J
Ö N K Ö P I N GI
N T E R N A T I O N A LB
U S I N E S SS
C H O O LJÖNKÖPING UNIVERSITY
The Impact of Economic Crisis on Small and Medium Enterprises:
in perspective of Swedish SMEs
Master Thesis in Business Administration Author: Zinaida Ratko & Kaan Ulgen
Tutor: Mike Danilovic
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Acknowledgements
… There is nothing like a crisis to clarify the mind. In suddenly volatile and different times, you must have a strategy.
Richard P. Rumelt, 2009, McKinsey and Company. We, the authors of this thesis, would like to acknowledge the following people for their help throughout the process of this research.
First of all, we would like to thank our tutor, Mike Danilovic, for his great support and patience, interest-ing ideas and inspiration.
We would also like to gratitude our fellow students for constructive feed-back.
Last, but not the least, we would like to thank our families and friends for supporting us during this im-portant period of our lives.
Kaan Ulgen Zinaida Ratko
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Master Thesis in Business Administration
Title: The Impact of Economic Crisis on Small and Medium
Enterprises: in perspective of Swedish SMEs
Authors: Zinaida Ratko and Kaan Ulgen
Tutor: Mike Danilovic
Date: May 2009
Subject terms: Economic Crisis, Financial Crisis, SME, Recession, Impact of Crisis
Abstract
Problem:
Business world has met uncertainty, which settled everywhere: from global fi-nancial markets and national economies, to organizations and employees’ minds. As every crisis, this situation came unexpectedly, almost out of a clear blue sky. Sweden, being highly dependent on international development, has faced negative effects in all aspects of busi-ness life. SMEs have emerged as an engine of economic and social development through-out the world. As well as more than 99 percent of all enterprises in Sweden are classified as SMEs, the impact of economic crisis may be more than significant.Purpose:
The purpose of the study is to investigate the impact of the current economic crisis and recession on the Small and Medium Enterprises in Sweden.Method:
In order to fulfill our purpose we combined both techniques – qualitative andquantitative methodological approaches. We used a quantitative analysis tool – survey to collect primary data from the SMEs. In its turn, qualitative analysis was implemented to see how the data from earlier studies and our findings can be interconnected.
Results:
It was found, that companies are facing mostly negative effects. The perception of currently facing economic challenges can be assessed as anxious, which means that companies see the further development in a tough way. Damaged business confidence can be also recognized in pessimistic forecasts for profitability in 2009. However, the crisis can be considered as a driver for change. On the positive way, every downturn and faced chal-lenge, e.g. stressful situation, stimulate organisations to analyze, look for new effective solu-tions and make decisions in the way they would never thought about. It was found out that importance of crisis planning is distinctly risisng during current times of uncertainty. Fu-thermore, companies tend to react on the faced challenges by designing, following crisis plans and creating special crisis teams.Our research may help the businesses to understand what difficulties the majority is facing, and thus not only to prevent same risks but also turn them into opportunities.
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Table of Contents
1
Introduction ... 5
1.1 Background ... 5
1.2 Problem area ... 5
1.3 Objective of the Study ... 6
1.4 Research questions. ... 6
2
Frame of References ... 7
2.1 Crisis ... 7
2.1.1 Definitions and Properties of Crises ... 7
2.1.1.1 The crises are an “over-Production Case”: ... 8
2.1.1.2 Crises are generally not for individuals ... 8
2.1.1.3 Crises are "periodic" or at least we can call them “boomerang” ... 8
2.1.1.4 Crises are an integral part of the capitalist system ... 8
2.1.2 What is the procedure of economic crises? ... 9
2.1.3 Chronological order: ... 10
2.1.4 A brief summary of the current economic crisis ... 11
2.1.4.1 World ...11
2.1.4.2 Sweden ... 12
2.1.4.3 From Macro to Micro level ... 13
2.2 SME ... 15
2.2.1 SME definition ... 15
2.2.2 Entrepreneurship background of SMEs. Importance. ... 15
2.2.3 SME management – specific characteristics. ... 16
2.2.3.1 SME management functions ... 17
2.3 Crisis effects on SME ... 19
2.3.1 Possible affects on companies of the crisis in general ... 19
2.3.1.1 Enhancing Factors of Crisis effects on companies ... 20
2.3.1.1.1 Internal Factors ... 20
2.3.1.1.2 External Factors ... 20
2.3.1.2 Negative effects of the crisis on Managerial and Organizational Structure ... 21
2.3.1.2.1 Communication problems in organization ... 21
2.3.1.2.2 Centralize authority ... 21
2.3.1.2.3 Corrosion of decision Quality ... 21
2.3.1.2.4 Reduction of Organizational Change Trends ... 21
2.3.1.2.5 Lack of coordination ... 21
2.3.1.2.6 Disorder in Duties, Authority and Responsibilities ... 22
2.3.1.2.7 Fear and panic ... 22
2.3.1.2.8 Corrosion in the Decision Process ... 22
2.3.1.2.9 Dispiritedness ... 22
2.3.1.2.10 Increase of self-defense: ... 22
2.3.2 Theory of retrenchment ... 23
2.3.3 SME responses to recessions and contractions. Earlier findings. ... 25
2.3.3.1 2003, Observatory of EU SMEs ... 25
2.3.3.1.1 Responses relating to employment ... 25
2.3.3.1.2 Responses relating to investment plans ... 26
2.3.3.1.3 Other responses to economic developments ... 26
2.3.3.2 Centre for Business Research (Cambridge, UK), December 2008 ... 27
2.3.3.3 Survey of European SMEs: Growth and Concerns. Eurofactor 2009. ... 28
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Research Methodology ... 29
3.1 Research Techniques ... 29
3.2 Selection of sample and study area ... 30
4
3.3.1 Secondary data ... 30
3.3.2 Primary data... 31
3.3.2.1 Design of Survey Questions ... 31
3.4 Data Analysis ... 32
3.5 Quality Issue ... 33
3.6 Limitations of the Study ... 33
4
Empirical Findings and Analysis ... 35
4.1 Disposition of analysis ... 35
4.2 Companies perspective ... 36
4.2.1 General information about respondents ... 36
4.2.1.1 Position. ... 36
4.2.1.2 Amount of employees and annual turnover. ... 36
4.2.1.3 Operating Industry. ... 36
4.2.2 Effects of economic crisis on SMEs ... 37
4.2.2.1 Obtaining Finance ... 37
4.2.2.2 Export volumes ... 38
4.2.2.3 Suppliers Amount ... 39
4.2.2.4 Prices 40 4.2.2.5 Customers Amount ... 41
4.2.2.6 Customers Payment Period ... 42
4.2.2.7 Sales Volumes ... 43
4.2.2.8 Forecast : Profits will fall ... 44
4.2.2.9 General Perception ... 45
4.2.3 SMEs responses ... 45
4.2.3.1 Creation of Crisis plan ... 46
4.2.3.2 Maintenance of Marketing Expenditures ... 47
4.2.4 Future strategies ... 48
4.2.4.1 Invest in Innovations ... 48
4.2.4.2 Maintain IT costs ... 49
4.2.4.3 More Insourcing – Less Outsourcing ... 49
4.2.4.4 Freeze Recruitment ... 50
4.2.4.5 Lower Salary Increases ... 51
4.3 Comparison with other surveys ... 51
4.3.1 Common trend: Obtaining Finance is getting harder ... 52
4.3.2 Common trend: Customers payment period is getting longer ... 52
4.3.3 Common trends: Sales volumes decrease, Profits fall ... 52
4.3.4 Common trend: General perception is pessimistic ... 53
4.3.5 Common trend: Maintenance of R&D and Innovation investments ... 53
4.3.6 Common trend: Freeze Recruitment ... 54
5
Conclusion and Final Discussion ... 55
5.1 Conclusion ... 55
5.1.1 Effects of the crisis ... 55
5.1.2 Response and Future Strategies ... 55
5.2 Implication for the management ... 56
5.3 Implication for research and consulting institutions ... 57
5.4 Further Studies ... 59
References ... 61
Appendix 1 ... 64
Appendix 2... 66
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1
Introduction
This thesis analyzes the impact of Economic Crisis of 2008-2009 on Small and Medium Enterprises. The first chapter will make a brief presentation of the topic, its importance and background of the research area. The objective of the study and research questions will be introduced.
