Published on April 16th, 2015 | by Jan Godsell

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European SMEs: Building from a strong capability base

In business research, much of management literature have suggested that it was possible to ‘copy-paste’ models for successful small and medium enterprise (SME) businesses from one context to another. Real-life practice has however demonstrated that this is not usually the case.

Increasingly, it is recognised that the underpinning principles or approaches of successful businesses can be transferable, if they are applied in a considered and context specific way.

Five key principles underpin the capability base of successful SMEs:

  1. Niche / focused

Since 1980, Michael Porter has argued that one of the three generic competitive strategies is the ‘niche’ or ‘focus’ strategy. This is the approach whereby a ‘cost leadership’ or ‘differentiation’ strategy is applied to a specific market. SMEs by their definition are small and therefore have limited resources. Consequently the importance of finding a niche in a market is critical in order to focus and channel the firm’s energy and resources. Increasingly in a more globally networked world, the larger Original Equipment Manufacturers (OEMs) and Multi-National Enterprises (MNEs) seek specialist skills from their supply chain partners as they focus on what they perceive to be ‘core capabilities’. This provides a huge opportunity for the Specialist SME (or SSME).

  1. Customer-driven

Increasingly, SSMEs are focused on the products and services that would fall into the larger corporates’ ‘too-difficult’ box; products and services that deliver real benefit but the development of which is perceived to be too difficult, costly or non-core. Successful SSMEs often take a customer-centric approach to their business, starting with one of these ‘difficult’ customer problems and finding an innovative and cost-effective solution. Once the solution has been found they are then able to develop both their manufacturing and broader supply chain to align with the customer demand signal, to cost-effectively balance demand and supply and create flow.

  1. Embrace opportunities for globalisation

SMEs may initially evolve to serve a need in a local market but as they grow, are presented with export opportunities. These opportunities can start to present a dilemma for the SME when the customer demands production closer to the point of consumption. This can be driven by legislative local content requirements, competition from low labour cost countries or a combination of the two. Smart SMEs find ways to embrace this challenge, regarding globalisation as an opportunity not a threat.

As an example, MechTool Engineering (MTE) – winner of the best SME in the UK MX Awards 2014 – was faced with this dual challenge. There was both local content and cost pressure for it to move manufacture of its blast resistant modules closer to the customer in South Korea. MTE developed an innovative response in which it retained production of the panels in the UK, but moved final assembly to South Korea. This was the most-cost effective way to meet the customers’ requirements whilst maintaining scale of operations in the UK.

  1. Strong financial management

In the UK, access to finance can be problematic for SMEs. Commonly, loans for equipment have a maximum repayment term of five years, which is often out of sync with the useful life of the equipment. Despite or, indeed, because of this problematic backdrop, the need for strong financial management is critical to SME survival. Whilst it is important to manage costs today and ensure positive cash flow, it is also essential to invest in the future. Successful SMEs manage the risks of business cycles, whilst still finding opportunities to invest in future capability. These companies manage their debt carefully or even look for ways for their customers to fund the investment.

  1. Work collaboratively to embed innovation

It emerged through the UK MX awards judging process, that the vast majority of the SMEs who were short-listed had collaborations with universities, many of which were focused on embedding innovative technologies and business practices within the SME. They range from the most basic level of the SME providing a topic for a Master’s student dissertation, through to doctoral projects and R&D programmes.

In more technically demanding environments, companies use doctoral studies either through a classic PhD or the more practically based Engineering Doctorate (EngD). Surprisingly, it emerged that the most commonly used mechanism was the Knowledge Transfer Partnership (KTP). This is a scheme supported by the UK government through the Technology Strategy Board (now Innovate UK). It provides the SME with 60% of the funding for KTP associate(s) to work with the company under the supervision of an academic to help embed a specific innovation. It is the UK government’s most successful scheme for technology transfer, with a heritage of over 20 years.

To conclude, European SMEs have a strong capability base from which to build. Their strategic and customer focus, willingness to collaborate and to innovate, strong financial management and ability to embrace globalisation will stand them in good stead in this fast-changing landscape.

This blogpost was adapted from an article written by Professor Jan Godsell for the Manufacturing Excellence Report 2014. The report is produced in conjunction with the German Manufacturing Excellence Awards (MX), a business improvement and awards programme run by the Institution of Mechanical Engineers.

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Jan Godsell is Professor of Operations and Supply Chain Strategy at WMG. Jan's research focus is on the way that product, marketing and supply chain strategy align to create a responsive or demand-driven approach to supply chain management.

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