Small Businesses Strategies in Times of Crisis: Empirical Evidence from the Province Of

10th Global Conference on Business & EconomicsISBN : 978-0-9830452-1-2

Small Businesses Strategies in Times of Crisis: Empirical Evidence from the Province of Pesaro-Urbino[1]

Tonino Pencarelli –

Simone Splendiani –

Elisa Nobili –

Abstract

This work aims to understand the strategic behavior of small local businesses during the global economic crisis in the year 2009.

The brief initial literature review on strategies related to the crisis identifies primary strategic behavior recognized by most authors as a response to the crisis. The authors then verify applications through a field survey, carried out on a sample of over 300 sectorally different small and micro enterprises affected by the crisis.

The research shows a complex picture of the crisis, with uneven and varied dynamics. The strategic responses of Small Businesses are often defensive and aimed at reducing the impacts of the decrease in turnover and profit margins through rationalization and downsizing strategies. We emphasize, however, also cases of active response, such as growth through internalization or strategies aimed at redefining the business.

1. Introduction: from global crisis to company crisis

According to many observers, the global crisis of 2008-2010 is configured as a cascade process, whose source was the bursting of the American housing bubblebetween 2005 and 2006. The collapse in property prices, partially due to the mishandling of so-called subprime mortgages, was added to the difficulties many American households had in honoring their debts and has prevented them from refinancing their mortgages. It was evidently the beginning of a period of serious and deep recession, marked by a contraction of real GDP, a significant and widespread drop in demand and, consequently, production and employment. This recession was caused not by companies but by consumersseverely affected by the decline in housing prices, stock price and jobs (Pellicelli, 2009).

In the Marche region of Italy, in which the firms of our survey are located, the impact of the global crisis has proven to be very hard. In 2009 the regional GDP declined by about 6% more than the Italian average[2]. This affected certain characteristics of the regional economy, such as increased specialization in industry, fashion and durable consumer goods, the purchase earnings from which can be easily returned to families in times of crisis. According to data from the Bank of Italy, between autumn 2008 and the end of 2009 the region's exports contracted by about a third, double the national average, while there was a general decline in sales of industrial enterprises about 15%.

For the purpose of our study is important to note that although the global recession - and consequently the regional one - has been an important factor in determining conditions of decline,for businesses the causes of the crisis appear to be very numerous and not easily decipherable. The business crisis can be observed as a process of deterioration of viability[3], because of inadequate strategic approaches and clumsy corporate structure aggravated by external cyclical factors. Value destruction is not always so obvious but may be latent, potentially compromising the ability of the company to respond quickly and appropriately to the situation. In other words, deterioration may not emerge clearly for years, only to manifest itself in all its effects as the result of a triggering event - like an economic downturn (Cf. Guatri, 1995; Piciocchi, 2003; Sciarelli, 1995).

The literature has questioned the factors behind the decline in business, and there and emerge two opposing lines of thought (Cf. Guatri, 1995).The first is subjective-behavioral, which indicates the human factor and management errors as the causes of decline. The second isobjective, which recognizes the existence of some objective conditions that make the company vulnerable and then "ripe" for the crisis. In our opinion, the crisis is the consequence of the accumulation of unfavorable operating results due to the inability of the business and managerial skills to govern the complex relationships between the dynamics of external environmental and internal business. A crisis is therefore a result of adverse events both inside and outside the enterprise (Sciarelli, 1995). While external factors are largely outside the control of business, internal ones are related to specific organizational and strategic errors made by company management[4].

Also according to Codaet. al. (1987) neither the managerial choices nor the environmental variables - alone - can account for a crisis. The initiation of a process of corporate crisis is due to inadequate entrepreneurial and managerial resources in relation to the complexity of the issues to manage[5]. According to this view of overlap between internal and external factors[6], the incidence of adverse external events on the business economy is very different depending on whether companies based their success on fragile foundations that will eventually collapse or, on the other hand, on well-designed,internally consistent,successful businessformulas[7].

The analysis of the context in which the company operates, however, may represent a starting point for understanding the crisis and the underlying causes[8].

