The Hindu Business Line : Get lean and mean for success in emerging markets

SMALL and medium enterprises (SMEs) and micro and small industry sector could be valuable tools for development as such units have proved to be more competitive than large-scale units.

Changes in optimal firm size have emphasised the role of SMEs. The availability of comparatively inexpensive and small machines allows faster adjustments. Along with the emergence of markets for customised products, this has created profitable niches for highly specialised yet flexible SMEs.

For example, according to Mr George B. Assaf of Unido, who was here recently, a small unit managed by a single person with a strong entrepreneurial vision is likely to be more competitive under these conditions than large-scale units, which rely on mass production technologies with heavy investments, high labour costs, and multiple layers of decision-making.

Until recently, he said, it was believed that successful industrial development coincided with the emergence of large enterprises with great scope for internal specialisation in labour and capital.

It was hoped that this would resultin high productivity and competitiveness through internal economies of scale. This belief emanated from the experience of decades of strong industrial growth based on mass production of goods with large volumes of fixed capital.

Technological and market developments have challenged this perspective. This is the consequence of increasing reductions in the optimal scale of operation in many industries stimulated by the use of information technology. It is also consequence of the growing importance of markets where consumers put a premium on customised products.

Dynamic manufacturing branches are now characterised by flexible specialisation, which, often leads to outsourcing of production and other firm activities. Outsourcing again increases the scope for quality of relations among firms and support institutions.

For instance, the manufacturing efficiency of SMEs in many Italian clusters is due to a large extent to the proximity to highly customised services.

These services include transport and marketing of output, provision of investment finance, acquisition of knowledge, communication services, product testing and quality certification facilities.

SMEs that want to focus on their core competence cannot afford to have any of these services in-house. Thus, each SME in a cluster can attain a high level of specialisation because a large number of stakeholders are located nearby. This provides the whole product and service range and allows SMEs to save costs and compete successfully.

However, the phenomenon of clustering and performing is not conditioned by mere geographical proximity of a sizeable number of firms.

Surveys of successful industrial clusters suggest that these clusters have prospered not only due to passive external economies that arise due to geographical concentration of firms. They have been successful due to planned joint action or business cooperation among firms.