of the three size classes. Small and medium-sized enterprises employ the highest share of employees aged 25 -50 and the lowest share of older employees. Large enterprises employ the highest share of young people. Bild 22 22

REVIEW OF SMALL AND LARGE WORKPLACES Table 4. 4 Small and large workplaces: a review Bild 23 24

THE OWNER-MANAGER • The owner’s willingness to take risks is constitutive for the genesis and the existence of the company. Possible consequence: owners identify and are identified with their business in a way that does not exist in larger companies • These persons determine the company goals and are usually being replaced with their agreement only. This in turn means that the rate of succession is low • Often there is no separation of business and private life Bild 24 25

STRATEGY AND MANAGEMENT I • Empirical studies on insolvency have shown that mainly management and leadership mistakes are the reasons causing insolvency in small companies. • SMEs orientate themselves to quick adaptation of changing business conditions. • Besides lacking resources, SMEs are said to be short of management time and of management skills. • Sometimes the lack of planning and strategy is compensated for by optimism in the company’s own strength in conjunction with flexibility and responsiveness. Bild 25 26

STRATEGY AND MANAGEMENT II • Managerial tools are rarely used in many SMEs. This is mainly explained by a lack of time; missing expertise with such tools is also rather likely. Empirical studies have shown that this situation is likely to change once the company starts growing. • The coincidence of ownership and management induces the fact that decision-making primarily lies in the owners’ hands. • From outside the firm, many owners are suggestive of being very restrictive with respect to the disclosure of information about their companies. This is supported by lower accounting standards and consequently, very low or none financial reporting rules, which in turn make it more difficult for external persons to analyse a company’s condition. Bild 26 27

• • • Numerous new private firms are ‘born to die young’ Many surviving firms are ‘born small and stay small’ Only a small proportion of new and small firms make significant contributions to economic development Attitudinal, resource, operational and strategic barriers (i. e. market failures) to firm formation and growth Universal national support schemes to SMEs (or ‘blanket policies’), ‘targeting’ support, ‘picking winners’, ‘avoid losers’, and / or provide ‘customised support’ to each ‘type’ of entrepreneur or firm Bild 27 28

DESIRE NOT TO GROW • • • Many owners of small firms do not want to grow their ventures Only a small proportion of small firm owners have the inclination or expertise to grow their ventures Owners do not have the aspirations or management skills required to grow a firm Growth may attract attention from competitors who may bid to takeover the business Many entrepreneurs are concerned with maintaining their independence (Birley and Westhead, 1994) Desire to run the firm to a point (‘comfort zone’) which allows owners to maintain control and ownership Bild 28 29