The Importance of SMEs in New Zealand - Essay Example

 The Importance of SMEs in New Zealand Introduction In any economic system, business makes the foundation of the economy and while classical economists suggest that companies working with the economies of scale will be the ones that will benefit the most, niche markets and specialized services allow for the presence of SMEs in any economic system. As per the data given by Massey et. al. (2004), this is certainly the case for New Zealand where nearly 400,000 organisations list themselves as SMEs. The importance of these SMEs for New Zealand is threefold since they create a means of entry into business for new entrepreneurial talent; give a productive outlet for individuals who value independence in economic terms and create the most efficient form of running a business in certain industries where economies of scale do not apply. Why SMEs are important In fact, the third reason may well be the most important reason for the existence of SMEs and the efficiencies gained by them are important enough for lager companies to be envious. Global companies that operate in New Zealand such as GE emulate the business models created by smaller companies to gain the advantages of adaptability and flexibility. During his tenure, Jack Welch, the CEO of GE made it a special focus to establish the best management systems and allowed his company to be behave like a small company (Welch, 2005). There is strong evidence to support the idea that small companies are more efficient than their larger counterparts and the extensive study conducted by Eugenio and Pernías (2006) correlates production and innovation strategies with the size of the company. In their study, they looked at the tile industry and found that small companies were more likely to be more innovative in terms of production and use those innovations to come up with new designs and products for their customers. After examining a multitude of companies around the world, they concluded that in comparison to other firms, “Small firms tend to be more innovative overall (Eugenio & Pernías, 2006, Pg. 1)”. Small companies in New Zealand can lay claim to several advantages that come from being small, flatter, and having a more compact organizational structure which is a direct result of the size of the company (Pirich, 2001). Thackston (2000) recommends that short chains of command would make company management easier and would also make the company more flexible in terms of changing the business according to the needs of the company. Naturally, a smaller company would begin with that advantage but it must be noted that a small company can also fail if they do not build on their advantages with other supporting elements. This is the reason that the majority of start-ups fail to get off the ground since the global rate of failure for new companies is quite high. Nearly half of these companies do not go beyond their sixth year and only one in five survive eight years in existence (Hardy, 1996). However, those that succeed often have a lot going for them in terms of retaining and establishing good human resources as entrepreneurs within the company. In the history of business, there have been several cases where small businesses have eventually become big businesses and the champions of the industry due to the leadership and motivation that is created by one or more individuals within the enterprise. This is certainly a part of the argument forwarded by Burlingham (2003) who says that the people within a small company and the culture of a company can go a long way towards making the company act like a small business or act like a large bureaucratic organisation. He gives a detailed review of the culture at Zingerman’s Community of Businesses which includes everything from the hippie sandals and casual clothes worn by the CEO to the financial figures of the company showing tremendous margins of profits and more than fifteen million dollars in total sales. Keeping the financial information aside, the focus is on the culture of the small business which has built a strong sense of belonging and ownership for the employees, a trust relationship with the owners, excellent management practices and the zeal to provide customers with the best possible service (Burlingham, 2003). Throughout the history of the Zingerman’s Community of Businesses, it was able to adapt and change to the business requirements simply because it had entrepreneurial business managers that appreciated change and flexibility for individuals who value independence in economic terms. However, such successes can only be created where there is a close match between the company culture and the type of people who work there. Zingerman’s Community of Businesses positively encourages entrepreneurs to come and work for the company with their own bright ideas so they can be invested in and eventually turned into new companies under the same umbrella. Any employee who has an idea for a product can start selling it as his/her own project, manage it, develop it and if it takes off they can turn it into a new company altogether (Burlingham, 2003). This example of how one small American company manages to keep itself fresh and young should serve as a beacon to companies in New Zealand since the Zingerman’s Community of Businesses is continually increasing in size with the inflow of new ideas created by the brightest entrepreneurs who are lured to work for them. Not only the employees, but the community is also happy with the company since a tenth of their operating profits always go to various charitable causes within the community (Burlingham, 2003). This simply goes to show that keeping the culture of a small business with the right mix of people will help a company be flexible even though it may employ hundreds of people and have a huge budget to deal with. New Zealand gets more forty percent of its total value added output from small and medium sized companies and the figure has been one the rise in recent years (MED, 2007). While 250 large companies may account for more than 90% of the exports made by the country (Pirich, 2001) the overall number of small companies makes them amount to 96% of all enterprises in New Zealand. This means that people working with small companies have a means to achieve economic independence while being a part of a culture of entrepreneurship and individual achievement. Such has been noted by the government and the Minister for Small Businesses has said that, “It is their numbers that makes them important to the economy, but it is their potential for growth that makes them vital to the economic transformation agenda (MED, 2007, Pg. 1)”. The facts regarding economic independence speak for themselves since the average profit per employee for a company with five or less employees rose from $26,296 in 2003 to $31,169 in 2004 (MED, 2007). Companies larger than that could only hope to see such margins and these figures go to show that entrepreneurs who are willing to take the risk of starting small businesses may be able to gain economic independence with relative ease. It also holds great promise for the future of the country since there appear to be a large number of people who have economic sense and can be a part of a highly skilled group of employees in small businesses around the country. This idea is reflected on a global level by the Herman Group (2004) that points out that small companies will form the future of the world’s economy and that: “Future economic growth will come from these small enterprises, which are more flexible and mobile than their lumbering big brothers. Communications technologies overcome many of the functional limitations of being small, and micro-businesses can usually relocate quickly to draw from a new labour pool, serve new customers, and contribute to a new region's tax base (Herman Group, 2004, Pg. 14)”. Conclusion This is a very valuable set of advantages and these are gained in part by the size of the company but the majority comes from other factors which need to be further developed in New Zealand so that it can be a part of the coming age of small businesses leading the way towards the development of an economy. In this regard, certain sociological elements like encouraging and supporting small business started by women or other minorities in business should be helped by the government since women make less than a third of all employers and just 33% of those who consider themselves to be self employed (MED, 2007). Works Cited Burlingham, B. 2003, ‘The Coolest Small Company’, Inc, 25(1), 64-72. Eugenio, M and Pernías, J. (2006). Innovation Complementarity and Scale of Production. Journal of Industrial Economics, 54(1) 1-29. Hardy, E. 1996, ‘Meet the boss’, Forbes, 158(11), 268-286. Herman Group. (2004). Strength in Small Business. Futurist, 37(4), 14-16. Massey, C. et. al. 2004, Speaking Up: Stories of Growth in SMEs in New Zealand, Massey University. MED (Minstry of Economic Development) 2007. ‘SMEs in New Zealand: Structure and Dynamics’, [Online] Available at: http://www.med.govt.nz/templates/StandardSummary____13977.aspx Pirich, A. 2001. An Interface Between Entrepreneurship and Innovation, Aalborg University. Thackston, H. 2000, ‘Small Business: Being Small Gives You Big Advantages’, InsiderReports.com, [Online] Available at: http://www.insiderreports.com/department.asp_Q_ChanID_E_SO_A_DeptID_E_GTKN_A_StoryID_E_20001377 Welch, J. 2005. Winning. HarperCollins. Word Count: 1,549 Read More