ARCHIVED — Working Papers

No. 16: Business Strategies of SMEs and Large Firms in Canada

by Gilles McDougall and David Swimmer, Micro-Economic Policy Analysis, Industry Canada, October 1997

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Summary

This research investigates the strategies for growth and competitiveness pursued by large firms and small and medium-sized enterprises (SMEs), to find out whether they differ and, if so, whether these differences can help identify problems specific to SMEs.

In this study, "business strategy" is defined as "all aspects of a firm's behaviour," including approaches to management, human resources, technology, investment, staff training, use of government programs, and sources of innovation.

The present study is based on a recent survey of SMEs and large firms conducted by Abt Associates of Canada for Industry Canada. The study increases understanding of large firms by using a larger sample than case studies do, thereby permitting generalization about the conduct of large firms. It also increases understanding of SMEs by permitting comparisons with large firms to find out whether the strategies SMEs follow are distinguishable from large firms' strategies and whether they might be a cause for concern.

This study finds the following important similarities between SMEs and large firms:

• Both large firms and SMEs perceive the four most important influences on their competitive position to be product quality, customer service, flexibility, and range of products.
• For both SMEs and large firms, growth is most influenced by management, marketing, and employee morale. Other important influences on growth are: access to capital and markets, ability to adopt technology, and organizational culture. Government assistance is considered the least important influence on growth.
• SMEs and large firms differ little in business strategy. Market share and new products are considered important to the business strategy of both large firms and SMEs, as are technological change, efficient use of inputs, management practices, and human resources strategy.
• For both large firms and SMEs, customers and managers are the most important sources of product innovation. The R&D unit, the production unit, and suppliers are the next most important. Managers and the production unit, followed by customers and the R&D unit, are the most important sources of process innovation.

This study has identified the following important differences between large firms and SMEs:

• Large firms are much more likely than SMEs to pursue linkages with other firms through strategic partnerships, joint ventures, and strategic alliances.
• Proportionately more small firms than large firms use government programs, although the use of government programs is widespread among firms of all sizes. SMEs are more likely than large firms to consider R&D tax credits and government training programs to be very important. SMEs attach less significance to market information and export incentives supplied by government, although these services are important to them.
• Large firms are more likely than SMEs to perceive organizational culture and skilled labour as important growth factors. Large firms also consider innovative organizational structure to be more important to overall management practices.
• More employees in large firms than in SMEs receive formal training, except for professionals, who receive approximately equal training. Employees spend equal time in informal training in SMEs and large firms, approximately 10 percent of work time.
• Large firms perceive licensing of intellectual property as a more important source of both product and process innovation than SMEs do.

In conclusion, SMEs and large firms generally follow similar business strategies. Both SMEs and large firms perceive management, marketing, access to capital and markets, and ability to adopt technology as the most important growth factors, and government assistance as the least important growth factor.

The results highlighted in this paper indicate that government policies should focus on improving the business climate. Sound macro-economic policies and fair, efficient market-framework policies do much to help both large firms and SMEs to become more competitive and prosperous, and to create more jobs.

However, some important differences between SMEs and large firms' business strategies indicate that some specific government interventions might be warranted. First, the overall business strategies of large firms focus more on the importance of employees than those of SMEs do. Large firms perceive skilled labour to be more important than SMEs do, and more large firms than SMEs offer their employees formal training. Government training programs could, therefore, be an important source of help to SMEs.

Second, large firms are more likely than SMEs to engage in strategic partnerships, joint ventures, and strategic alliances with other firms. SMEs could, therefore, benefit from exploring the potential for linkages with other firms. In this area, government can help by facilitating such linkages at both the national and international level.

Finally, the use of licensed intellectual property is more important as a source of innovation for large firms. SMEs could, therefore, benefit from further consideration of these potential sources of innovation, and government could facilitate that consideration.

The evidence presented in this paper indicates that government policy focus on SMEs is warranted. Although SMEs rank government assistance as their least important growth factor, they use government programs more than large firms do, and generally rate them as more important to their overall business strategy.

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