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Managing SMEs to grow
Juhapekka Suutarinen
Adviser, Confederation of Finnish Industries EK
International seminar in Pristina, Kosovo
October 20-21, 2011
17.10.2011 JSu
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Managing SMEs to grow: contents
• Background: enterprise structure in Finland• What is EK and how do we work?• Growth as a chosen strategy in an SME• International markets could make a difference• Mergers and acquisitions as growth drivers• Benefitting from board members’ knowledge and experience• Challenges to financing, and tax systems• How to engage and reward key personnel?
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Elinkeinoelämän keskusliitto
Finlands Näringsliv
Confederation of Finnish Industries
3 EK/Eng/shs11.2004
17.10.2011 JSu
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EK represents
• The entire private sector and companies of all sizes
• 27 branch associations
• About 16,000 member companies, of which 96% are SMEs
• Over 70% of Finland’s GDP
• Over 95% of Finland’s exports
• About 950 000 employees
Unparalleled knowledge and information of Finnish business
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Director General
Mikko Pukkinen
EK organisation
Regional officesAssistant manager Annaleena Mäkilä
SME AffairsDirector Pentti Mäkinen
EK BrusselsHead of EK BrusselsTytti Peltonen
DirectorTellervo
Kylä-Harakka-Ruonala
Infrastructure
DirectorTimo Kekkonen
InnovationEnvironment & Competences
DirectorJussi Mustonen
Economic policy
DirectorEeva-Liisa Inkeroinen
Industrial relations
DirectorJukka Ahtela
Legislation and trade policy
CommunicationDirector Leena Jaakkola
AdministrationDirector Markku Järvenpää
17.10.2011 JSu
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EK activities
Regional Offices Regional Offices
EK BrusselsEK Brussels
• Energy• Supplies
Management• Logistics• Infrastructure• Climate • Environment • Sustainable
Development
CommunicationsCommunications
BusinessInfrastructure
• Labour and Social Law
• Business Law• Competition
and EU-law• Corporate
Security• Trade Policy
• Economy• Taxation• Business
Cycles • Employment• Financing
Welfare
• CoordinatingCollective Bargaining
• Development of Working Life
• Wage Increase andLabour MarketAnalysis
• Labour marketstatistics
Legal Affairs and Trade Policy
Economic Policy IndustrialRelations
• Education and Training
• Labour and Immigration
• Innovation Environment
• Company Growth andInternationali-sation
• Foresight• Information
Society
Innovation Environment
and Competences
SME Affairs SME Affairs
17.10.2011 JSu
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Delegation for Entrepreneurs
General Assembly
Board
Extended Management Group
Director General
Management GroupCommittee of
Member Federations
• Business Infrastructure• Legal Affairs and
Trade Policy• Economic Policy• Industrial Relations• Innovation Environment
and Competences• SME Affairs• Regional Offices• EK Brussels • Communications
Regional Advisory Boards
Committees
Member Companies Member Federations (27)
Decision making in EK
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EK Departments
DirectorMr Jussi Mustonen
DirectorMs Tellervo
Kylä-Harakka-Ruonala
Director Mr Jukka Ahtela
Director MsEeva-Liisa Inkeroinen
Labour and Social LawDirector of LegislationMr Lasse Laatunen
Business LawDirector of LegislationMr Hannu Rautiainen
Trade Policy andInternational
RelationsChief Policy Adviser
Mr Simo Karetie
Corporate Security
EconomicsSenior EconomistMr Penna Urrila
TaxationChief Policy AdviserMr Tero Honkavaara
Coordinating Collective Bargaining
Development ofWorking Life
Wage Increase andLabour Market
Analysis
Labour market statistics
Energy and Climate Chief Policy Adviser Mr Mikael Ohlström
Transport and Infrastructure
Chief Policy Adviser Ms Tiina Haapasalo
Natural Resources and
Supplies Management
BusinessInfrastructure
Legal Affairs and
Trade Policy
EconomicPolicy
IndustrialRelations
DirectorMr Timo Kekkonen
Innovation and Growth Director of Innovation Ms Hannele Pohjola
Education, Training and Labour
Director of Education and Training
Ms Jaana Lehto
Innovation Environment
and Competences
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Ways for EK to influence national policy and legislation
The President of the Republic
The Government
Ministries
The Parliament
Committees
Political parties
• Opinions at request• Own-initiated statements and recommendations• Participation in committees and working groups• Hearings • Background contacts
EK
Departments
Member federations
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Ways for EK to influence in the EU
Commission EuropeanParliament
Council
Ministries and Finnish EU Mission
• Opinions by EK and BUSINESSEUROPE at request• Own-initiated statements and recommendations• Participation in committees and preparatory bodies• Hearings in Finland and Brussels• Direct contacts in Brussels
BUSINESSEUROPE
Sector federations
EK
Departments
Member federations
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Employees
Number and share of enterprises (2009)*
N % Cumulative %
1-4 228 517 86,6 86,6
5-9 17 814 6,8 93,4
10-49 14 486 5,5 98,9
50-249 2 334 0,9 99,8
250- 608 0,2 100,0
Total 263 759 100,0Source:Statistics Finland *excluding primary production sectors
Number and share of enterprises by size class
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Finnish enterprises by size class
Size class
Number of enterprises (excl. sectors of primary production)
1995 2000 2005 2009
1-4 156142 183833 196421 228517
5-9 14280 15644 16369 17814
10-49 9351 12728 13085 14486
50-249 1746 2200 2293 2334
250- 496 560 576 608
Total 182015 214965 228744 263759
Share of enterprise base, %
1995 2000 2005 2009
85,8 85,5 85,9 86,6
7,8 7,3 7,2 6,8
5,1 5,9 5,7 5,5
1,0 1,0 1,0 0,9
0,3 0,3 0,3 0,2
100,0 100,0 100,0 100,0
Source: Statistics Finland, Statfin –database
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Source: OECD (2009). Measuring Entrepreneurship. A Collection of Indicators. 2009 Edition
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Source: OECD (2009). Measuring Entrepreneurship. A Collection of Indicators. 2009 Edition
17.10.2011 JSu
1616
Employer enterprises and self-employed persons in Finland
0
20
40
60
80
100
120
140
160
180
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Employers
Self-employed persons
Source: Eurostat
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Significance of high growth SMEs