The global crisis of 2008-2010 struck most economic sectors, even unrelated sectors and sectors that had historically not suffered duringrecessionary periods, such as the luxury sector. However, many areas - and many companies - have been strengthened during the crisis and this highlights the need for a specific analysis for individual sectors. Probably as very different situations emerge, there will be different opportunities to "reverse course" and then manage the decline (Cf. Harrigan, 1988).It is likely that some areas will come out of the crisis with new factors of competitiveness andnew business models or renovated product technologies (Pellicelli, 2009).

The objective of the paper is to analyze the strategic behaviour of firms after the impact of global crisis. This behavior is determined by pre-crisis business conditions, as is the intensity of the impact that the downturn has had on the sector to which they belong.

The study is based on a questionnaire survey conducted on a sample of micro and small businesses (up 49 employees) located in the Province of Pesaro and Urbino,Marchein early 2010. The objective was to capture not only the strategies implemented in the months before (especially the second half of 2009, during thefull-blown crisis) but also the actions foreseen in the short term (the first half of 2010) whose developments on the overall economic situation appeared very uncertain. The survey sample consists of 308 companies, about 8% of those registered at the Chamber of Commerce of Pesaro and Urbino. Stratified sampling is adopted byshares, according to the weight of the various productive sectors (agriculture, commerce, industry) of the total registered companies.

The research presents a complex picture of the crisis, with uneven and varied dynamics. The strategic responses of Small Businesses are often defensive and aimed at reducing the impacts of the decrease in turnover and profit margins through rationalization and downsizing strategies. We emphasize, however, also cases of active response such as growth through internalization or strategies aimed at redefining the business.

The analysis reveals that the main reaction to the crisis is defensive, cutting unnecessary costs, investment bans and non-renewal of workers’ contracts are frequently used actions. However, there are cases of companies able to "look beyond the crisis”, to when the scenarios will be different and will probably change the rules by which to write new competitive strategies.

2. Business characteristics and impact of the crisis

The companies studied are extremely diverse in terms of activities, legal form, size and number of employees. The sample is composed of 32% - industry, 31% - crafts, 20% - trade and the remaining 17% agriculture. The vast majority of firms, 71%, are micro-enterprises– MicroEs(up to 10 employees, based on definition given by European Commission), while others are considered small-enterprises- SEs, up to 49 employees.The companies concerned tend to develop their sales reports mainly at the provincial level, but extend nationally in both sales and procurement. We can therefore say that the sample consists of companies engaged in little business with foreign markets.[9]

The economic crisis has hit companies in the province of PUhard , particularly for employment. Our survey reveals that staff reductions concerned the 29% of sample firms (19% of MicroEs and 53% of SEs). The industrial sector was most affected (68%), while the least affected appears to be agriculture (problem not experienced by 98% of respondents). Trade and craft stands at 16% to 33% staff reductions.

The study highlights in particular the use of layoffs (38%) and redundancies (26%), followed by remedies such as the reduction of the working day (17%) or working week (8%). 11% of respondents, however, claim to have used other means. All companies reported non-renewal of contracts.

One of the primary purposes of the study has been to assess the competitive position of companies as perceived by managers or entrepreneurs themselves, as an important element for assessing the impact of the crisis and possible ways out. This is carried out through swot analysis. While quality standards and technical skills emerge first, other entrepreneurs perceived structural weaknesses such as high costs, limited commercial and managerial skills, financial weakness and in most cases the lack of international outlook. With reference to the external environment, firms indicate the presence of market niches and the possibility of alliances and partnerships as the greatest opportunities.A fairpercentage of companies also noted the presence of growing markets. The biggest threat for companies, however, is represented by price wars.

