Managing SMEs to grow

Juhapekka Suutarinen

Adviser, Confederation of Finnish Industries EK

International seminar in Pristina, Kosovo

October 20-21, 2011

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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

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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

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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

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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

Enterprise structure in Finland

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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

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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

Growth as a chosen strategy in an SME

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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

International markets could make a difference

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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

Mergers and acquisitions as growth drivers

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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 !

Benefitting from board members’ knowledge and experience

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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

Challenges to financing, and tax systems

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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

How to engage and reward key personnel?

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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

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Thank you for your attention!

This Presentation has been produced with the financial assistance of the European Commission. The views expressed herein are those of EK and can therefore in no way be taken to

reflect the official opinion of the European Commission.