MEDIUM-SIZED FIRMS,
BIG FIRMS LOCALLY
Ljiljana Zeljković
Sonja Pisarov
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Nature of MSFs as organization which
combine selected characteristics of
entrepreneurship and corporate power
Different types of MSFs
Geographical dimensions of MSFs with
respect to locational behaviour and as big
firms locally in the mediation of local/global
forces
Medium-Sized Firms
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“Enterprises differ from each other along innumerable
dimensions”
Underline this variability by an explicit focus on MSFs
Distinctive characteristics of MFS’s
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MFS’s as backbone
hidden champions
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potential of MFS’s as “threshold firms”
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Geographically, the locational choices and spatial
organization of MSF’s have important implications for
local development.
Medium-Sized Firms
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The potential significance of MSF’s is that they are “big
firms locally”
Like small firms – strong attachment to home where
ownership, control and investment are largely
concentrated.
Hidden outside of their market niches - Locally well known
and have noticeable local impact
Their growth requires a geographical extension of
activities so they are typically aggressive exporters
Have special role in linking the fortunes of localities with
the forces of globalization
Towards a theory of medium-sized
firms
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Small firm – employs less than 100 people and have
sales less than US $25 million
(Small) medium-sized firms – employing between
100, 200 and 300 people with sales US $25-50
million range
MNCs – employing in excess of 10.000 and with
sales measured in billions of dollars
What about the firms between these size ranges?
- A lot of them and may be regarded as incorporating
the “true MSFs
Towards a theory of medium-sized
firms
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“Little giants” stemmed from their impressive
growth and profitability performance
especially in relation to the real giants
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These firms specialize in specific productmarket niches, all have major exports and
most have international operations
Medium-sized firms as backbone
firms: a model
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Nakamura – MSFs vitally important to the economy as a
whole  backbone firms
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The corporate priorities and culture of MSFs are comprehensively
shaped by the values of dominating entrepreneurs
Entrepreneurs closely co-operate with skilled and participatory
workforces
R&D and marketing are key which focus this co-operation on
innovation, with respect to technology, work organization, marketing
and product markets
Highly innovative and seek to enhance the penetration of highly
specialized market niches, often on international scale.
Strong commitment to exporting and foreign investment
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Medium-sized firms as backbone firms: a
model
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MSFs typically evolve from small firms but can originate in other
ways (spin-offs from large firms)
May remain medium sized, grow to become larger themselves, be
acquired by large firms or decline back into the small firm sector,
or even fail.
Differ from small firms in terms of organizational structure and
technology as well as with respect to size.
As in the case of small firms influenced by the abilities, values and
even personalities of individual entrepreneurs. But due to the
scale and speed of growth have to deal with a range of new
managerial challenges as they learn to functionally decentralize
In MSFs, but not in small firms, the realization of firm-level
economies of scale is important
Medium-sized firms as backbone firms: a
model
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In contrast to corporate giants, MSFs are more
entrepreneurial so decision making is faster process and
decision-makers are in closer contact with the workforce
Also, typically more focused on highly specialized
product markets even though, like large firms, they may
be global in scope
MSFs are better able than large firms to capture the
latent value of employees and develop market niches
With focused innovation efforts can achieve dominant
national and even global positions in highly differentiated
markets
Medium-sized firms as backbone firms: a
model
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MSFs may become attractive acquisition
targets for large firms or other MSFs
On the other hand, if they continue internal
growth, from medium to giant size, it raises
question about organizational metamorphosis
Firms can achieve substantial size while
combining entrepreneurialism with more
decentralized organizational structures
Case study– Magna – MSF to giant, decentralization with
entrepreneurial perspective
The social rationale of medium-sized
firms
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MSFs contribute to national economic development by
promoting competition and efficiency, by responding to