• Political interest 1: majority of new jobs created in growth companies
• Political interest 2: increase of turnover and profit rate peak at growth companies, meaning more tax revenues
→ Enterprise policy ought to be tuned to support growth in order to maximize the wellbeing of the society
• Important to identify not only growth startups but also growth-oriented companies over the course of entrepreneurial lifecycle
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Choosing growth as a strategic path 1/2
• Determining factors for an entrepreneur:
2) Ability to grow– Knowledge
– Innovativeness
– Resources
– Networks
– Realism
1) Willingness to expand business– Attitude
– Controlled risk-taking
– International vision
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Choosing growth as a strategic path 2/2
3) Competitive edge and factors for success, e.g.:– Know-how of personnel and successful incentives
– Effective cost control
– High quality
– Innovative ideas, brand
– Customer relations, company location
4) Market potential– Clear market focus
– Demand for products / services
– Recognisable customer desire
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Growth from abroad
• Geographical expansion is a conscious choice– Export (Import)
– Establishment of a sales or production unit abroad
– Cooperation and networking
• In Kosovo as in Finland home market is limited
• Quest for new business opportunities means expanding abroad– especially technology-oriented products for niche markets
– support for internationalisation from public or private sources available
– subcontracting for main suppliers
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Success factors
• Risk tolerance and good planning; customer orientation
• Mastering markets (customer relations, marketing, market knowledge, communication)
• Mastering production (progressive technology, diverse selection of products)
• Mastering networks (business contacts, distribution chain, corporate image)
• Mastering strategies (strategic planning, management, international experience of the board)
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Potential hurdles
• Costs and difficulties of marketing
• Finding functional distribution channels
• Regulations and standards of products
• Location of customers
• Legislation and regulations on the targeted market
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When organic growth is not enough
• Growth through mergers and acquisitions (M & A) used as an accelerator
• 2/3 of Finnish growth companies have used M & A’s, in most cases to– benefit from synergy
– find new sales or marketing channels, or customers
– expand their product or service selection
• Typical entrepreneur using M & A’s to grow owns or has owned several companies in his / her career (serial or portfolio entrepreneurs)
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Succeed or fail in an acquisition
• What to go after:– target company operates on the same – or close enough – industry,
market, or phase of supply chain
– the target’s goals and business strategy supplement those of the buyer
– target company is already familiar to the management
• Details that need special attention:– overcome the opposition for change in the target company
– use enough resources on thorough planning of acquisition process, and set a timetable
– acknowledge your own deficiencies !
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Board shows direction, management executes
• In an average SME, the board consists mainly, or totally, of members of management and/or owner family
• When pursuing growth this is often not good enough
• According to many studies, wide knowledge and experience are invaluable assets in achieving targeted growth
• At the same time as putting up their time and effort for board work, experienced entrepreneurs or business angels are often willing to invest in a promising enterprise
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To make the best use of the board:
• Take care of sufficient diversity of members– age, sex, background, experience
• Keep an active contact with board members, even between board meetings
• Be ready to reward members, and cover their expenses for meetings
• Remember: the board’s main task is not to listen to performance reports but to determine the strategic direction and “spar” the management
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Access to finance key factor in enterprise growth
• Growth implies need of finance, and high growth normally requires financing from outside sources
• Current economic crisis and new solvency regulations for banks form financial challenges to enterprises– secondary sources grow in importance, if there are such
• In Finland, e.g. insurance companies, pension institutes, Finnvera and Tekes (the Finnish Funding Agency for Technology and Innovation) offer financing for entrepreneurs
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Scarce capital may result in undesirable outcomes
• Difficulties in finding capital could mean slow growth, or no growth– if working capital dries up difficulties may even lead to bankruptcy
• Common problems entrepreneurs face are– high cost of capital
– demand for securities and real collaterals
– bureaucratic procedures related to many secondary sources
• The financial system ought to be able to provide capital for enterprises at every phase of life cycle– if private sources are not available public sector should bridge the gaps
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Tax incentives could be considered
• Incentive for research, development and innovation (R&D&I)– e.g. tax deduction from salaries related to R&D&I
– under discussion in Finland; would benefit especially SMEs
• Higher write-off rate for investments
• No tax on profit as long as it stays within the company– Estonian model: allows more room for investments and company
development
• Incentive for business angels’ capital investments in SMEs
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Importance of personnel ought to be seen from a company’s reward and bonus system
• Growth requires skills– be prepared to reward growth-supporting skills
– consider having all personnel groups under a performance-related payment scheme
• Growth entrepreneurs view rewarding and bonuses as a key driver for change and a means of communicating company values to the personnel
• Reward and bonus system should contain both monetary and non-monetary parts
• Company-level decisions on pay raises