Fig. 1 - The SWOT analysis according to local entrepreneurs: a summary

Strengths / Weaknesses

• Quality standards
• Technical skills

/

• High costs
• Limited commercial and managerial skills
• Financial weakness

Opportunities / Threats

• Market niches accessible
• Strategic alliances

/

• Price wars

The sample firms also possess certain characteristics common to small and micro enterprises, such as the lack of organizational and managerial skills, lack of attention to monitoring performance and, in general, a lack of strategic awareness(Pencarelli, Savelli, Splendiani, 2009; Cf. Pencarelli, 2009). All these represents a condition of vulnerability and risk.However, there are elements typical of small businesses - such as structural flexibility that may, on the contrary, bestrengths of particular importance in times of crisis(Cf. Marchini, 1998;Faraci, 1996).

Turning to financial data, study shows that for 42% of the sample turnover inthe second half of 2009 was down compared to the first, turnover was constant for a further 42% , while it increased for 16%. The research shows that MicroEs recorded a higher percentage of turnover decrease.

Fig. 2 - Turnover trends in the second half of 2009

As well as turnover, we also examined other indicators such as the firms' liquidity, debt turnover and changes in timing of collection and payment[10].We found that:

-Financial liquidity deteriorated from the first to the secondhalf of 2009 - for 51% of the companies. It was stable for 42% of the companies, while it improved in 7% of the cases;

Fig. 3–Financial liquidity trends in the second half of 2009

-Debt turnover - in the same period - was not altered for 51% of companies. It increased for31% of the companies, decreased for8% of them, and 10% of respondents said they had no share of debt;

Fig. 4–Debt turnover trends in the second half of 2009

-Timing of payment collection remained unchanged for 47% of companies and increased for44% of them;

-Timing of payment remained unchanged for 45% of firms, although there is a significant percentage of firms for which it increased(43%).

The survey also addressed the issue of the relationship between banks and companies, investigating the conditions of access to credit. This revealed significant differences between MicroEs and SEs. While the majority of the first (63%) states a substantial stability of credit conditions, SEs perceive a worsening in 61% of cases. Overall stability conditions prevail, albeit slightly, on the cases of worsening. This latter is due mainly to increasingly necessary guarantees, high costs and increased length of credit service processing.

Fig. 5 – Credit conditions trends in the second half of 2009

3. The strategic responses to the crisis

Possible responses to a situation of decline can be grouped under three strategic categories[11]:

-Offensive strategies (or development strategies) - to improve the competitive position of the company. Typical examples are offering the same quality product at lower prices, seeking continuous product innovation , pre-emptive strikes intonew market segments, etc.. Development strategies include both concentration within the sector in which the company operates, and diversification through which development is generated outside the sector.

-Defensive and waiting strategies - to protect market position and competitive advantage. This response reflectsthe consideration of the crisis period as temporaryand due to external causes of a cyclical nature. Businesses that implement this type of response often cutinvestment and the recruitment of personnel, focus on traditional activities and new developments expected in the industry and competitors' moves. These strategies are usually adopted by companies that have a strong position in areas with average attractiveness may be due to modest growth or declines in demand or environmental factors that threaten to change the competition.

-Strategies of contraction, which usually goes through two stages. First theytry to improve efficiency by reducing costs, improving productivity, reducing staff, delaying investments, closing obsolete plants, while reducing inventory, reviewing all organizational procedures and abandoning products with low or negative profitability. If the situation remains difficult, theymove to a second phase during which the companyfaces three options: to start a turnaround or reversal, compete to give up and put the company in position to sell or decide to leave the field and get out of the market, or finally bankruptcy or liquidation, (Pellicelli, 2005). The exit paths in this case can be fast - through the sale of its assets to another company or with the cessation of activities - or slow - through a strategy of disinvestment, or keeping the investment minimum and trying to maximize cash flow in the short term in preparation for a gradual withdrawal. This strategic orientation is typical of periods of economic recession and crisis when reports to the company managementneed to assess whether it is appropriate to reduce presence in a market segment or sector.

Generally, the immediate behavior of the entrepreneur before the crisis is that of rejection and disbelief (cf. Mayers, 1988). Those responsible for taking decisions tend to minimize signals from outside and invite a change in analytical perspective, focusing more on the strengths of the company. They are grippedby a kind of block inoperational decision-making, to the point of almost total inertia. Seeing the arrival of the recession - which was apparent in the financial crisis and general decline in demand - most companies tend to be prudent, to postpone investment decisions. This is the first phase described by Pellicelli (2009) and so-called “wait and see[12].

