If I’m going to study methods for SMEs (Small and Medium Enterprises), I really need to decide what they are. Being in NZ, the easy way out would be to use the NZ Government’s definition. Unfortunately, that’s so tight as to be basically useless for my purposes, so I’ve got to find one which covers the firms for which I think there’s a problem.
Although there is broad agreement within government and academic circles on the defining characteristics of a “small” business (management and control by private owner, scale sufficiently small as to be unable to influence operating environment), there is no obvious agreement on the characteristics of a “medium” one, and hence of an “SME”. Definitions used by governments for legal and statistical purposes vary wildly, and terms such as “small business” and “SME” are sometimes used interchangeably but sometimes not. The OECD describes this range of terminology in some detail, and notes that “diversity and richness of SME characteristics, political strategies and economic conditions are unlikely to ever yield a commonly used and accepted definition of SMEs” [35].
Some examples of government definitions include:
- NZ Ministry of Trade & Enterprise: SME 1-19 employees [36].
- European Commission: SME less than €50 million turnover or €43 million balance sheet, or less than 250 staff [37].
- US Small Business Administration: Small Business for some industries turnover less than some figure between $0.75-$32.5 million (depending on industry), for others employees less than 100-1500 (likewise), or for others assets less than $165 million [38].
In the literature, the terms frequently remain undefined. Use of the term “small business” is more common in the American literature, and perhaps reflecting the complexity of the US Government’s definitions, is more likely to be defined to suit the sources or objectives of the paper, for example, “Inc. 500 companies” [39] or “winners of the “Best 50 Managed Companies in Canada” award” [40]. Elsewhere, the term “SME” is more likely to be encountered, and more likely to correspond, explicitly or otherwise, to relevant government criteria.
It is notable that the NZ Government’s SME definition is extremely small by international standards, perhaps reflecting the small size of the overall economy. Absent a reason to assume that NZ-specific factors have a significant impact upon the issue under research here, there is no reason to favour the NZ Government definition of SMEs over any other. The extreme restrictiveness of this definition would also exclude almost all tech firms having an NPD function large enough to make any but the most basic management practices appropriate.
Fortunately, in light of the difficulties outlined above, the use of numerical measures to define the SME is neither absolutely necessary nor necessarily beneficial. Qualitative approaches to definition are common, and, as well as the benefit of convenience and flexibility, have theoretical advantages. Curran, for example, argues that numerical definitions lead to “size reductionism” – a tendency to attempt to explain every aspect of small firms by reference to whatever size criterion has been selected, and that this leads to other important characteristics being neglected or treated as secondary [41, 42].
One qualitative approach to defining SMEs is by contrasting their characteristics with those of “large” firms. In the context of innovation, a common perspective, as expressed by Rothwell [43] is that
“the innovatory advantages of large firms are in the main associated with their relatively greater financial and technological resources, i.e. they are material advantages; small firm advantages are those of entrepreneurial dynamism, internal flexibility and responsiveness to changing circumstances, i.e. they are behavioural advantages“
Assuming that the material issues are largely beyond the ability of NPD managers to control, one might define an SME in terms of the control loops that produce such behavioural advantages. A useful definition could then be:
“of a scale such that those who control the resources are in a position to directly observe their utilisation“.
This might reasonably cover firms where the person in charge of product development was separated from those undertaking the detail work by no more than one layer of management. Although such a definition makes no explicit reference to company headcount or turnover either within the NPD function or overall, it is broadly consistent with numerical measures similar to the European Commission definition. In the context of the NZ tech sector, this would include all but the largest dozen or so firms.
For the purposes of my thesis, I’m going to make do without a hard definition of an SME, in the expectation that if I find significant scale-based variation between the firms studied, I can observe factors which contextually clarify the definition.