consumer demands and by enhancing innovativeness
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To national economic efficiency “by thwarting monopolies”
To political pluralism “by disrupting the political hegemony between
big business and big government”
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“True” MSFs directly “compete against the giants” and
pubic benefits of this competition largely result from the
greater efficiency
MSFs define the most efficient levels of operation and
are big enough to fully exploit economies of scale and as
a group are often more efficient than giant firms
Nakamura- 3 stages in the evolution of MSFs
in Japan (1960s to 1980s)
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1950-1960
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MSFs provided a key role in introducing new
organizations and labour relations strategies to facilitate
the introduction of new technologies (Honda, Sony)
Revolutionized existing SF management thinking by
focusing on products with growth potential
Introduction of meritocracy and equality in the
workplace
The leading MSFs distinguished themselves from small
firms by achieving scale economies and high wages
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3 stages in the evolution of MSFs
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1970s
MSFs led diversification and economic
restructuring processes in the economy as a
whole
Developed new applications and products in
related or entirely new directions, through
original R&D or by introducing technology
developed elsewhere
A type of R&D based scope economy
3 stages in the evolution of MSFs
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1980 – 1990
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MSFs have led the shift in the Japanese economy from
its heavy industry and mass production towards
integration in a more international division of labour
Japanese firms bridged manufacturing with primary and
service activities and create entirely new businesses
Information and communication techno-economic
paradigm - growth of highly differentiated markets as a
result of breakdown of the mainframe computer
Shift towards flexible mass production
Offered a new lifestyle choices to consumers
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Entrepreneurs of the 1960s more likely to be “lone
wolves” whereas of the 1980s are more willing to
collaborate, merge and network with other firms
For Nakamura, MSFs that become giants of the 1990s
will draw their competitive advantage less from
economies of scale than from economies of scope and
networking with other firms to enhance their
innovativeness
MSFs are not only a source of the giant firms of the
future, but offer models of organization to which existing
giants must adjust (the idea of “intrapreneurship”)
Case studies of medium-sized
firms: alternative strategies
The terms used by Taylor and Thrift to
classify different types of SF may be applied
to MSFs
1. Leaders
2. Subcontractors
3. Loyal opposition
And the possibility of becoming laggards
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1. Leaders
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Leader MSFs are innovative, growth oriented firms which
enjoy significant, possibly dominant, market shares
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3 examples – Invacare (US), Murata (Japan), MacDonald Dettwiler
(Canada)
All 3 companies focused on specific market niches and have been
able to use established technological and marketing expertise to
diversify into new but related products
Murata and Invacare have become market leaders and manufacture
large outputs of specialized products which generate important
economies of scale from their R&D and marketing networks as well as
in the production process itself.
MacDonald growth is based on economies of scale and scope of its
qualified workforce as they rely on established expetise and flexibility
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2. Subcontractors
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The majority of subcontractors are relatively
small and it is possible in some industries for
such firms to transform themselves and become
MSF leaders
It is also possible for highly innovative and
specialized MSFs to develop as subcontractors
Japan: 1. F-tech, a supplier to one core firm in
the auto industry
2. THK, a supplier of linear ball bearings
to several core firms in several industries
Subcontractors
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Core auto assembler (Honda) typically rely on a
large base of subcontractors
F-tech’s relationship with Honda is extremely
close, both firms talk about diversifying in recent
years
F-tech’s plan is to reduce its dependence on
Honda , a plan reflects a broader gradual
erosion of keiretsu relationships that comprise
stable, monopoly business relations
Subcontractors
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In contrast to F-tech, THK is completely
independent and supplies several core firms.
In the robot industry it sells to all important
manufacturers
THK has control of the patents and its
willingness to work closely with Hirata has
ensured that the relationship between the
two is stable and growing.