“Call it a “global financial crisis, global credit crunch or the financial markets gone wrong” the fact re-mains that we are facing a time of economic uncertainty and of consequences difficult to predict“ .
(IASP, October 2008)
1.1
Background
Problems with the repayment of subprime mortgages in the US triggered a strong wave of concern about lending around the world in August 2007 (Oxlade, 2009). This was the be-ginning of the so called ‘credit crunch’. The major American investment banks went bank-rupt in a short period of time. Crisis in the U.S. dynamically spreaded to Europe. Iceland's three biggest banks went bankrupt (The Icelandic Government Information Center, 2009). Many financial institutions in Europe also faced the liquidity problem that they needed to raise their capital adequacy ratio. The financial crisis also spread to other countries and de-veloped into a global economic and financial crisis.
Business world has met uncertainty, which settled everywhere: from global financial mar-kets and national economies, to organizations and employees’ minds. Putin (2009) calls cur-rent situation as the greatest uncertainty from the times of the Great Depression of the late 1920s and the early 1930s. Looking to the past, many conclude that crises leave a perma-nent mark on national economy, businesses and people’s lives in general.
Sweden, being highly dependent on international development, has faced negative effects right from September 2008. At this time Riksbank started to cut interest rates: key interest rate (repo rate) was cut from 4.75 percent in September 2008 – to 0.50 percent in April 2009 (Riksbank, 2009). Swedish krona has weakened significantly. According to National Institute of Economic Research, Swedbank, Riksbank and Statistics Sweden (see Apendix), inflation and GDP forecasts for Swedish economy and in general on EU level are much lower than before 2008.
As every crisis, this situation came unexpectedly, almost out of a clear blue sky (Soros G., 1998). Thus, no one was prepared for the difficulties and, moreover, there is no single for-mula of the right response. Crises threat existing businesses without any distinction of size. How are the businesses affected? How everyone copes with crisis? These and other ques-tions are being the hot topics of ongoing discussions.
1.2
Problem area
This work will focus on the impact of current economic crisis on Small and Medium En-terprises in Sweden, mainly because SMEs have emerged as the engine of economic and social development throughout the world. The role of entrepreneurship has changed
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matically and fundamentally, so that it has been seen as a requisite ingredient generating employment, economic growth and international competitiveness in the global economy. A simple glance at the forms of business in the EU shows that 99 percent of companies in the EU are SMEs (companies with a maximum of 250 employees and a maximal turnover of € 50 million), employing around 75 million people.
In common with most EU countries, more than 99 percent of all enterprises in Sweden are classified as SMEs. Altogether, the SME sector in Sweden accounts for more than 60 per-cent of total private employment (SBA, 2008).
These facts raised our interest in making research study focusing on SME’s to understand their perception of the situation, adopted actions and future strategies. Our research is based on the literature study, analysis of earlier findings and empirical investigation.
1.3
Objective of the Study
“The starting point for any piece of sound research is for the researcher to be very clear regarding the objective of the research.”
(Ketchen and Bergh, 2004, p.246)
The Objective of the study is to investigate the impact of the current economic crisis and recession on the Small and Medium Enterprises in Sweden.
1.4
Research questions.
This study intends to answer the following research questions:
• What effects, difficulties and changes are the companies facing?
• What are the common responses and future strategies for coping with the crisis? • What lessons can be learnt for managerial practice?
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2
Frame of References
This section is divided into three parts: Crisis, SME and Crisis effects of SME.
Definition and characteristics of crisis, historical overview of crises, and a brief description of current econom-ic crisis and present situation will be given.
SME’s business model, main characteristics and measures of such enterprises. Theoretical approaches for understanding the SME’s nature and development will be stated.
Possible effect of crisis on SME’s. Results of several earlier empirical studies will be described.
2.1
Crisis
In this chapter definition and characteristics of crisis will be introduced. Short historical overview of earlier crises. A brief description of current economic crisis and present situation will be given.
2.1.1 Definitions and Properties of Crises
Whenever we start to mention about the word crisis we are always using the two more words: recession and depression. If we want to explain the crisis we have to identify these concepts also.
Recession means in very simple words: slowing economic activities. There should be a con-traction compared with a position previously accessed, this getting down may be shallow or deep. Sometimes the word of recession is used as synonyms of crisis. On the other hand, if the level of economic activity is already stayed in low level for quite a long time; this situa-tion is defined as depression (Flamant, 1970).
A crisis in the economy always comes after a period of prosperity. The main feature of it, economic rise will replace with sudden drop, rapid decline of prices, reducing in production and income. This is accompanied by unemployment and bankruptcies and of course the stock market crashes. In the 18th century crises were occurred mainly because of the wars, financial speculations or starving. But in 19th century crisis started to occur because of capi-talist economy. Moreover, they start to occur not only in one sector or in a particular re-gion and at regular intervals were 6-11 years (Guitton, 1971).
During the period of 1820 to 1929 there were 13 very big economic crises. Those crises were occurred at the following years:
- 19th century there were 8 crises: 1825, 1836-39, 1847, 1857, 1866, 1873, 1882-84, 1890-93.
- 20th century there were (until 1929) 5 crises: 1900, 1907, 1913, 1920, 1929.
From the observations of the crises economists can say the economic crisis has three key features: (Guitton, 1971)
- A crisis is a “over-production" phenomenon, - Crises are general not for individuals,
- Crises are "periodic" or at least we can call them “boomerang”, We can add fourth feature:
8 - Crises are an integral part of the capitalist system.
