Advantages for small and medium-sized enterprises?

1995/04/01 Aranguren, Mari Jose Iturria: Elhuyar aldizkaria

• Teknologia
• Enpresa

If we look at the evolution that occurs in the number of small and medium enterprises and the employment to which these companies belong, in the Basque manufacturing industry the weight of small and medium enterprises increased markedly in the second half of the 80's. The small and medium enterprises created over the years have been the main job creators in the Basque manufacturing industry. In addition, this does not only happen in the ACBC, but if we address reports and research from national and foreign countries, it can be observed that in Spain, the United States, the United Kingdom, France, etc. the same thing happened. If any particular characteristic is mentioned with respect to foreign countries, we should mention the delay of this event in Spain and the ACBC, since in these two areas this increase in the weight of small and medium enterprises has occurred later than in foreign countries.

Although small and medium-sized enterprises have played an important social role, that is, they have been important sources of employment, in many studies of Industrial Economy, the greater relative weight of small businesses in the industry of a country has been considered as an obstacle or weak point for the competitiveness of this country. In favor of this opinion the following reasons have been mentioned:

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  Small and medium-sized enterprises created in the second half of the 1980s have been the most important job creators in the Basque manufacturing industry.
  In sectors where economic scales are important, small businesses are at a disadvantage. That is, by producing more product units in a sector, they will be able to produce less and in that sector small companies would have difficulty competing in costs with large ones. The economic scales are given by the distribution among more productive units of the part or fixed cost of the investments that are made. Consequently, the economic demands in a company can have different origins and are not generated by will and desire for the distribution of the fixed costs of the production process, but by the distribution of the fixed costs that are generated in technology, different marketing areas, etc. Moreover, it seems that in recent years they occur more frequently for these last two reasons.
• Small businesses often have a lower technological level, largely because of one of the reasons we have mentioned when talking about economic scales, that is, because of the importance that economic scales can have in technological investments (e.g. R&D costs are usually fixed costs) and the more they occur, the more easily the investment made would be profitable. Therefore, since large companies produce more, they would have more facility than small ones to monetize their R&D investments. As a result, small businesses struggle to compete in sectors that demand high fixed investments at the technological level.
• For the same reasons, and this time regarding marketing costs, i.e. advertising costs, etc., large companies usually have more work in the marketing area. This, as we have already mentioned when talking about technology, is due to the different economic scales that can be given in marketing, that is to say, that large companies can distribute among more products the fixed marketing costs for producing more units. Consequently, in sectors very open to foreign trade that require high fixed marketing costs, small businesses can hardly compete.

Small businesses struggle to compete in sectors that demand high fixed investments at the technological level.

However, despite the fact that small and medium-sized enterprises present certain barriers to competitiveness, we cannot say that the fact that they are small companies is damaged by the competitiveness of a country until it has been previously seen what type of sectors exist in that country. In the following lines we will talk about some of the advantages that small businesses can have:

• In highly variable sectors, where the level and characteristics of their demand vary frequently and easily, small businesses can have advantages. Large companies, due to their structure, have higher fixed costs. That is, in large companies capital costs have more weight than labor costs, so the flexibility of large companies is less. As a result, small businesses have the facility to adapt to demand changes with lower cost variations than large companies, and this is the concept of flexibility used by Stigler.
• On the other hand, in small businesses decision-making is made faster and easier, especially by the lower hierarchy of them. As a result, small businesses have ways to accelerate the dissemination of information between higher and lower and higher levels. This is another concept of flexibility used by the author Harrigan.

Small businesses can hardly compete in sectors very open to foreign trade that require high fixed marketing costs.

In recent years demand has undergone major changes, both because of the influence of fashion and the growing internationalization. This also requires flexibility to be competitive.

Finally, it must be said that in sectors disadvantaged by economic scales, small businesses can take advantage of other means to be competitive. These means can be:

• Flexible technologies: In the 1980s, flexible technologies, i.e. easily adapted technologies to produce different products, have made great strides and these flexible technologies reduce the importance of cost-effective product scales. Therefore, small businesses can invest in flexible technologies and obtain the profitability of this investment through the production of different products in these machines and obtaining economic scales at the business level instead of obtaining the product level.
• 

  Small businesses can hardly compete in sectors very open to foreign trade that require high fixed marketing costs.
  Business cooperation: small businesses can cooperate in several areas, that is, share market networks, certain special technologies, etc. In this way, by distributing the fixed costs that can be given in some areas between the product units of the different companies, they would be easier to monetize their investments.
• Differentiation strategy: small businesses, although they have difficulty competing in sectors where the economic scale is important, can compete in the other strategy, that of differentiation. On the one hand, they can take advantage of frequent changes in demand characteristics (influencing fashion, etc.) to try to be the first to offer these features. On the other hand, you can differentiate your products by directing them to a part of the market, that is, based on the proximity to the customer and using customers who value this feature, you can direct them to the market of the environment in which they are located.

Therefore, we cannot affirm, without more, that the existence of small and medium enterprises is detrimental to the competitiveness of a country. The analysis should be reduced at least at the sectoral level in order to say so. There are very intensive sectors in capital where economic scales are very important. It would be necessary to see if in these sectors small companies find the way to face the difficulty of competing in costs.

In highly variable sectors, where the level and characteristics of their demand vary frequently and easily, small businesses can have advantages.

Other sectors, however, may present a very variable demand (it may be that in some of them the economic scale is also important), that is, that the level of demand or the characteristics of the same can present large variations (e.g. At a given time the demand for leather shoes can be very high and after a while fashion, or the importance that sport acquires, people may prefer to buy sneakers to do sport). In those countries where this type of sector has a significant weight, it will be very important to have companies with a high potential for adaptation to supply/demand, and in these cases small companies can be suitable for their flexibility.