3. Loyal opposition MSFs
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Kuhn’s interpretation of MSFs gives particular
emphasis to the role of MSFs as competitors to
giants
MSFs operate “under the shadow of giants”
because of their potential role as a competitor
and threats as acquisitors
In some markets MSFs directly compete with the
giants and in others MSFs meet this competition
more obliquely by developing competitive
strengths
Loyal opposition MSFs
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In the case of USA, Dr Pepper for a long time
offered a loyal opposition to Coca Cola and
Pepsi
Japan: Matsushita has emerged as the largest
MNC and Murata, Hirata and Yaskawa were well
established in other industries and entered robot
manufacture in innovative ways
Each of the loyal opposition firms and Matshuita
developed its own network of suppliers
Loyal opposition MSFs
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In Japanese economy, the suppliers in the robot
industry have played vital roles in innovative
products that enhance performance and reduce
costs
Among some of the suppliers, the level of
expertise of the suppliers equals or surpasses
that of the core firm
The level of expertise of the suppliers equals or
surpasses that of the core firms
Loyal opposition firms compete with the leading
firms by incorporating the expertise of others
Geographic perspectives on mediumsized firms
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Geographical behavior, structure and impacts of
the MSFs are distinctive in relation to large and
small firms
The origins and headquarters of MSFs reveal
more diverse location patterns and peripherality
appears to pose no significant disadvantage in
contrast to giant firms which concentrated their
control functions in the central cities of
metropolitan areas
The location preferences of MSFs
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According to one survey 44 of 50 head offices
MSFs were located in smaller places
Simon emphasizes: “The typical hidden
champion is located in a small town or village
rather than in a big city. Few can be found in the
urban centers”
Owner-managers of MSFs were often born and
raised in the small towns where they established
operations and such locations facilitate a close
interdependence between employers and
employees
The location preferences of MSFs
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In many of Germany’s rural-based MSFs, labor
relations are characterized by forms of
“enlightened patriarchy”
Internal problems absorb much less managerial
energy than in large companies
Even in Japan, where head-offices patterns and
industrial activity has traditionally been highly
concentrated in Tokyo and Osaka, MFSs
originate and thrive in peripheral locations.
MSFs as big firms locally
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In the USA, Japan and Germany, the control
functions of MSFs can be found dispersed
throughout the country in remote regions and
small places.
Within the localities in which they are principally
based, MSFs are big economically as well as
politically. This is self-evident when MSFs locate
in small rural localities.
Even within metropolitan areas, MSFs typically
are not hidden but an important part of local
economy
MSFs as big firms locally
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MSFs offer distinctive contributions to local
economic development
This distinctiveness is revealed by reference to a
framework developed by Oinas
To help understand the implications of enterprise
strategy and structures for local development,
Oinas constructs a simple typology linking
enterprise dependence and non-dependence on
each other
MSFs as big firms locally
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Firms are either dependent or non-dependent on
localities.
While some firms depend on specific localities
for specialized, skilled and loyal supplies of
labor, a variety of business contacts which have
been moulded by close personal relationships
and supportive community attitudes other firms
are not tied to any particular place in terms of
specialized labor, localized inputs and outputs
and personal preferences
MSFs as big firms locally
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Similarly, localities are either dependent or nondependent on firms
Locality dependence increases with the size of
operations and the extent to which firms are
locally linked
In Oinas’s terms “committed agents” occur in
situations where there is a high level of
interdependence between firm and locality
“Indifferent agents” are typically large branch
plants which are externally controlled and are
better connected globally than locally
MSFs as big firms locally
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In these regions MSFs have had the capabilities
to develop globally competitive industrialization
The growth of MSFs can bring mixed blessings
for local development
The growth of MSFs in one area may threaten
smaller rivals based in other area
If MSFs should be acquired by another firm
based elsewhere, the shift to subsidiary status
may sooner or later re-define local impacts in a
way that reduces the firm’s local commitments
MSFs as big firms locally
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Enterprises for which localities have little
dependence are typically small and are labelled
by Oinas as either “committed” and “indifferent
patients” depending on the extent to which they
participate in local networks
MSfs offer examples of “committed agents”,
especially in home locations
The contributions of MSFs to local development
are particularly evident in peripheral locations,
including agricultural regions where innovative
manufacturing has not been traditionally
expected.
MSFs as big firms locally
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Some MSFs also become giants themselves
and with such growth, changes in established
organizational structures and location
preferences can arise, particularly with respect
to the movement of control functions to big
metropolitan centers
Such a shift is inevitable
Conclusion
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The evolution of MSFs plays a crucial role in
mediating global forces in a manner that has
direct implications for local development
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Localities can provide MSFs with access to
location advantages which help the
internationalization process and in turn MSFs
can help localities even remote ones, participate
in highly competitive global environment
Conclusion
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Evolution of MSFs has direct implications for
local development
Localities can provide MSFs with access to
location advantages, and in turn MSFs can help
localities to participate in competitive globaly
environment
Traditionally, it has been assumed that foreign
investment has been dominated by giant firms
In present time, MSFs clearly have
internationalization options beyond that of
exporting and the are clearly capable of directly
investing in foreign countries.