2.1.1.1 The crises are an “over-Production Case”:
The economic crises are certain with rapid growth of the bankruptcies. This decline can be seen first in the stock market and in the banking sector. Then, the stock market crashes will be come up with the crisis in the banking sector. Stock market is a place where people trying to predict future. New techniques which are belongs to capitalism will lead to endless hopes. According to endless hopes people are starting speculations, but suddenly people realize that this is too much for us when they understand that “this environment is too optimistic for us” at that point everything is too late. After this point fear start sands it is the point of cracking. After banks and the stock market crisis will spread to other sectors. The weak companies, factories and plants will cut of the employers, which mean unem-ployment. (Dura, 2007) Indeed in the UK’s history, each crisis has come up with 30 per-cent of loss of employment. On the other hand, the workers who are not cut off may face with decrease of their wages. All industries even agricultural sector will be affected by the crisis. Social environment can be corrupt, and sometimes revolt may occur. We understand that the crisis is a result of the mutual dependence of the sectors in the economy. There-fore, no one can stay away from it, someone will affected low the other may affected a lot. Because of mutual dependence crisis can be spread to all sectors so it is not for specific sector or group.
2.1.1.2 Crises are generally not for individuals
Big crises are "general", it means that if a crisis occurs, all the world's industrialized economies will be affected, more or less but they will affected for sure. This is a result of "mutual dependence" in international base. On the other hand, if one takes a look at the chronological order of crises in all the major capitalist economies, we can see that they are almost the same. In every crisis there is a leader sector which is starting point of the crisis but also in international base there is also “pioneer” country for the crisis, which is starting point of it and then it will spread out from this pioneer country. (Dura, 2007) According to history of the world pioneer countries were firstly Russia, United Kingdom and nowa-days it is United States. Today is not possible to keep crisis within a single country.
2.1.1.3 Crises are "periodic" or at least we can call them “boomerang”
Crises can occur again and again in regular intervals. Those intervals can be changed from 6 to 11 years; (these numbers are obtained from previous occurred crises). Following this observation economist decided that crises are like boomerang, whenever you feel that you get off from it you can face it again. According to Kondratieff’s waves theory in 20th and 21st century we’ll face with crisis in same intervals and with similar rea-sons and similar effects, so according to this theory crisis is predictable. (Aydoğuş, 2008)
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The new economic system, which is established in Europe at 19th century has very different features if one compares with it previous ones. This new system is always facing big crashes and crises were coming in intervals. So even some economists say that econom-ic crisis is part of the system and without the crisis the system cannot work properly. (Dura, 2007) Moreover, some economists say that crisis is something we need.
2.1.2 What is the procedure of economic crises?
It was mentioned before that there were also crises occurring before capitalism but those crises happened because of hunger, wars or natural disasters. Basically they were cris-es of “lack of production”. Due to drought, flood and other reasons production is per-formed following the demand and the latter raises with crisis. However, in the capitalism crises are coming up with new cause which is called “over-production”. The main reason for over-production is that one cannot predict the demand. Every entrepreneur is investing for one main reason, which is making profit. You can make profit with selling your product but there are many different producers who are producing same product. We can estimate consumer’s need but there is one very important unpredictable factor: you can not predict if consumer will choose to buy the product.
All problems start from this point: “What if we cannot make planned or expected sales?” Thus in the capitalist economy each company makes a prediction about future and plan their production level according to this plan. Also according to this plan they rent real es-tates or machineries and they may buy raw materials. After production they will start to sell. This is how capitalist economy runs but there is a big risk at this point.
There is a time difference from the day of plan make and the day of sale start and in capi-talist economies everything can change rapidly so in this time difference basically every-thing can be changed: market can move in another direction, different needs may occur or disappear. Because of these unpredictable rapid changes company may face the reduction of sales. Here is the beginning of this crisis point: serious market shortage which starts in a single company can affect whole sector then that sector can affect other sectors and with time all country can be affected by it. The company which faces the shortage will stop buy-ing raw materials and will reduce the number employees for cost savbuy-ing purposes, this will help other companies to deal with shortage. Importance of sector and market share of the companies, who are facing the shortage, will show us how much that crisis will affect the country.
As you can see, one of the biggest nightmares of the companies are the products which you cannot sell and which are waiting in warehouses: this can lead you to bankruptcy. For this reason capitalist economies have to be stable and stability is one of the biggest dream of everyone in capital economies. For them, stability means that they can sell everything they produced according to their plans and this means getting profit. Indeed, stability is one of the hardest things to achieve in capitalist economies. Imagine thousands or hundred thou-sands of entrepreneurs and they are deciding independently about their companies, it is al-most impossible for all of them to reach their plans. The results of the crisis in short term: bankruptcies of the firms, useless banks, stopped factories, full warehouses of products, big loss for humanity, unemployment and at the end - social tension.
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2.1.3
Chronological order:¾ 1929-31: Because of Great Depression prices of agricultural products were decreased dramatically and because of great depression syndrome and unclear economic situa-tion export market was almost dead and all banks stopped the credits for a while, ¾ 1954: After end of Korean War economy started to slow down because of war
econ-omy was turning very fast and there was a very optimistic situation because govern-ments were spending billions on war and war-related sectors;
¾ 1958: U.S. enters recession, Unemployment peaked at 7.7% It affected Europe; ¾ 1970: U.S enters recession, 210,000 postal employees launched the first mass work
stoppage in the history of the U.S. Postal Service. Also in 1970, four railroad unions conducted a 1-day nationwide railroad strike. This was 20th century first mass strike and it created some pressure on entrepreneurs;
¾ 1980: Energy prices contributed to this recession, the shortest on record. Combined with record interest rates, it also contributed to President Carter losing to Ronald Reagan in November 1980. Unemployment peaked at 7.8%
¾ 1982: Latin America countries couldnt pay back their debts because of this “big debt crisis” started, result of it interest rates increased;
¾ 1987: In November, the New York stock market collapsed. This followed by bank-ruptcies of banks and long-term recession;
¾ 1990: The Tokyo stock market collapsed, economic recession and unemployment has began result of it, long-term deflation started;
¾ 1994: Mexico entered to crisis and it followed by Brazil and Argentina. They devaluate their currencies. China devaluated yuan.
¾ 1997 – 99: Crises started in Far east and southeast Asian countries. Capital went out from those countries and investors stopped to invest. Specifically Japan was affected a lot. They devaluated their currencies and global market had suffered it. It is called “Asia Crisis”;
¾ 1998: Russia was affected by “Asia Crisis”, and they announced moratorium. Russian Ruble devaluated;
¾ 2000: World oil prices increased, NASDAQ collapsed and US market has reduced, so Europe was affected because of it’s dependency on US economy;
¾ 2001: Argentina got into a crisis and it spreaded out to all Latin America in short period of time, while this was happening in Latin America, there was war atmospherein the US. Nasdaq collapsed and big companies went to bankrupt, recession started as a result of it;
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Summing up, we can say that recessions and downturns are cyclic processes, but no one knows the exact time and place of the next one. The reasons and consequences are differ-ent for every crisis. In the 18th cdiffer-entury crises occurred mainly because of the wars, finan-cial speculations or starving. But in 19th and 20th century crisis started to occur because of capitalist economy. After 1929 crises start to occur again and again in short intervals, but the humanity still is unprepared and uncertain every time. This time, hard times also come unexpectedly.
