MEDIUM-SIZED FIRMS, BIG FIRMS LOCALLY Ljiljana Zeljković Sonja Pisarov

MEDIUM-SIZED FIRMS, BIG FIRMS LOCALLY

Ljiljana Zeljković

Sonja Pisarov

Nature of MSFs as organization which combine selected characteristics of entrepreneurship and corporate power

Different types of MSFs Geographical dimensions of MSFs with

respect to locational behaviour and as big firms locally in the mediation of local/global forces

Medium-Sized Firms

“Enterprises differ from each other along innumerable dimensions”

Underline this variability by an explicit focus on MSFs Distinctive characteristics of MFS’so MFS’s as backboneo hidden champions

o potential of MFS’s as “threshold firms” Geographically, the locational choices and spatial

organization of MSF’s have important implications for local development.

Medium-Sized Firms

The potential significance of MSF’s is that they are “big firms locally”

Like small firms – strong attachment to home where ownership, control and investment are largely concentrated.

Hidden outside of their market niches - Locally well known and have noticeable local impact

Their growth requires a geographical extension of activities so they are typically aggressive exporters

Have special role in linking the fortunes of localities with the forces of globalization

Towards a theory of medium-sized firms

Small firm – employs less than 100 people and have sales less than US $25 million

(Small) medium-sized firms – employing between 100, 200 and 300 people with sales US $25-50 million range

MNCs – employing in excess of 10.000 and with sales measured in billions of dollars

What about the firms between these size ranges?

- A lot of them and may be regarded as incorporating the “true MSFs

Towards a theory of medium-sized firms

“Little giants” stemmed from their impressive growth and profitability performance especially in relation to the real giants

These firms specialize in specific product-market niches, all have major exports and most have international operations

Medium-sized firms as backbone firms: a model

Nakamura – MSFs vitally important to the economy as a whole backbone firms

The corporate priorities and culture of MSFs are comprehensively shaped by the values of dominating entrepreneurs

Entrepreneurs closely co-operate with skilled and participatory workforces

R&D and marketing are key which focus this co-operation on innovation, with respect to technology, work organization, marketing and product markets

Highly innovative and seek to enhance the penetration of highly specialized market niches, often on international scale.

Strong commitment to exporting and foreign investment


MSFs typically evolve from small firms but can originate in other ways (spin-offs from large firms)

May remain medium sized, grow to become larger themselves, be acquired by large firms or decline back into the small firm sector, or even fail.

Differ from small firms in terms of organizational structure and technology as well as with respect to size.

As in the case of small firms influenced by the abilities, values and even personalities of individual entrepreneurs. But due to the scale and speed of growth have to deal with a range of new managerial challenges as they learn to functionally decentralize

In MSFs, but not in small firms, the realization of firm-level economies of scale is important


In contrast to corporate giants, MSFs are more entrepreneurial so decision making is faster process and decision-makers are in closer contact with the workforce

Also, typically more focused on highly specialized product markets even though, like large firms, they may be global in scope

MSFs are better able than large firms to capture the latent value of employees and develop market niches

With focused innovation efforts can achieve dominant national and even global positions in highly differentiated markets


MSFs may become attractive acquisition targets for large firms or other MSFs

On the other hand, if they continue internal growth, from medium to giant size, it raises question about organizational metamorphosis

Firms can achieve substantial size while combining entrepreneurialism with more decentralized organizational structures

Case study– Magna – MSF to giant, decentralization with entrepreneurial perspective

The social rationale of medium-sized firms

MSFs contribute to national economic development by promoting competition and efficiency, by responding to consumer demands and by enhancing innovativeness

To national economic efficiency “by thwarting monopolies” To political pluralism “by disrupting the political hegemony between

big business and big government”

“True” MSFs directly “compete against the giants” and pubic benefits of this competition largely result from the greater efficiency

MSFs define the most efficient levels of operation and are big enough to fully exploit economies of scale and as a group are often more efficient than giant firms

Nakamura- 3 stages in the evolution of MSFs in Japan (1960s to 1980s)

