1. LECTURE 2: SME vs. LSE

2. AGENDA: Solberg’s 9 strategic windows
SME vs. LSE: qualitative differences
SME vs. LSE: the strategy
The Value Chain
The Virtual Value Chain

3. Solberg’s 9 strategic windows
It is often the case that companies that are beginning to export when they are not ready yet, i.e. they do not have the necessary competence to start exporting
Solberg has developed a Table with 9 strategic windows / solutions to the situation described above
A firm with limited international experience and weak position in the home market should not engage in international markets and should try to improve its performance in its home market (window 1)

4. Solberg’s 9 strategic windows
If the company is small competing with large multinationals, then it should try to increase its net worth, so it could be bought (window 7)
If a company has already certain competences in international business operations, it can overcome its disadvantages by going into alliances with companies with complementary competences (window 8)

5. Solberg’s 9 strategic windows

6. LSE vs. SME
There is a convergence in how SMEs and LSEs orient within today’s processes / circumstances (a.k.a. globalization)
Big companies turn themselves into “confederations” of small, autonomous, entrepreneurial and action-oriented companies. Examples include IBM, Philips, ABB etc.
As a reaction to pressures from international markets, LSEs and SMEs evolve towards a globally integrated but market-responsive strategy, i.e. “think global, act local”

7. LSE vs. SME

8. LSE vs. SME The starting point is different:
LSEs take advantage of “economies of scale”, launching standardized products on a world-wide basis =>today they need to maintain their competitiveness on national markets
SMEs see national markets as independent from each other => today they realize that they are interconnected and see the benefits of coordinating the different marketing strategies in order to benefit from “economies of scale”

9. LSE vs. SME: qualitative differences
Table 1.1 on p. 7 lists the main qualitative differences between management and marketing styles in SMEs and LSEs
1. Resources
Financial: SMEs lack resources because of a limited equity base (owners invest a limited amount of capital into the business, which is used quickly)
Business education/specialist expertise: SMEs’ managers have limited formal business education (contrary to LSEs); they are generalists rather than specialists & global marketing expertise is usually the last of business disciplines acquired by expanding SMEs

10. LSE vs. SME: qualitative differences
2. Formation of strategy / decision-making processes:
Planned
Not Planned
None of the companies has a purely deliberate or intended strategy; there are elements of both
LSEs try to formulate their intentions as precisely as possible and try to implement them with minimum distortions
SMEs are characterized by the entrepreneurial decision-making which is intuitive and loose

11. LSE vs. SME: Strategy

12. Two Additional Strategy Development Perspectives

13. LSE vs. SME: qualitative differences
3. Organization
Employees in SMEs are closer to the entrepreneur because of his/her influence of them, thus they must conform to his/her personality
4. Risk Taking
- LSEs are risk averse (do not like taking risks)
SMEs assume risks depending on circumstances (favorable / unfavorable conditions, lack of information)
5. Flexibility
SMEs can react faster and in a more flexible way to customer enquiries (due to shorter communication lines: customer => enterprise)

14. LSE vs. SME: qualitative differences
6. Economies of scale & Economies of scope
- Economies of scale: factors that cause the average cost of production to decrease as output increases. Economies of scale are the driving force behind all mass production: when printing a book, there is a large initial fixed cost in setting up the printing press. Once the press is running, the cost of printing each book remains nearly constant: if it costs $1000 to set up the press and $1 to print each book, the unit cost per book will be $2 if 1000 books are printed, $1.50 if 2000 books are printed, and $1.10 if 10,000 books are printed. The same principles apply in car manufacturing, where the cost of producing 1000 cars is rarely 10 times the cost of producing 100 cars. Achieving economies of scale of this kind usually demands substantial investment: car companies invest large amounts of money in production lines with sophisticated robots in order to increase output and reduce unit production costs

15. LSE vs. SME: qualitative differences
Economies of scope: opposite of economies of scale, it is for example the experience or the knowledge, a specific product a company has. SMEs can benefit from economies of scope when it goes into an alliance or a joint venture with a partner which has what the particular SME is missing on the international market in question (complementary product, knowledge)
5. Use of information sources
LSEs rely on consulting firms
SMEs gather information in an informal manner

16. Family vs. non family firm (John Ward, IMD)
For the family business
For the non-family business
The purpose is continuity
The purpose is maximizing near-term share price
The goal is to preserve the assets & reputation of the owning family
The goal is to meet institutional investors expectations
The fundamental belief is that the first priority is to protect downside risk
The fundamental belief is that more risk promises more return
The strategic orientation is adaptation
The strategic orientation is constant growth
The management focus is continuous incremental improvement
The management focus is innovation
The most important stakeholders are customers & employees
The most important stakeholders are shareholders & management
The business is seen as a social institution
The business is seen as a disposable asset
Leadership is stewardship
Leadership is personal charisma

17. Capital vs. Debt Capital structure Cost of equity Equity W A C
Investments
Interest
Debt
Capital structure highly correlated to industry
E(I) > cost
Book or market value ?
Capital structure can be expressed with the debt to capital ratio: (debt) / (debt + equity)

18. Choice of investments - Forms of investment
A company can increase its wealth through different kinds of investments:
Industrial investments: machines, growing, closing,...
to increase production
to reduce operating costs
Commercial investments: marketing, development,…
to increase sales
to gain market shares, brand value,…
Financial investments: takeovers, portfolio management,…
to generate capital gains & profits
Assets:
- Fixed assets
- tangible
- intangible
- financial
- Working
Capital
requirement

19. Stages in equity financing
Love money (friends & family)
Venture capital
Private placement
Initial Public Offering (IPO)
Vulture funds
Hedge funds (1,200 B€ industry as of 12/2006)

20. Value Chain
Provides a systematic means of displaying and categorizing activities
Each stages offers possibilities to contribute positively to the firm’s competitive strategy by performing some activity in a better way than the competitors, thus providing the company with uniqueness or advantage
VALUE is the amount the buyers are willing to pay for what a firm provides (perceived value) and a FIRM IS PROFITABLE when the value it commands exceeds the costs involved in creating the product, this being the goal of any generic strategy

21. M. Porter's original value chain model

23. Internal & External linkages
Internal linkages – between activities within the same value chain, but on different planning levels within the firm
Strategic level
Managerial level
Operational level
External linkages – between different value chains “owned” by different actors in the total value system

24. Internationalizing the value chain
Centralizing upstream functions: R&D, Production
Decentralizing downstream functions: Marketing, Sales & Service
For example: downstream functions/activities create competitive advantages that are country-specific (reputation, brand name), BUT there might be a need to centralize upstream activities to be able to create rational production units that can exploit economies of scale

25. Information business & the virtual value chain
We are in the “Information Age”, thus information is very important today!
The concept of virtual value chain was introduced which treats information as a supporting element in the value-adding process.
4 ways to use information to create business value:
Managing risks: the role of professions like finance, accounting, auditing etc.

26. Information business & the virtual value chain
2. Reducing costs: use of information as efficiently as possible to achieve the output required from business processes and transactions (various improvements such as eliminating unnecessary paper work)
3. Offering products & services: know the customers and share information with partners to enhance customer satisfaction (build relationships with customers: account management systems, customer profiling etc)
3. Inventing new products: innovation (Microsoft and Intel operate in a “continuous discovery mode”) – mobilizing people to collaborate, share information and promote discovery throughout the company

27. Q: Does the virtual value chain model make sense?