SMALL AND MEDIUM-SIZE ENTERPRISES PROVIDING MOST JOBS

 

By García-Lombardía, Pilar; Pin Arboledas, and José Ramón

Europe boasts 23 million small and medium-size enterprises (SMEs), providing jobs for 67 percent of the workforce and creating 85 percent of all new employment. In Spain, as in Europe, SMEs (which account for 99 percent of all Spanish companies) drive the economy and the labor market.

A report on Spanish SMEs’ globalization efforts — produced by IESE in collaboration with Eres Relocation Services — highlights internationalization, exports, innovation and R&D investment as key boosters for SME competitiveness going forward.

SMEs in Spain
From 2009 to 2015, the size of Spanish companies fell considerably, as severe job losses across the country drove people to become self-employed, especially in the services sector. In 2014, 80 percent of Spanish SMEs operated in services.

So-called micro-companies now provide work for 40 percent of the Spanish labor force and account for 94 percent of all Spanish companies. This is notable, because companies typically need to reach a certain critical mass for internationalization to become viable and profitable.

Indeed, half of the Spanish companies with exports in 2014 (77,786) reported less than 5,000 euros in annual revenue from abroad. Meanwhile, 589 Spanish companies accounted for 61 percent of all exports.

Looking at the Mittelstand
With all this in mind, the report recommends that Spanish businesses look at the keys to success for the Mittelstand — Germany’s SMEs collectively known for their degree of specialization and extensive international reach. Identified as “micro-multinationals,” the Mittelstand firms motor the German economy.

The report homes in on two fundamental traits of Mittelstand firms, which are often family-owned: 1) an emphasis on personal and long-standing relationships with stakeholders and 2) a focus on long-term sustainability over short-term profits.

Operating in this way, Mittelstand firms achieve remarkable levels of efficiency through business models based on heavy concentration in niche markets, which they come to know inside and out.

In order to compensate for having such a tight focus, Mittelstand companies usually diversify internationally and focus on innovation. They tend to offer manufactured goods to which their innovations add value, enabling them to become leaders in their respective niche markets.

Looking to the work of Hermann Simon, author of Hidden Champions, the Mittelstand has the following external strengths:

  • Closeness to the client: In their offerings and production, Mittelstand firms cater to the necessities and demands of their clients, keeping the customers’ wishes as their own corporate objectives.
  • Strategic branding: In their niche markets, the Mittelstand companies are known as global symbols of ingredient branding — a marketing strategy that shines the spotlight on specialized components or ingredients of a product.
  • Innovation: For market leadership and robust growth, inventions and improvements are key. The Mittelstand dedicates an average of 6 percent of its budget to R&D investment — about twice as much as the average German industrial company’s spending levels.

Now, turning from the external to the internal strengths of these firms:

  • Solid finances. Most are self-financed.
  • Simple organizational structures. Structure follows strategy. This allows for a simple organization, with less division of labor than in large multinationals.
  • Highly qualified and dedicated employees. These companies hire professionals with strong technical skills, company loyalty (job turnover is considered more of a setback than, for example, absenteeism), attention to detail, and a local focus.
  • Effective management. Managers are known for their dedication to the firm’s mission, solid executive training, thorough knowledge of the business and a notable ability to inspire younger workers.

This model for “hidden champions” is already employed in some Spanish SMEs — such as Guzman Global, which is analyzed in the report.

Eight Tips for Survival
Despite some obvious difficulties that Spanish SMEs face in internationalizing, remember that diversifying abroad may be key to survival. To this end, the report offers SMEs these recommendations:

1. Grow in size, either directly or by working in clusters with other companies in the same sector.

2. Invest heavily in R&D. A company cannot compete if it does not commit resources to innovation.

3. Identify products that can have added value and focus investments in R&D to improving them.

4. Get close to clients and satisfy their needs with high standards of quality and service.

5. Aim to export when possible. Selling abroad not only increases revenues but also increases diversification.

6. Prepare properly for internationalization. A business first needs to be up and running, with dedicated human and financial resources. Then, get to know the international business trends and get into contact with international trade forums and associations.

7. Invest in training for managers and the rest of the workforce.

8. Redefine strategies for the long term and stay the course in order to establish a lasting presence in international markets.

This involves a titanic undertaking that smaller firms cannot tackle on their own. The government should offer help with financing and innovation plans, for example, in a clear and sustained fashion in order to fuel this important motor of the economy.

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