1950-1960 MSFs provided a key role in introducing new

organizations and labour relations strategies to facilitate the introduction of new technologies (Honda, Sony)

Revolutionized existing SF management thinking by focusing on products with growth potential

Introduction of meritocracy and equality in the workplace

The leading MSFs distinguished themselves from small firms by achieving scale economies and high wages

3 stages in the evolution of MSFs

1970s MSFs led diversification and economic

restructuring processes in the economy as a whole

Developed new applications and products in related or entirely new directions, through original R&D or by introducing technology developed elsewhere

A type of R&D based scope economy

3 stages in the evolution of MSFs

1980 – 1990 MSFs have led the shift in the Japanese economy from its

heavy industry and mass production towards integration in a more international division of labour

Japanese firms bridged manufacturing with primary and service activities and create entirely new businesses

Information and communication techno-economic paradigm - growth of highly differentiated markets as a result of breakdown of the mainframe computer

Shift towards flexible mass production Offered a new lifestyle choices to consumers

Entrepreneurs of the 1960s more likely to be “lone wolves” whereas of the 1980s are more willing to collaborate, merge and network with other firms

For Nakamura, MSFs that become giants of the 1990s will draw their competitive advantage less from economies of scale than from economies of scope and networking with other firms to enhance their innovativeness

MSFs are not only a source of the giant firms of the future, but offer models of organization to which existing giants must adjust (the idea of “intrapreneurship”)

Case studies of medium-sized firms: alternative strategies

The terms used by Taylor and Thrift to classify different types of SF may be applied to MSFs

1. Leaders

2. Subcontractors

3. Loyal opposition

And the possibility of becoming laggards

1. Leaders

Leader MSFs are innovative, growth oriented firms which enjoy significant, possibly dominant, market shares

3 examples – Invacare (US), Murata (Japan), MacDonald Dettwiler (Canada)

All 3 companies focused on specific market niches and have been able to use established technological and marketing expertise to diversify into new but related products

Murata and Invacare have become market leaders and manufacture large outputs of specialized products which generate important economies of scale from their R&D and marketing networks as well as in the production process itself.

MacDonald growth is based on economies of scale and scope of its qualified workforce as they rely on established expetise and flexibility

2. Subcontractors

The majority of subcontractors are relatively small and it is possible in some industries for such firms to transform themselves and become MSF leaders

It is also possible for highly innovative and specialized MSFs to develop as subcontractors

Japan: 1. F-tech, a supplier to one core firm in the auto industry

2. THK, a supplier of linear ball bearings to several core firms in several industries

Subcontractors

Core auto assembler (Honda) typically rely on a large base of subcontractors

F-tech’s relationship with Honda is extremely close, both firms talk about diversifying in recent years

F-tech’s plan is to reduce its dependence on Honda , a plan reflects a broader gradual erosion of keiretsu relationships that comprise stable, monopoly business relations

Subcontractors

In contrast to F-tech, THK is completely independent and supplies several core firms.

In the robot industry it sells to all important manufacturers

THK has control of the patents and its willingness to work closely with Hirata has ensured that the relationship between the two is stable and growing.

3. Loyal opposition MSFs

Kuhn’s interpretation of MSFs gives particular emphasis to the role of MSFs as competitors to giants

MSFs operate “under the shadow of giants” because of their potential role as a competitor and threats as acquisitors

In some markets MSFs directly compete with the giants and in others MSFs meet this competition more obliquely by developing competitive strengths

Loyal opposition MSFs

In the case of USA, Dr Pepper for a long time offered a loyal opposition to Coca Cola and Pepsi

Japan: Matsushita has emerged as the largest MNC and Murata, Hirata and Yaskawa were well established in other industries and entered robot manufacture in innovative ways

Each of the loyal opposition firms and Matshuita developed its own network of suppliers

Loyal opposition MSFs

In Japanese economy, the suppliers in the robot industry have played vital roles in innovative products that enhance performance and reduce costs