2.1.4 A brief summary of the current economic crisis
“…It’s not what any of us expected….
As consumers batten down the hatches and the global economy slows, senior executives confront a more profoundly uncertain business environment than most of them have ever faced. Uncertainty surrounds not only the downturn’s depth and duration - though these are decidedly big unknowns - but also the very future of a global economic order until recently characterized by free-flowing capital and trade and by ever-deepening economic ties. A few months ago, the only challenges to this global system seemed to be external ones like climate change, terrorism, and war. Now, every day brings news that makes all of us wonder if the system itself will survive.”
(Bryan and Farrell, 2008)
2.1.4.1 World
Problems with the repayment of subprime mortgages in the US triggered a strong wave of concern about lending around the world in August 2007 (Oxlade, 2009). This was the be-ginning of the so called ‘credit crunch’. (A credit crunch happens when banks hoard cash. If the supply of loans evaporates, the economic outlook quickly becomes bleak (ThisIsMo-ney.co.uk definition) )
Looking to the past, During the 2000s, very big price increase observed in agricultural commodities and especially petroleum products. China and India which are highly popu-lated growing countries demand from these countries to products caused to increase the price of products (Economist Journal, 15th of April,2009). Food prices in 2008 reached the highest levels in history (see Appendix, Commodity Prices). Valuable substances such as gold and oil gained for the highest historical value of the U.S. dollar against almost all other currencies have fallen significantly. Housing prices in the U.S. during the 2000s had shown a big increase. One reason for this increase can be obtained easily reachable mortgage. Constantly rising housing prices in the market creates optimistic atmosphere, and this op-timistic situation caused banks to give credits to low-income families to buy their own houses. When housing prices start to decline the credit market collapsed, people has found themselves unable to pay their credits.
Fears were increased, when Bear Stearns which is investment bank holds a large amount of high-risk housing loans went to bankruptcy in March then the U.S. government sold it to another investment bank JPMorgan Chase. This bankruptcy is followed by another invest-ment bank Lehman Brothers and Merrill Lynch and insurance firm American International Group. At the end of the September U.S. Congress approved a $ 700 billion rescue pack-age. Crisis in the U.S. in a short time spreaded to Europe. Iceland's three biggest banks
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went bankrupt (The Icelandic Government Information Center, 2009). Many financial in-stitutions in Europe also faced the liquidity problem that they needed to raise their capital adequacy ratio. The financial crisis also spread to other countries and developed into a global economic and financial crisis.
2.1.4.2 Sweden
As Öberg, First Deputy Governor of Riksbank, Sweden’s central bank responsible for monetary policy, commented the current economic situation in March 2009:
“The speed of the global economic downturn is unparalleled in modern times and has come as a surprise to the Riksbank and many other forecasters. At the beginning of September we were ex-pecting world growth to amount to almost 4 per cent in 2009. In the Monetary Policy Report we published in February we are instead forecasting almost zero growth this year. Developments in the world economy are thus expected to be the weakest since the beginning of the 1980s.”
Sweden is highly dependent on international developments, and this dependency has been risen over time. This can be illustrated by changes in shares of export activities in total bal-ance of resources : from over 20 percent in 1990 to around 40 percent in 2007 (Öberg, 2009). According to Riksbank and Statistics Sweden (see chart below), there is a great de-crease in the demand for Swedish export goods, which means that global economic down-turn has a substantial impact on the Swedish economy.
Forecasts of the analysts are not that optimistic: GDP will decline by 1.5 percent in 2009 and the growth will recover only in 2010 (chart below; Öberg, 2009).
Chart 1 – Sweden. Export Falling Chart 2 – Sweden. GDP
Another sign of the tough situation faced in economic environment is banks reaction re-garding interest rates: key interest rate (repo rate) were cut from 4.75 percent in September 2008 – to 0.50 percent in April 2009 (Riksbank, 2009). This had also a great impact on mortgage rates and lower petrol prices.
Swedish currency (SEK) has weakened significantly since the beginning of December. Ac-cording to Öberg (2009), since mid-September, the currency has weakened by around 12 percent when measured against a trade-weighted index.
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In addition to all this changes, levels of unemployment are significantly rising, which con-sequently leads to low purchasing capacity and fear among normal people. Such situation causes great changes in business environment.
2.1.4.3 From Macro to Micro level
“The current situation is often compared to the Great Depression of the late 1920s and the early 1930s. True, there are some similarities. However, there are also some basic differences. The crisis has affected everyone at this time of globalization. Regardless of their political or economic system, all na-tions have found themselves in the same boat.
There is a certain concept, called the perfect storm, which denotes a situation when Nature’s forces con-verge in one point of the ocean and increase their destructive potential many times over. It appears that the present-day crisis resembles such a perfect storm.”
Prime Minister Vladimir Putin’s speech at the opening ceremony of the World Economic Forum Da-vos, Switzerland January 28, 2009
As Bryan and Farrell (December 2008) assess, there is a strong need in understanding the circumstances, trends that are happening within the industries and economic environment in order to overcome the paralysis that dooms any organization and to begin shaping the future.
Meanwhile, the process is going on, governments around the world are nationalizing finan-cial systems, discussions are being held, all the systems are working with the same goals: to survive and desirably benefit from these new patterns.
Small and Medium enterprises, which are considered to serve as an engine of economic growth (Observatory of EU SMEs, 2003/7) are being under a strong attention of both le-gal, financial, governmental and other authorities, and scholars in the European Union and worldwide.
Starting from the September 2008 a number of surveys and analytical reports done by dif-ferent organizations worldwide has been increasing. The main purposes of these studies are to understand how the current economic environment is effecting businesses, particularly their financial, managerial, sales and distribution, innovation and other business processes; how the companies cope with faced difficulties; to share the knowledge to make the best decisions which will lead to the recovery from crisis and minimize the consequences for lives at all the levels of society: from normal people to world economy in general.
The previous studies of Small and Medium Enterprises, that this research will take into ac-count, were made from the perspective of different countries and authorities :
- Observatory of European SMEs held by European commission in 2003 for the Europe-19, which examined the performance, behavior when economic was recovering from economic downturn and responses of SMEs to economic shocks.
- SME Finance and Innovation in the current economic crisis, survey made by Centre for Business Research (Cambridge, UK) in December 2008.
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- Eurofactor Barometer Survey of almost 3,000 European companies, Issy-les-Moulineaux, 19 January 2009, which highlights the main trends of the year The empirical findings and general conclusions from the mentioned researches will be dis-cussed in Chapter 4 more detailed. But in order to get a better understanding of SMEs as a business entities, which are the subject of the sample study, the definition, background and main managerial peculiarities need to be described.
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2.2 SME
In this chapter the definition of SME is given. Theoretical background of small business (entrepreneurship theories), and arising from its nature specific managerial characteristics is discussed based on multi-functional approach. This will provide basis for understanding possible reactions of SMEs in economic downturns (which will be described in next chapter).
