MEDIUM-SIZED FIRMS, BIG FIRMS LOCALLY

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

2. 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

3. Medium-Sized Firms • “Enterprises differ from each other along innumerable dimensions” • Underline this variability by an explicit focus on MSFs • Distinctive characteristics of MFS’s • MFS’s as backbone • hidden champions • potential of MFS’s as “threshold firms” • Geographically, the locational choices and spatial organization of MSF’s have important implications for local development.

4. 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

5. 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

6. 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

7. 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

8. Medium-sized firms as backbone firms: a model • 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

9. Medium-sized firms as backbone firms: a model • 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

10. Medium-sized firms as backbone firms: a model • 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

11. 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

12. 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

13. 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

14. 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

15. 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”)

16. 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 • Leaders • Subcontractors • Loyal opposition And the possibility of becoming laggards

17. 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

18. 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

19. 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

20. 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.

21. 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

22. 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

23. 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

24. 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

25. 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

26. 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.

27. 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

28. MSFs as big firms locally • 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

29. MSFs as big firms locally • 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

30. MSFs as big firms locally • 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

31. MSFs as big firms 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

32. MSFs as big firms locally • 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.

33. MSFs as big firms locally • 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

34. 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

35. 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.