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This is the third report on the `Made in Europe' research programme. Earlier reports concentrated on the maturity of implementation of `best practice' in both the design and manufacturing processes of larger European companies. Here, the authors shift the focus to small and medium-sized enterprises (SMEs) particularly in Britain and Italy. While few SMEs are in the world-class category, small company practices are customer-oriented, responsiveness-focused and concerned with new products. SMEs' competitive edge typically comes from speed, responsiveness and closeness to customers. SMEs exhibit a greater level of confidence than larger companies in their ability to make change, but neglect training and education. Within the SME sector there are sharp differences between micro (5-20 employees), small (21-50) and medium-sized (51-200) companies while those which are subsidiaries of larger companies have significantly higher levels of best practice. There are differences between countries and regions.
Over the last 20 years manufacturing competitiveness has rapidly increased worldwide, and the nature and content of practices which lead to world-class manufacturing levels have become well known. It has also been shown that the adoption and effective use of best practices leads to superior performance.
However, these developments have been observed almost exclusively in larger manufacturing enterprises. In most European economies, a substantial proportion of both employment and manufacturing output comes from small manufacturing enterprises, particularly those with fewer than 200 employees. This report focuses on such SMEs, defined here as companies with between five and 200 employees.
Although it is often argued that large company practices are not necessarily applicable to such small manufacturing sites, the supporting evidence is mainly anecdotal. Key questions that remain to be answered about SMEs include:
* What are the manufacturing strengths and weaknesses of SMEs?
* Does best practice established in larger enterprises have relevance in SMEs?
* Are there differences between SMEs and small sites that are subsidiaries of larger companies?
* What changes must small companies undertake in order to grow successfully?
* What manufacturing practices are linked with high performance?
In addition, the small company environment may vary from country to country, which raises a further question:
* What are the strengths and weaknesses of SMEs in different geographic areas, and what can be learnt from these differences?
This report presents results based on site visits to 297 companies in seven European countries that were conducted as part of the `Microscope' project (for methodology, see Appendix). It also draws on data from earlier studies by IBM and London Business School that formed the basis of the `Made in Europe' series of reports, and that now provide the basis of the Confederation of British Industry PROBE benchmarking programme and parallel programmes elsewhere (Voss et al 1995, 1996).
The Microscope Project
The most powerful process any company can adopt and that delivers immediate, measurable and sustainable productivity improvements is the transfer of best practice.
In order to improve and maintain competitiveness, companies need to know where they stand in relation to other companies. This does not just mean being aware of the products and services of their competitors; it also involves an understanding of best practice in workforce management, innovation, product development, equipment, and manufacturing production processes. Such awareness of their company's competitive position helps them to achieve world-class manufacturing. The first step in company improvement toward world-class manufacturing is for the company to quantify the performance gap so that it can move towards closing it.
The need to diagnose their situation and to improve is just as great for small companies as for large ones. The Microscope project was established with the support of the European Social Fund (ESF) ADAPT initiative, and other partners and participants in seven European Union (EU) countries.
The original PROBE tool has been adapted for smaller companies. Microscope is a benchmarking protocol that enables small manufacturers to take the first step in the improvement process, through comparing their level of practices and performance with other manufacturers. Microscope consists of two major tools:
* A benchmarking tool, used by accredited facilitators on the company site, which is aimed at gathering relevant information about the manufacturing business and providing diagnostic results for the company;
* A central database that includes all the data gathered using the site tool, which is aimed at providing comparative data for company diagnostics and enabling periodic reports which highlight the current status of manufacturing within European small companies.
The analysis in this study is based on the initial sets of data gathered as part of the on-going Microscope project.
The Practice-Performance Model and World-class Manufacturing
The study is based around a framework that links practice in manufacturing and design to operational and business performance (Figure 1). A company that reaches a certain standard of both practice and performance, equalling or surpassing the very best of its international competitors in every area of its business, is referred to as a "world class manufacturing company".
[Figure 1 ILLUSTRATION OMITTED]
* Practice refers to the established processes that a company has implemented to manage its manufacturing business.
* Performance refers to the measurable outcome of these practices at both the operational and business level.
The central hypothesis of the model is that adopting best practice will lead to attainment of high performance.
How Do Small Manufacturing Companies Compete?
Part of the Microscope analysis was devoted to assessing the positioning of SMEs with respect to their growth prospects, competitive environment, competitive priorities, and the impact of change.
Small does not necessarily mean static
When asked about expectations for growth (Figure 2), most expected growth in sales (66%), profitability (47%), number of customers (61%), and product range (61%), whereas most foresaw no change in number of employees (56%) and a declining number of suppliers (78%).
[Figure 2 ILLUSTRATION OMITTED]
However, those operating in conditions of higher market and price competition reported lower sales turnover, profitability, and product range growth, indicating that operating in niches preserves companies from price competition, allowing higher margins and sales growth.
Companies felt that they were competitive in quality and delivery
The companies were also asked to rate their perception of their own competitive advantage compared with their competitors. As shown in Figure 3, most companies regarded themselves as being highly competitive. The highest rankings were given to quality and delivery, and the lowest rankings to price. This is consistent with the nature of the markets in which they competed and their perceived competitiveness, emphasising the strong consistency between SMEs and their environment.
[Figure 3 ILLUSTRATION OMITTED]
Competition was perceived as being mainly on quality and delivery - not price
Respondents were asked to rank the level of competitiveness in their industry on a scale of 1 to 5 (1=strongly disagree, 3=no opinion, and 5=strongly agree). Competition was seen as fiercest in quality and on-time delivery, followed by lead-time and product customisation (Figure 3). Although the SMEs in the sample competed in markets that emphasised quality and responsiveness rather than price as the prime order winner, price competitiveness was nevertheless still seen as important.
Change is a constant
When asked about the extent to which change affects them, companies reported a high level of past and future change (Figure 4). The questions about change included:
* How much over the past two years company operations had changed
* How much over the same period the company business environment had changed
* The expected amount of change in the business environment over the next two years
* The company's competence in change.
[Figure 4 ILLUSTRATION OMITTED]
Practice and Performance in SMEs
A starting point in examining small manufacturing companies was determining the extent to which they had achieved world-class standards of practice and performance, which was defined as reaching or exceeding 80% for both practice and performance on the world-class model.
The SMEs in this study were classified into six groups based on their practice and performance scores, using the same practice and performance criteria as in previous reports for larger companies. Figure 5 plots the results, underlining the strong relationship between practice and performance.
[Figure 5 ILLUSTRATION OMITTED]
World class? Only three SMEs (1%) of the small companies reached world-class standards. One came from Italy, one from England, and one from Northern Europe. This is less than half the proportion found among larger companies in the previous `Made in Europe' studies.
Contenders? Over half of the SMEs - the largest group of companies - had the potential to compete internationally. These companies have the basis for growth and improvement and with perseverance could become world class.
Performance leads practice (promising)? A surprisingly high proportion of companies (27%) fell into this group, perhaps …