2.2.1 SME definition
Gunter Verheugen (Member of the European Commission Responsible for Enterprise and Industry) stated, that updated SME definition, which entered into force on the 1st of Janu-ary, 2005, represents a major step towards an improved business environment for SMEs and aims at promoting entrepreneurship, investments and growth (SME user guide, 2005)
Enterprise category Headcount Turnover Balance sheet total
Medium-sized < 250 ≤ € 50 million ≤ € 43 million
Small <50 ≤ € 10 million ≤ € 10 million
Micro <10 ≤ € 2 million ≤ € 2 million
Table 1 – SME definition
2.2.2 Entrepreneurship background of SMEs. Importance.
Entrepreneurship and economic growth theories are linked by the the theories of industry evolution (Jovanovic, 1982; Ericson and Pakes, 1995; Audretsch, 1995; Hopenhayn, 1992; Lambson, 1991 and Klepper, 1996). While it was suggested in traditional theories that en-trepreneurship would make economic growth slower, these theories suggest exactly the op-posite - that entrepreneurship will stimulate and generate growth (Observatory of EU SMEs, 2003/7).
The reason for these different interpretations lies in the context of the underlying theory. In the traditional theory, new knowledge played no role; moreover, the main engine for economic growth support was considered to be static efficiency, determined largely by the ability to exhaust scale economies. By contrast, the new theories are dynamic in nature and emphasize the role of knowledge. Because knowledge is inherently uncertain, asymmetric and associated with high transaction costs, differences appear concerning the expected val-ue of new ideas. This fact therefore emerged the tendency for people to leave existing job and start a new enterprise in an attempt to commercialize the perceived value of their knowledge (Observatory of EU SMEs, 2003/7).
Evolutionary theories focused on change as a central phenomenon. One of the central ma-nifestations of change is Innovative activity which stimulates entry, growth, survival, and the way enterprises and entire industries change over time. The dynamic performance of regions and even entire economies are linked to how well the potential from innovation is tapped.
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Different approaches to evolution of start-ups and SME’s has been the subject of a large li-terature. For example, Audretsch (Innovation and Industry Evolution, 1995) analyzed the factors that influence the rate of new enterprise start-ups. He founded that such start-ups were more likely in industries in which small enterprises accounted for a greater percentage of the industry's innovations. In turn, the initial condition of not just uncertainty, but big-ger extent of uncertainty vis-a-vis existing enterprises in the industry is captured in the theory of enterprise selection and industry evolution proposed by Jovanovic (Selection and the Evolution of Industry, 1982). The described model terms new enterprises as entrepre-neurs, and focuses on the idea, that entrepreneurs face different and random costs and mainly, they discover the value of the costs through the process of learning from its actual post-entry performance. In particular, Jovanovic (Selection and the Evolution of Industry, 1982) assumes that entrepreneurs are unsure about their ability to manage a new-enterprise start-up and therefore their prospects for success. Although entrepreneurs may launch a new enterprise based on expected post-entry performance, and once the business is estab-lished - discover their true ability in terms of managerial competence and of having based the enterprise on an idea that is viable on the market. Jovanovic also states the possibility of risk of expanding business if ability exceeds expectations, and possibility of successful exit from the industry. This model is a theory of selection, where efficient enterprises grow and survive and inefficient enterprises decline and fail, became one of the most common of entrepreneurial growth theories. The impact of entrepreneurship is manifested by growth - at the levels of the enterprise, the region and even at the national level (Observatory of EU SMEs, 2003/7).
The examination of the role of entrepreneurship as a determinant of economic perfor-mance is an obvious way to create a better understanding of the role of SMEs in this con-text (Observatory of EU SMEs, 2003/7). For example, Foelster (2000) examines not only the employment impact within new created and small companies, but on general link be-tween increases in self employment and total employment in Sweden during 1976-1995 yrs. Layard-Nickell describes the framework, which provides a link between micro behavior and macroeconomic performance, and shows that growth of small business has had a posi-tive impact on regional employment rates in Sweden (see Appendix 1).
2.2.3 SME management – specific characteristics.
Different approaches can be found when searching for theoretical background of relation-ships between firms and the external business environment: the resource-based view (Bar-ney, 1991), the dynamic capability perspective (Teece et al., 1997), and the competence movement (Hamel and Prahalad, 1994) emphasize the proactive potential of the firm by linking to certain types of resources and capabilities. Their basic reasoning is well-adopted in management research and directly relates to small business management (Shepherd and Wiklund, 2005). The entrepreneurship theory tends towards describing features closer to particular circumstances SMEs have to cope with. As Freiling (2007) questions: What can we learn from entrepreneurship theory?
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2.2.3.1 SME management functions
Facing the fact that about 99% of all companies in the EU belong to the small business, it is not easy to outline features of the general kind (Freiling, 2007). SMEs’ nature and their characteristics have been described by Jennings and Beaver in 1997:
• Structural peculiarities of coordination. According to a small size of the firm, the degree of structural complexity is low. The management can often easily over-view and control existing business, thus the broad hierarchies are often not re-quired. The design of the business processes can be poor since administrative back-up is only required to a limited extent. Hence, the flexibility is usually higher com-paring to larger firms. This expands the advantages of the small business.
• Managerial peculiarities of coordination. The small business can be characte-rized by strong influence of the owner-managers. The management process is therefore to a large extent personalized (Storey, 1994; Beaver, 2002) and dependent on the entrepreneurs’ dominant logics (Prahalad, Bettis, 1986). The low degree of structural complexity allows them to control the whole organization or at least con-siderable parts of it. This consequently makes procedures of formal planning not that crucial as for large organization (Freiling, 2007).
Hence, many of the findings from the entrepreneurship theory which refer to single persons (e.g. the entrepreneurial traits school, Low – MacMillan, 1988; Gartner, 1989) can be transferred to SMEs.
Freiling assesses that, considering the key role owner-managers play, capacity re-strictions (managerial bottlenecks and lack of specialized knowledge and professio-nalism) turn out and highlight the liabilities of coordination small business is con-fronted with.
The advantage of small business can be the unity of ownership and leadership, which helps to avoid a large amount of conflicts concerning the question of finance.
• Risk-taking peculiarities. Beaver (2002) raised the question, if (how far) the risk situation of SMEs really different from larger companies? Following described above approach, the small business is much more personalized, which also con-cerns the risk situation. The strategic capital investments, usually made by the own-er-managers for a long time, are reliable and at the same time outline the financial restrictions many SMEs are confronted with. In the literature (Jennings and Beaver, 1997; Beaver, 2002) many risk factors are described, such as the fact that SMEs usually depend on a rather small customer base, have limited bargaining power and have to specify their assets to a large extent in order to find an attractive position in niche markets.
Consequently, the vulnerability during crises is high and there is a tough need in strong management, well-timed decision-making, strategic planning and crisis man-agement to protect organization from the negative consequences of uncertainty. • Peculiarities of innovation. According to Schumpeter’s (1934) definition,
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It cannot be simply considered, that SMEs are in general more innovative than large firms.