If we analyze the strategies adopted by firms during the crisis period, the first strategy implemented wasthe investment ban, preferring to adopt prudent behaviour. 84% of enterpriseshave not made significant investments in recent months[13] - 86% of MicroEs and 78% of SMs.

Fig. 6–Investment trends in the second half of 2009

In addition to the investment ban, research has shown that in the short term, the predominant strategic behaviour by firms was defensive and prone to waiting (57%). Development/offensive strategies were implemented by 36% of businesses and strategies of contraction by 7%. In other words, this data confirms that companies preferred to engage in prudential and waiting strategies. Specifically, if we look at the data by company size, we seethat SEs adopted development strategies in 2009 (but also those in the highest percentage adopted strategies to cut back, albeit with significantly lower incidence). Defensive strategies were implemented, especially among MicroEs.

Fig. 7 - Strategic responses in the second half of 2009

The study reveals that the bigger companies (SEs) andthose who most felt the need to reduce staffimplementedcontraction strategies.

Defensive and waiting strategies, however, were adopted mainly by smaller companies (MicroEs) and members of the agricultural sector. These, not surprisingly, are also the firms that experienced fewer problems of employment-reduction despite having recorded a contraction in turnover.

Companies that had shown an attitude toward development objectives tend to do so not onlyby adopting cost-containing strategies, but alsoby making new investments, entering new market niches and exploiting new technologies.This is the case of firms belonging to the craft sector but also of larger and businesses who have not feltthe need to reduce staff even though they have also experienced a decline in turnover.

Fig. 8– Strategy-based profile of companies in 2009

Strategies of contraction
-They belong to the industrial sector and they are the bigger companies (SE)
-They tend to have felt the need to reduce staff in 2009
-In the second half of 2009 they showed constant or declining turnover and have made investments
-These companies have had constant turnover in 2010
-The strategic focus for 2010 is aimed at reducing costs;
-They identify quality as the main element of strength the and as high cost the main element of weakness
-They identify partnerships and alliances as the main opportunities and price wars as a threat
Defensive and waiting strategies
-They belong to the agricultural sector and they are smaller companies (MicroEs)
-They tend not to have felt the need to reduce staff in 2009
-In the second half of 2009 they showed a decrease in sales but they have made investments
-These companies have had constant turnover in 2010
-The strategic focus for 2010 is clearly aimed at cutting costs
-For these companies, quality is a strength while high costareanelement of weakness
-They identify the presence of market niches and alliances and partnership as the main opportunities, while as price wars a threat
Development strategies
-They belong to the handicraft sector and they have between 10 and 49 employees (SE);
-They tend not to have felt the need to reduce staff in 2009
-In the second half of 2009 they showed a decrease in turnover, but a good percentage of them have made investments
-These companies have had constant turnover in 2010
-The strategic focus for 2010 is aimed at reducing cost (but in lower percentages), improvingof production processes and quality of work, entering new markets and innovation
-They identify quality as a primary strength and high cost as a weakness
-The main opportunities are represented by available market niches while price wars are the primary threat.

1. Conclusions

Economic history teaches that after every recession there is a recovery. This can be fast or slow, may be linear or have irregularities, may occur first in some countries than others or in some sectors than others. To state that there will be a recovery from the global crisis of 2008-2010 - as many observers expect - is not enough for an entrepreneur or manager. It is important to understand what will change after the crisis and seize the opportunities that inevitably arise. As Pellicelli suggests (2009), there are four rules to follow in this period of uncertainty: to be informed; to be able to resist - those whoin the past have prepared their organizations to withstand shocks; to be flexible – i.e. increase the portfolio of viable options, and - above all – to be able to look beyond the crisis in the awareness that every crisis brings new opportunities for those who will take(Cf. Baccarani and Golinelli, 2006).