Chapter 10.

Medium Sized Firms (MSFs) Big Firms Locally

Daniel Wright & Hannah Wheaton

Introduction

So far we have looked at Small Firms (Market System Firms) and Large Firms (Planning System Firms)

Chapter 10 focuses on the Medium Sized Firms (MSFs) and their distinctive characteristics.

The chapter is in two main parts:1. Distinctive nature of MSFs2. Geographical dimensions of MSFs

Theory of MSFs

• Any definition of a MSF must take into account definitions for small and large firms.

• MSFs generally between 300 – 10,000 people

• Sales in the US$50 million – US$2 billion range

• 50 little ‘giants‘ based in the US• Impressive growth and profitability performance

• These firms also specialise in specific product market niches and are aggressive exporters and have international operations.

• Since at least the 1960‘s, MSFs have made their mark as their own distinctive segment of firms

Distinctive Nature of MSFs

• MSFs are known as backbone firms - “MSFs are vitally important to the economy as a whole; they are literally backbone firms.” (Nakamura, 1990)

• The behavior, structure and impact of MSFs are similar to that of small firms but they are just on the ‘big side’ of the range of small firm sizes

• Corporate Priorities & Culture are comprehensively shaped by the values of the dominant entrepreneur(s) and their relationship with the workforce

• Research & Development and Marketing are key interrelated functions which focus on innovation

• Therefore MSFs are highly innovative and continually try to improve the reach of specialised market niches

• MSFs – International

• Specialising in Market Niches leads to a strong commitment to exporting and foreign investment

• Specialisation and geographic diversification of products and markets help MSFs obtain Economies of Scale at Product, Factory and Firm levels

Organisational

Metamorphosis Metamorphosis

Organisational

Large Firm Large Firm

Small Firm Small Firm

TIMEProduct Quality & Refinement in Mkt Niches

Scale Economies theough specialisationStrong commitment through exporting

Geographic Diversification

Entrepreneurial Vitality

Realisation of Human Potential

R&D Market Know-how

Model

Importance of MSFs

• Contribute to national economic development by promoting competition and efficiency

• Disrupting monopolies & political relationships between ‘big business’ & ‘big government’

• Reduces X-Inefficiency (eg. bureacracies, labour relations)

• Therefore MSFs that are large enough are better able to fully exploit economies of scale and as a group are often more efficient then giant firms (Blair 1972, Shepherd 1979)

Nakamura’s Evolution of MSFs – Japan (1950-1980)

1950s: MSFs played key role in introducing new organisations and labour relations strategies to introduce new technologies (Honda & Sony)

1960s: Distinguish themselves from Small Firms by achieving EOS and high wages

1970s: MSFs lead diversification and economic restructuring processes in the economy as a whole

1980s-1990s: MSFs lead the shift in the Japanese economy from its heavy industry and mass production bias towards integration in a more international division of labour, in which Japanese firms enter niche markets.

Importance of MSFs

MSF vs Small Firms

• Differ in:• Organisational Structure• Technology• Size

• Entrepreneurs & Managerial Challenges• Learn to functionally decentralize• Co-ordinate multiple plants, often in different countries• Manage large labour forces• Secure substantial financing

• Economies of Scale• MSFs have the ability to achieve EOS, through • Advantages in:

• Research & Development• Marketing Functions

• In contrast to corporate giants, MSFs are less bureaucratic and have fewer managerial layers so that decision making is a faster process and the key decision makers are closer to the workforce.

• Developing Human Relations

• High Specialised Product Markets

MSF vs Large Firms

Different Types of MSFs

• MSFs can be thought of as leaders, subcontractors and as local opposition firms.

• Leaders are innovative, growth orientated firms that enjoy significant market shares.

• Subcontractors are relatively small, highly specialised firms who deliberately seek to be complimentary to large firms

• Loyal opposition firms are direct competitors to large firms - they “operate under the shadow of giants“ (Edwards 1979).

Case Studies: Leaders

• Ivacare – US based health care company

• Murata – Japanese based textile machinery company

• MacDonald Dettweiler –

smaller Canadian based communications firm

Case Studies: Subcontractors

• MSFs are categorised as Subcontractors by innovating and specialising in niche markets with the aim of producing complimentary goods of other firms

• Examples of such subcontractor MSFs are:• F-Tech• THK

(Both are MSF subcontractors but are operated in contrasting manners)

Case Studies: Subcontractors

F-Tech• Specialised supplier of

suspensions to Honda• Honda’s sole suspension

supplier and 66% of sales are to Honda

• President has hands on approach, but Honda owns a 20% share of the company

• Located within 90min drive of Honda‘s assembly plants in Japan & Canada

THK• Specialised linear ball bearings

supplier

• Supplies to several core industries

• Products are specialised, precise, and world leaders

• Firm is completely independent with its own unique organisation of suppliers

Case Studies: Loyal Opposition

• MSFs that develop corporate strengths not evident in existing large firms in the same industry

• Example:• Dr Pepper – A US soft drink company that has

traditionally offered loyal opposition to Coca Cola and Pepsi

• Began as a family enterprise in 1930’s• Dr Pepper was able to be competitive with such large

firms because of regionalisation and consumer loyalties

Geographical Dimensions

• Location Preferences• MSFs reveal more diverse location patterns

• Headquarters are relatively dispersed

• Often in hometowns of owner/managers

• Big Firms Locally• Firms are either dependent or non-dependent

on localities• Committed Agents / Indifferent Agents

Geographical Dimensions

Committed Agents-Large local employer-Strong local integration-Participation in local networks-Local control-Family ownership

Indifferent Agents-Large local employer-Non-local participation-External control-Global markets

Committed Patients-Small local employer-No local integration-Local markets

Indifferent Patients-Small local employer-Non-integrative functions-Non-participation-Ownership doesnt equal control

Enterprise Dependence

Loca

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nce

High Low

Hig

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Conclusion

• Because MSFs are important locally, their behaviour in relation to the pressures of Globalisation is particularly fascinating. Thus the evolution of MSFs plays a critical role in mediating global forces in a manner that has direct implications for local development

• Symbiotic relationship between MSFs and localities

• How MSFs respond to global competitive pressures is likely to be an indicator of the relationships between capital and community.