However, there are some important features regarding the innovation process that can be treated as advantages of small businesses (Gibbons – O’Connor 2003): There is typically neither a well-equipped R&D department nor specialized R&D personnel in SMEs. In this context the logic and run of innovation process of SMEs usually is not limited by the department scale (frame). Many employees and owner-managers are involved and rethink the given processes and products more fundamentally. This can be explained by the limited structural complexity, that makes possible an easier overview of major issues the company is concerned with and start of innovation and renewal processes smoothly and rapidly. Given these throughput advantages of innovation processes of the different kind SMEs are in a promising position to achieve high levels of R&D productivity and innovativeness as well. This helps SMEs to make their way even in turbulent environments (Freil-ing, 2007).
• Peculiarities of the market interfaces. SMEs are, by definition, limited by the amount of employees. This smallness affects the firm’s positioning on factor, prod-uct, financial, and personnel markets in terms of bargaining power, name recogni-tion, and brand awareness (Beaver, 2002).
Certain entrepreneurial functions, such as coordination, managing uncertainty (risk man-agement), innovation, and ‘market-making’ represent the featured areas in SME’s manage-ment (Casson (1982); Schumpeter (1934); Knight, 1921). Freiling (2007) summarizes the importance of entrepreneurial functions in the following way:
1. Management will be poor in terms of performance measures as long as the ex-ecution of entrepreneurial functions is neglected. If firms are confronted with complexity and turbulence and do not consider the management of uncertainty, they are more likely to fail.
2. The functional discussion tells us that it is possible to operationalize and con-cretize entrepreneurship and entrepreneurial behavior by referring to certain functions to be executed.
3. It seems to be difficult to isolate one and only one function fitting all the (im-portant) requirements of management.
This gives rise to the impression that the managerial peculiarities can be best understood and considered in case of multi-functional approaches of entrepreneurship theory (Freiling, 2007).
This work will not go deep into discussion of those approaches, but it should be admitted, that the opinions of scholars on the functions and managerial peculiarities vary and cover parts of aspects. Schneider’s (1987) approach lies in dealing with a system of three func-tions that explain the emergence and evolution of the firm. Another approach introduced by Barreto (1989), seems to address the above-mentioned peculiarities, which can be used for better understating the nature of effects of external economic environment on small businesses.
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2.3 Crisis effects on SME
This chapter focuses on the previously found and described affects of crises on SMEs, theirs possible reac-tions and applied strategies. The general affects on organizational structure and managerial acreac-tions of small businesses will be narrowed by previous analysis of European SMEs made after recession of 2002. For a basis for understanding possible reactions of SMEs in current economic environment, which follows the ob-jective of this research, the results of lately performed surveys and publications are provided.
2.3.1 Possible affects on companies of the crisis in general
Whatever are the causes of crises, they have one common point which is they are putting businesses to hard situations. Crisis threatens the survival of the business; this is always un-derstood from the word “crisis”. Especially in the last century most of the crises, pro-foundly influenced businesses. Companies that are not prepared or unable to show flexible features for crisis, give struggle to live. Some had structural changes in many ways, they did those changes to avoid the damages of crisis or overcome the crisis. From this perspective, as a result of crises, managerial and organizational structures of companies are getting changed. One of the reasons of this change is requirement for “new blood” in company. These changes may come with psychological and sociological negative effects but also bring ability to business to continue its life. (Dinçer, 1992) Success of the managers and en-trepreneurs plays an important role in to minimize the impact of the crisis in the global scale.
Some companies may turn crises into an advantage. However, the crisis affects negatively the overall structure and operation of companies. Level of crisis affection on companies depends on internal and external environmental factors. The companies which are more dependent on internal and external environment will be affected more negatively by the crisis. Business environment factors can be analyzed in two main parts: internal environ-mental factors and external environenviron-mental factors. Internal environenviron-mental factors are em-ployees, directors, partners, business managerial characteristics , organizational characteris-tics, technology, business's financial structure, production system, such as business strategy and policies. External environmental factors are the competitors, legislation, political and economic situation, cultural features and international relations. Mr. Dinçer (1992, p.274) has expressed three important points about environment-business interaction:
1. Dependence between the business and environment:
Ability of controlling environment for the business will decrease negative effects of crisis for business.
2. Perception of the crisis positive or negative:
When the business sees the crisis as a blocker to achieve goals then crisis became a threat element.
3. Sensitivity of companies for changes:
Change rates of company may be higher or lower. The negative effects of the crisis will be more exposed on companies that are not flexible.
Mostly affected by the crisis period are often those companies, that cannot control external environment, have the high level of sensitivity to changes and that see crisis as a threat in-stead of opportunity. (Dinçer, 1992, p.275).
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2.3.1.1 Enhancing Factors of Crisis effects on companies
2.3.1.1.1 Internal Factors
When we start talking about internal factors, which are increasing the impacts of crises. On managerial and organizational structure of the management and leadership styles of the managers, responsibilities, hierarchy, formal and informal communication within the organ-ization, decision-making, management issues such as the center of the disciple must be un-derstood. Crisis process is a threat for the current situation and future of a business, it is very clear that administrative and organizational structure will require a significant change (Özbakır, 1992, p.2).
During the crises, organizational stress reaches the top level. On the one hand try to find suitable solutions to resolve the crisis, on the other hand, the tension created by uncertainty and running time pressures negatively influence the management structure of enterprises. Business managers have to try minimizing damages with precaution actions. To do this the first way is to make a series of organizational and administrative structure changes. Crisis requires rapid reactions, for this reason business structure is developed to provide quick decision. Standard decision-making methods are insufficient to resolve the crisis; these force managers for new decision-making methods. The important thing is to adapt perso-nally to new environment.
For this adoption instead of keeping current values organization has to accept new values. Accurate collection of information, communication, which cannot be easily settled up well, and psycho-social status of employees are changing the organizations atmosphere.
The atmosphere which is changed will effect significantly communication, motivation, or-ganizational justice and moral, such as oror-ganizational trust and oror-ganizational citizenship. Another factor which may increase the negative effects of crisis is absence of proper plan for dealing with crisis. Which has to include customers, competitors, vendors, partners, credit agencies, various internal and external environmental factors. Companies, that doesn’t have crisis plan, can face the reduction of mobility and flexibility. Also, it is highly advised in the literature, a special team which is called “crisis management team” has to be established. Another factor which is increasing the effect of the crisis is; if the managers doesn’t pay enough attention to the demand from customers or competitors. Inadequate environmental analysis of the managers will create strategic weaknesses. These weaknesses will increase the likelihood of encountering crisis. (Özbakır, 1992)
Business managers or owners when they fail to follow environmental changes and when they cannot keep pace with global developments or the country's economic situation, it can increase negative impacts. Another factor arises if managers did not establish an early warn-ing system by makwarn-ing the internal and external business environment analysis. Failure of the organizational structure of enterprises to show sufficient flexibility to adapt to new conditions or resistance to change will also increases the effects of the crisis.
2.3.1.1.2 External Factors
There are also some external factors besides the internal factors which we mentioned above. Biggest external factor is change in income of company and rapid price changes (Dinçer, 1992, p.271). The increase in costs will automatically come with preventions such
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as: reduce the number of employees, reduce the social benefits for employees and loading more work to the existing workers. New law and regulations can also increase effects of it. The new taxes, increasing social security contributions, to collapse of the credit facilities, the new customs legislation can also affect business dramatically.
