Managing SMEs to grow

1. Managing SMEs to grow Juhapekka Suutarinen Adviser, Confederation of Finnish Industries EK International seminar in Pristina, Kosovo October 20-21, 2011

2. 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? JSu

3. Elinkeinoelämän keskusliitto Finlands Näringsliv Confederation of Finnish Industries 3 EK/Eng/shs11.2004

4. 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 JSu

5. SME Affairs Director Pentti Mäkinen Regional offices Assistant manager Annaleena Mäkilä EK Brussels Head of EK Brussels Tytti Peltonen InnovationEnvironment & Competences Legislation and trade policy Infrastructure Economic policy Industrial relations Director Tellervo Kylä-Harakka-Ruonala Director Jussi Mustonen Director Eeva-Liisa Inkeroinen Director Jukka Ahtela Director Timo Kekkonen EK organisation Director GeneralMikko Pukkinen Communication Director Leena Jaakkola Administration Director Markku Järvenpää JSu

6. EK activities Business Infrastructure Legal Affairs and Trade Policy Economic Policy Industrial Relations Innovation Environment and Competences • Energy • Supplies Management • Logistics • Infrastructure • Climate • Environment • Sustainable Development • Education and Training • Labour and Immigration • Innovation Environment • Company Growth and • Internationali-sation • Foresight • Information Society • Labour and Social Law • Business Law • Competition and EU-law • Corporate Security • Trade Policy • Economy • Taxation • Business Cycles • Employment • Financing Welfare • Coordinating • Collective Bargaining • Development of Working Life • Wage Increase and • Labour Market • Analysis • Labour market • statistics Communications SME Affairs Regional Offices EK Brussels JSu

7. Decision making in EK Member Companies Member Federations (27) General Assembly Board Director General Extended Management Group Committee of Member Federations Management Group • Business Infrastructure • Legal Affairs and Trade Policy • Economic Policy • Industrial Relations • Innovation Environmentand Competences • SME Affairs • Regional Offices • EK Brussels • Communications Delegation for Entrepreneurs Committees Regional Advisory Boards JSu

8. EK Departments Business Infrastructure Innovation Environment and Competences Legal Affairs and Trade Policy Economic Policy Industrial Relations Director Ms Tellervo Kylä-Harakka-Ruonala Director Mr Timo Kekkonen Director Mr Jukka Ahtela Director Mr Jussi Mustonen Director MsEeva-Liisa Inkeroinen Energy and Climate Chief Policy AdviserMr Mikael Ohlström Transport and InfrastructureChief Policy Adviser Ms Tiina Haapasalo Natural Resources and Supplies Management Innovation and Growth Director of Innovation Ms Hannele Pohjola Education, Training and Labour Director of Education and TrainingMs Jaana Lehto Labour and Social Law Director of Legislation Mr Lasse Laatunen Business Law Director of Legislation Mr Hannu Rautiainen Trade Policy andInternational Relations Chief Policy AdviserMr Simo Karetie Corporate Security Economics Senior EconomistMr Penna Urrila TaxationChief Policy Adviser Mr Tero Honkavaara Coordinating Collective Bargaining Development of Working Life Wage Increase and Labour Market Analysis Labour market statistics JSu

9. Ways for EK to influence national policy and legislation The President of the Republic The Government Ministries The Parliament Committees Political parties EK Departments Member federations • Opinions at request • Own-initiated statements and recommendations • Participation in committees and working groups • Hearings • Background contacts JSu

10. Ways for EK to influence in the EU Commission European Parliament Council BUSINESSEUROPE Sector federations Ministries and Finnish EU Mission EK Departments Member federations • 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 JSu

11. Enterprise structure in Finland

12. Number and share of enterprises by size class Source:Statistics Finland *excluding primary production sectors JSu 12

13. Finnish enterprises by size class Source: Statistics Finland, Statfin –database JSu

14. Source: OECD (2009). Measuring Entrepreneurship. A Collection of Indicators. 2009 Edition JSu

15. Source: OECD (2009). Measuring Entrepreneurship. A Collection of Indicators. 2009 Edition JSu

16. Employer enterprises and self-employed persons in Finland JSu 16

17. Growth as a chosen strategy in an SME

18. 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 JSu

19. Choosing growth as a strategic path 1/2 • Determining factors for an entrepreneur: • Willingness to expand business • Attitude • Controlled risk-taking • International vision • Ability to grow • Knowledge • Innovativeness • Resources • Networks • Realism JSu

20. Choosing growth as a strategic path 2/2 • 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 • Market potential • Clear market focus • Demand for products / services • Recognisable customer desire JSu

21. International markets could make a difference

22. Growth from abroad • In Kosovo as in Finland home market is limited • Geographical expansion is a conscious choice • Export (Import) • Establishment of a sales or production unit abroad • Cooperation and networking • 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 JSu

23. 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) JSu

24. 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 JSu

25. Mergers and acquisitions as growth drivers

26. 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) JSu

27. 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 ! JSu

28. Benefitting from board members’ knowledge and experience

29. 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 JSu

30. 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 JSu

31. Challenges to financing, and tax systems

32. 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 JSu

33. 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 JSu

34. 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 JSu

35. How to engage and reward key personnel?

36. 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 JSu

37. 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. JSu