Among some of the suppliers, the level of expertise of the suppliers equals or surpasses that of the core firm

The level of expertise of the suppliers equals or surpasses that of the core firms

Loyal opposition firms compete with the leading firms by incorporating the expertise of others

Geographic perspectives on medium-sized firms

Geographical behavior, structure and impacts of the MSFs are distinctive in relation to large and small firms

The origins and headquarters of MSFs reveal more diverse location patterns and peripherality appears to pose no significant disadvantage in contrast to giant firms which concentrated their control functions in the central cities of metropolitan areas

The location preferences of MSFs

According to one survey 44 of 50 head offices MSFs were located in smaller places

Simon emphasizes: “The typical hidden champion is located in a small town or village rather than in a big city. Few can be found in the urban centers”

Owner-managers of MSFs were often born and raised in the small towns where they established operations and such locations facilitate a close interdependence between employers and employees

The location preferences of MSFs

In many of Germany’s rural-based MSFs, labor relations are characterized by forms of “enlightened patriarchy”

Internal problems absorb much less managerial energy than in large companies

Even in Japan, where head-offices patterns and industrial activity has traditionally been highly concentrated in Tokyo and Osaka, MFSs originate and thrive in peripheral locations.

MSFs as big firms locally

In the USA, Japan and Germany, the control functions of MSFs can be found dispersed throughout the country in remote regions and small places.

Within the localities in which they are principally based, MSFs are big economically as well as politically. This is self-evident when MSFs locate in small rural localities.

Even within metropolitan areas, MSFs typically are not hidden but an important part of local economy


MSFs offer distinctive contributions to local economic development

This distinctiveness is revealed by reference to a framework developed by Oinas

To help understand the implications of enterprise strategy and structures for local development, Oinas constructs a simple typology linking enterprise dependence and non-dependence on each other


Firms are either dependent or non-dependent on localities.

While some firms depend on specific localities for specialized, skilled and loyal supplies of labor, a variety of business contacts which have been moulded by close personal relationships and supportive community attitudes other firms are not tied to any particular place in terms of specialized labor, localized inputs and outputs and personal preferences


Similarly, localities are either dependent or non-dependent on firms

Locality dependence increases with the size of operations and the extent to which firms are locally linked

In Oinas’s terms “committed agents” occur in situations where there is a high level of interdependence between firm and locality

“Indifferent agents” are typically large branch plants which are externally controlled and are better connected globally than locally


In these regions MSFs have had the capabilities to develop globally competitive industrialization

The growth of MSFs can bring mixed blessings for local development

The growth of MSFs in one area may threaten smaller rivals based in other area

If MSFs should be acquired by another firm based elsewhere, the shift to subsidiary status may sooner or later re-define local impacts in a way that reduces the firm’s local commitments


Enterprises for which localities have little dependence are typically small and are labelled by Oinas as either “committed” and “indifferent patients” depending on the extent to which they participate in local networks

MSfs offer examples of “committed agents”, especially in home locations

The contributions of MSFs to local development are particularly evident in peripheral locations, including agricultural regions where innovative manufacturing has not been traditionally expected.


Some MSFs also become giants themselves and with such growth, changes in established organizational structures and location preferences can arise, particularly with respect to the movement of control functions to big metropolitan centers

Such a shift is inevitable

Conclusion

The evolution of MSFs plays a crucial role in mediating global forces in a manner that has direct implications for local development

Localities can provide MSFs with access to location advantages which help the internationalization process and in turn MSFs can help localities even remote ones, participate in highly competitive global environment

Conclusion

Evolution of MSFs has direct implications for local development

Localities can provide MSFs with access to location advantages, and in turn MSFs can help localities to participate in competitive globaly environment

Traditionally, it has been assumed that foreign investment has been dominated by giant firms

In present time, MSFs clearly have internationalization options beyond that of exporting and the are clearly capable of directly investing in foreign countries.

Documents

MEDIUM-SIZED FIRMS, BIG FIRMS LOCALLY Ljiljana Zeljković Sonja Pisarov