2.3.1.2 Negative effects of the crisis on Managerial and Organizational Structure
All companies because of their cultures, have different managerial and organizational struc-tures. In this structure, authority and responsibility of managers and employees, communi-cation relations, leadership behaviors, authority transfer and the level of specialization can be different. There are some internal and external factors for effecting crisis on business, according to this factors impact can be change but according to approaches described by Dinçer, (1992), Kies and Sproull, (1982), Staw and Dig., (1981) some major results of those affects can be described as follows:
2.3.1.2.1 Communication problems in organization
During the crisis period, communication process and feature of communication will be change. (Kies and Sproull, 1982; Staw and Dig., 1981). It occurs because of the lack of in-formation coming from outside to the organization and related internal communication in the organization. During the crisis period organization may receive less information or none. In this case, employees and decision makers may face some problems. One way to eliminate the chaos centralizes communication channels.
2.3.1.2.2 Centralize authority
During the crisis period for fast and accurate decision-making, organizations want to cen-tralize authority (Dinçer, 1992. p.284). This situation can be evaluated as negative. Central-ize of the authority can speed up decision-making process, but if there are various branches of business then it may be delay (Özbakır, 1992). The most important cause of the central authority, crisis is interrupting the normal decision making process. Top managers of en-terprises will want to learn everything from center.
2.3.1.2.3 Corrosion of decision Quality
Decisions, which will take from single center and fast, cannot be called qualified decisions (Barton, 1993). Before the crisis, managers are used to ask advise from different managers or expert of that field, with the crisis period they are asking just a few close friends and the their boss. Moreover, strategic quality plans can be delayed temporarily on the crisis period, however they can be replaced by crisis plans (Fink, 1986). The most important factor in the deterioration of the quality of decision mostly because of lack of information and planning. 2.3.1.2.4 Reduction of Organizational Change Trends
Due to the uncertainty in the crisis period, companies can freeze their actions temporary (Kies and Sproull, 1982). This tendency to inactivity will prevent the operation for new in-itiatives. Companies will effort to keep that situation stable. Maybe this situation is tempo-rary, even during the crisis; however, it is certain that it will affect business negatively. Another definition of the crisis is “the incompatibility of the company with its environ-ment" (Kernisky, 1997).
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Need for coordination increases in the crisis period (Türkel, 2002, p.3). However, again due to lack of information coordination between units and individuals uncover shortcomings. Surely, had gathered in the center of authority is also affected. Coordination shortcomings, the units also may be due to rupture of the relationship between. Units in the center of the privileges of the collection, the units will in the relationship between the minimum levels. 2.3.1.2.6 Disorder in Duties, Authority and Responsibilities
In the period of the crisis the most common way which companies act is reducing the number of employees. The most important of reducing employees is because of reduced demand from customers. Increase on input costs and decrease on sales is forcing compa-nies to cut costs as much as possible. According to executives, the most important source of savings is the people. Reducing the number of employees in companies means new tasks and responsibilities for managers. This situation will come with psychological pressure on staff. According to psychological pressure managers may not be able to work efficient (Nystorm and Starbuck, 1981).
2.3.1.2.7 Fear and panic
The most common feeling on the time of crisis is “am I going to loose my job?” and when employees see the tendency of job losses without clear reason this will create an extremely negative effect on employees (Özbakır, 1992, p.36). Fear and panic are the biggest threats for the companies. In order to fight this panic managers should consider their employees to be the last thing to give up.
2.3.1.2.8 Corrosion in the Decision Process
In the crisis period both on the individual level and organizational level mental perfor-mance will reduce, this will come up with corrosion of decision process. (Dincer, 1992, p.284). the most important reason for corrosion of decision process is uncertainties and centralized authority. Damaged decision process, may force some managers to give impor-tant decisions who has no any background or experience. This may cause additional prob-lems.
2.3.1.2.9 Dispiritedness
Period of crisis can be last in short or sometimes longer. Several conditions which will oc-cur in the crisis, time pressure and panic will affect the morale of individuals in the compa-nies (Türkel, 2002, p.3). General moral of the employees will adversely affect the climate of the organization. The worst thing can be happen when this negative climate starts to effect relationship between employees.
2.3.1.2.10 Increase of self-defense:
In the period of the crisis, employees who are working and paying attention on the crisis after crisis finished they may face with fears for their future (Tack, 1994, p.58). This fear can affect the decision for the employees to stay in that company or not. Because staying in the company which is faced with the crisis is too risky for some people. Because of this companies may loose some qualified employees. Benetth et al made a study (1995), and they saw that crisis is reducing loyalty of the employees (Bennetth, Martin, Bies and Brockner, 1995).
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The importance of impact of crisis on managerial level is unquestionable, as the business actions are the implementation of decisions made within the organization, which atmos-phere, as we described above, can be influenced to large extent.
2.3.2 Theory of retrenchment
Organizations are facing tough times in the current economic environment. Some are struggling for survival; others are trying to capture the opportunity to leverage their processes, technologies, or market positions and to expand where others cannot. While some firms can apply a higher degree of certainty to revenue cycle forecasts, as is the case for those with long-term contractual sales volumes, there is less certainty in firms that are more immediately reactive to their market environment.
Economic downturns, crises, and recessions – whatever their labels – mean the current economic environment is in turmoil. Market turbulence results in the following predictable characteristics (Goodell and Martin, 1992). Customers change as some gain ground and others go under. Customers and clients plan their expenditures more carefully and with a higher sensitivity to price. At the same time, sweeping price cuts may undercut perceived quality of an organization’s products and services. Customers may be looking for lower costs and may be unable to find them within the firm’s existing product line. This may cause existing customers to move to a different supplier.
However, even during economic challenges, customers are likely to sustain their basic busi-nesses and much of their purchasing will remain consistent to do so. At this point we talk about retrenchment, which is defined as “a set of organizational activities undertaken to achieve cost
and asset reductions and disinvestments” (Michael and Robbins, 1999). The business press
advis-es firms in industriadvis-es where profits rise and fall with the general businadvis-ess cycle to use trenchment as a response to poor macroeconomic conditions (McLaughlin, 1990). In re-cent years, we can face with a lot of people who are on "diet". Because of weight problems this trend will be increase and this trend will be continuing with “healthy diet” “controlled weight loss”. People who are loosing weight are usually making diet with control. Gary Hamel (2009) says that the companies who wants to cut-off costs they look like people who wants to loose weight.
“Fat companies will get in to short-term intensive diets, they reduces the amount of employees, sold assets by this way they can cut-costs but this is not the best way”.
Hamel (2009)
According to retrenchment theories there are four main findings which will be explained in details.
First one is “marketing channels will be a lower priority for retrenchment than advertising”. Among cost factors in marketing, the relationships and investments that comprise market-ing channels contain considerable dedicated investment specificity and human asset speci-ficity (Stern and El-Ansary, 1982). For example, dealers learn about a manufacturer’s prod-uct and constrprod-uct or adapt appropriate storage facilities. Such specificity makes marketing channels also an imprudent candidate for retrenchment. By contrast, advertising is easily purchased in a well-defined market contains little specificity (Pope, 1983). Advertising is therefore a better choice for retrenchment than marketing channels.
