Published in June 2005

Small Firm Business Strategies
By David McNutt

There are as many as there are firms. Which one is yours?

     There’s nothing wrong with being, or for that matter staying, a small firm. After all, small firms make up the huge majority of companies in our country. Small firms with less than 500 employees represent more than 99% of the employer businesses in this country. These small firms drive our economy.
     As consumers and companies and government spend, they spend it with small firms. Small-firm employment represents half of all private sector employees and almost half of the total US private payroll. Small firms create more than half—and sometimes all—of the net new jobs every year and some of these small firms will become large firms as more new jobs are created. Small firms create more than 50% of the non-farm private gross domestic product (GDP). Small firms supply more than 23% of the total value of federal prime contracts (approximately $100 billion).
     Very small firms—those with less than 20 employees, carry a disproportionate cost burden when it comes to overall government regulations when operating a company. The average cost incurred by a very small company for all government regulation is $6975 per employee compared to $4463 per staff member for companies with 500+ employees.
     Even so, the small firm in this country produces 14 times more patents per employee than large firms and employs 39% of high-tech workers. Small firms represent 97% of all identified exporters and produce almost a third of the known export value of the US.
But to represent such a large portion of our economy, small businesses are a volatile group; especially newly created ones. Of the more than half-million new firms started each year, two-thirds survive about two years; about half survive only four years. Almost a half-million small firms close each year and about 35,000 file for bankruptcy.
     In the past few weeks, I have discussed general stay-alive business strategies with many companies, not because they were about to go under, but because they constantly have their eyes on the horizon to figure out how to maintain their size or grow. The strategies that small businesses are employing are as varied as the types of firms, but they can be categorized in a number of general themes. They include strengthening accounting controls to get a better handle on costs; increasing their emphasis on finding and keeping good employees; and getting certified with government bodies as a small business to win contracts.
     Some firms have talked about marketing dilemmas and how to find new business leads and tap new markets. Some are focusing on narrow niche markets, some are attracted to broader markets with lots of competitors but feel they have an advantage.
     Some are spending capital to gain certain capabilities, some are outsourcing, some are in hiring freezes. Some small companies are trying to sell themselves, some are talking about buying other comp-anies. All of them are looking for better financing or to partner.
     When you consider that most of this industry is made up of companies that are very small firms with less than 20 employees and average $3.5 million in revenues, it’s not hard to see why the industry doesn’t grow very fast. It’s difficult for a $1.5 million contractor to take on a $750,000 project and experience a 50% growth rate in a single year. It’s also difficult for a manufacturer to commercialize a half-million dollar R&D investment when it takes a million-dollar investment for machinery and the market for the product is only 500 units a year.
     We’re a small industry made up of very small firms. There’s nothing wrong with being, or for that matter staying, a small firm, in a slow growth industry as long as one pays attention.
     Creating capital; gaining access to financing; finding capable employees; improving management skills; searching for healthy markets: They are all important strategies for continued existence of the small firm. Management must select and execute them. Pick one, stay alive. All of us need you.


David McNutt, a member of Sound & Communications’ Technical Council, is based in Chicago and has been involved in many business sectors of the systems integration industry. Send comments to him at dmcnutt@testa.com.

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