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Second finding is “Machinery and other equipment will be a lower priority for retrench-ment during recession than inventories”, among asset factors machinery and other equip-ment are likely to display physical asset specificity, because they are adapted to the firm’s needs. Such items as property, plant, equipment, tools and machinery are more specific to the firm and less likely to be priorities for retrenchment than inventories.
Last finding “Executives and front line supervisors will be lower priorities for retrench-ment during recession than hourly employees”, among human factors the human capital of some employees is likely to contain more specificity than the human capital of others. Ex-ecutives have considerable firm-specific human asset specificity, as they cannot be replaced easily ( Baker, Gibbs, and Holmstrom 1993). Front-line supervisors are also likely to have considerable firm-specific knowledge that makes them difficult to replace (Wruck and Jen-sen 1994) by contrast, hourly employees will have less specific knowledge and therefore will be a higher priority for retrenchment. If the topic is retrenchment and if the aim is cut-ting costs immediately first think will appear in our mind is cut-off jobs and continue with less employees because one of the biggest expense of companies is always employees wag-es. The newest and probably the biggest cut-off operation is Royal Bank of Scotland to cut a further 9,000 jobs. Royal Bank of Scotland said that it planned to lose 9,000 jobs, half of them in Britain, on top of the 2,700 it has already cut here this year. The announcement came hours after it was confirmed that the Government’s stake in the bank had risen from 58 per cent to 70 per cent. Stephen Hester, RBS chief executive, echoed Brown's com-ments, saying the bank needed to withdraw from riskier areas. A cost cutting program was also needed to bring it back into profit. "Unfortunately that means taking difficult decisions about jobs as well as taking many other cost reduction actions." RBS employs 170,000 people, 106,000 of whom are based in the UK. Its back-office operations employ 45,000 people worldwide, including 27,000 in Britain. So even this kind of huge Bank is going to cut-off job method to saving costs. Nowadays executives and academicians are always talk-ing about how to reduce costs without cutttalk-ing off jobs. Instead of layoff employees if you will reduce their working hours or salary this is much cheaper for companies. Companies are more creative in this way to reduce costs instead of misemploy people. Companies doesn’t want to cut-off people job like they did in 1929 so nowadays biggest companies such as FedEx, Dell and Motorola are giving unpaid vacations to their employees or they are reducing salaries of their workers because firing people and after crisis finished hiring them is more expensive for firms. Another example for reducing labor costs without layoff is Wermont’s Rhino Foods model they send their 25 workers to Autumn Harp which is honey producer because Autumn Harp need temporary labor force and Wermont’s Rhino Foods send their labor to them for temporary period it is kind of renting labors. One of the biggest human resource agent which is operating in the USA is Society for Human Re-source Management and according to their survey 37 percent of human reRe-sources manag-ers are trying to find alternatives instead of layoffs. Another different example Luxury Re-treats which is villa rental agency operating in the USA, they changed their 8 employees de-partment from product development to sales, CEO of the company even he send his own personal assistant to accounting department, CEO Joe Poulin said that “such as tough times you have to use your sources in the most effective way”. Ernst & Young gave one month unpaid vacation to their employees who doesn’t use his vacation in last three years in this way they reduced 17 percent of their costs on wages and employees were happy be-cause they find a time to relax. There are thousands of cost-saving examples and ways, for example recycling, energy saving etc. Theories and examples are mostly focused on labor and marketing costs because they take the significant share in total costs of the companies.
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2.3.3 SME responses to recessions and contractions. Earlier findings.
The organizational structure of any enterprise influences its decisions whether or not to make serious changes during downturns. According to Michael, S.C. and D.K. Robbins (1999) classification of possible actions taken by affected companies can be made along:
- entrepreneurial, pro-active response; - efficiency recovery, reactive response; and - no response.
Entrepreneurial responses are interpreted by significant changes in the product-market combination. Decisions that relate to employment and cost-reduction are typical examples of efficiency-recovery responses (Observatory of EU SMEs, 2003/7). In order to fulfill the purpose of this study, to understand the impact of current crisis on Small and Medium Enterprises, the results of previous empirical studies should be taken into account.
2.3.3.1 2003, Observatory of EU SMEs
“The European economy is recovering from an economic downturn. Very little information is available about the roles of SMEs in the business cycle and in particular how do SMEs respond to econom-ic adversity.”
(Observatory of EU SMEs, 2003/7)
2.3.3.1.1 Responses relating to employment
In EU surveys (Observatory of EU SMEs, 2003/7) it was found that the limited labor productivity growth in SMEs is mainly caused by micro enterprises. During downturns, smaller enterprises maintain more employees above the efficient level compared to larger enterprises (labor hoarding) (See The Observatory of EU SMEs, Chapter: SMEs in Europe, 1996,
1998.). Micro enterprises usually have fewer opportunities to dismiss personnel.
Further-more, considering the low degree of structural complexity, which is typical for SMEs as de-scribed above in Chapter 2) and consequently stronger personal ties within the enterprise, business owners are probably also less dispose to lay off personnel, even if they have the chance to act so.
About 70 % of the SMEs in Europe-19 agreed with maintaining the same number of em-ployees (as of Spring 2003), the Table 2 below shows relationship between enterprise size and employment decisions in response to the economic situation: 17 % of the micro-enterprise planed to reduce the number of employees, compared to 38 % of the medium-sized enterprises (Statistically significant at the 95 % level, Observatory of EU SMEs, 2003/7).
It is significant, that this pattern is not relevant to every country. The countries that reflect-ed no clear size class pattern are: Austria, Switzerland, Spain, Portugal, Iceland and Ireland. The pattern is present for all sectors excluding business services and personal services (for which no clear pattern can be observed, as EU commission claims).
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Table 2 Effect of the current economic situation on the number of employees, by size class, Spring 2003
2.3.3.1.2 Responses relating to investment plans
Investment behavior of SMEs can be also influenced by economic situation. About 50% of them admitted that the most important investments in 2002 were handled as planned. Moreover, Table 3 below also reveals that some of small enterprises may bring forward their investments. This could mean that a relatively significant number of small enterprises assume opportunities in investing (Observatory of EU SMEs, 2003/7).
Table 3 Effect of the current situation on (the most improtant) investment plans, by size class, spring 2003
2.3.3.1.3 Other responses to economic developments
Other actions, that are often performed by the entrepreneurs when facing economic fluc-tuations, are reducing costs and/or reducing prices.
Table 4 below shows that in general more than half of SMEs are following cost reductions as well as price reductions strategies, which can be considered as price instruments as a re-sponse to economic adversity. It is interesting, that almost half of the SMEs considered new markets in response to the economic slowdown. As EU experts (Observatory of EU SMEs, 2003/7) comment, this reaction is particularly apparent for enterprises that have existed for less than five years and enterprises that exported in the previous year.
