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Swiss SMEs: Locational Advantages Overshadowed by Uncertain Conditions

A Credit Suisse Study of Success Factors and Risk for Swiss SMEs

Credit Suisse today published its study on "Success Factors for Swiss SMEs – Managing Economic Risk." It is based on a survey of around 1,900 Swiss SMEs. The companies surveyed believe the central factors for their success in business are employees and their qualifications, as well as infrastructure. In the view of these SMEs, Switzerland will continue to offer both these locational advantages – over the medium term at least. Given uncertain conditions and the strong Swiss franc, the greatest challenges – according to the survey – are the economic environment and ties to foreign trade. But entrepreneurs also see the influence of the regulatory environment in a negative light. The most important economic risks, according to respondents representing SMEs, are a global recession, the shortage of skilled labor, and increasing competition. Countermeasures taken by SMEs include diversification, the creation of attractive working conditions, and investment in training and staff development.

Success factors are the bedrock of competitiveness. By conducting an annual survey of Swiss SMEs, this time redesigned, Credit Suisse helps to point out to SMEs and policymakers where there is room for improvement and to identify trends at an early stage. Conditions remain difficult, and this makes it all the more important for entrepreneurs to carry out reviews of their own success factors on a regular basis. Otherwise, decision-makers in business and politics may be tempted to look solely for short-term solutions to their problems.

Hans Baumgartner, Head of SME Business Switzerland with Credit Suisse, explains: "In this difficult market environment, Swiss SMEs have so far acquitted themselves well. High standards of quality and training consistently enable companies to establish themselves in new niche markets and in foreign countries. If entrepreneurs continue to do their homework, I am optimistic that they will also meet the challenges yet to come. Their entrepreneurial spirit and innovation lay the foundations for their commercial success."

Employees and Their Qualifications plus Infrastructure Are Key Locational Advantages
According to SMEs human resources and staff qualifications, along with infrastructure, are the factors with the most positive impact on their business performance. Eighty percent of survey respondents said employees and their qualifications were very important to their business performance, and almost 60% currently see this factor as having a positive effect on their own success. Infrastructure ranks third in terms of importance, but is undoubtedly the most positive in terms of its influence on entrepreneurial success. In general SMEs currently assess six of the nine success factors as positive, thus confirming Switzerland's good showing in international comparative studies of competitiveness.

The Economic Environment and Foreign Risks Are the Most Negative Factors for SMEs
The economic environment and foreign trade ties are currently having negative effects on the performance of Swiss SMEs. Companies have come under heavy pressure in recent years due to the challenges posed by the economic environment, such as competitive intensity, wage levels, price erosion, and demand trends. The economic environment is particularly significant for entrepreneurial success. Foreign trade ties, however, are generally seen as less important by SMEs, which can be attributed to the fact that many of them focus solely on the domestic market. Forty-four percent of small-business owners surveyed generate all of their sales revenue in Switzerland, 23% of them more than 90%. SMEs believe the economic environment and foreign trade links will exert an even greater negative impact on their business activity over the next three to five years. This expected deterioration makes it clear that further measures must be taken to cut costs or increase efficiency. The situation remains too difficult for companies simply to wait it out.

Regulatory Framework Impairs Performance
The negative assessment of the regulatory framework is all the more troubling because SMEs also expect the situation to get worse in this area in the coming three to five years, and because it is very important to half of SMEs surveyed. Motives for criticizing the regulatory framework apparently vary from one SME to another. Regional and sector-specific differences in the assessment are especially noticeable. SMEs in the fields of tourism/entertainment, retailing/sales and construction suffer worst from the negative effects of the regulatory framework.

Special Focus: "Managing Economic Risk"
Swiss entrepreneurs believe a global recession, a shortage of skilled labor and increasing competition constitute the greatest economic risks over the next one to two years. Commodity and energy prices are also seen as threats that companies must not ignore, as are exchange rate developments. Sixty-two percent of survey respondents believe a shortage of skilled labor would be very damaging, while 59% see it as either likely or very likely to occur. Eighty percent expect energy prices to rise, and 44% think there will be major negative consequences for their companies. Manufacturing companies see rising commodity prices as a particular threat. Exchange rate developments are extremely important to export-oriented SMEs. Swiss entrepreneurs see the risk of Switzerland becoming politically isolated as relatively insignificant.

Aligning the Educational System More Closely with the Labor Market
With regard to the shortage of skilled labor, SMEs focus their efforts to secure adequately qualified staff mainly on offering attractive non-monetary working conditions (69%), training and development opportunities (64%), and traineeships (57%). Attractive pay ranks fourth (56%). Seventy-two percent of companies want the government to align the educational system more closely with the labor market. Fifty-three percent want more public funds for education; the percentage is significantly higher in French-speaking Switzerland and Ticino than in the German-speaking region. On a nationwide basis, only 27% see attracting more skilled immigrants as an appropriate solution.

Moving Forward with an Eye to Foreign Market Risk
The strong franc is still a heavy burden on the Swiss economy. Companies most frequently respond to the risk of foreign trade ties by diversifying their suppliers and opening up new markets. Diversifying production facilities, on the other hand, is less common: only 20% of the companies surveyed have done so. Just 11% of the companies use export-risk insurance to mitigate risk, and only another 20% have even considered it. Forty-seven percent of SMEs with foreign trade links believe they are well prepared for exchange rate risk. Small-business owners believe they are best equipped to handle the risk of an inadequate network of foreign relationships (76%), and worst equipped to deal with foreign business-cycle risk (34%).

Only 23% of SMEs Systematically Evaluate Economic Risk
A company must be familiar with its risks and able to assess them realistically, or it will not be able to develop suitable strategies to counter them. According to the survey, however, only around 23% of SMEs evaluate economic risks on a systematic basis – while a further 51% do so as and when the situation requires. Larger SMEs address their risk more frequently and more systematically than smaller ones.

Notes on the Survey
In this newly conceived survey, SMEs assessed the importance (low/high) and the effects (positive/negative) of nine success factors, both today and in the future (on a medium-term horizon of three to five years). This survey supersedes the previous series "Megatrends – Opportunities and Threats for SMEs." The success factors investigated are: infrastructure, resources and the environment, the regulatory framework, the economic environment, foreign trade links, values and society, the research environment, employees and qualifications, and financing terms.

In addition the following ten risks were assessed: rising commodity prices, rising energy prices, less easy access to resources, global recession, increased competition, loss of price stability, Switzerland's political isolation, increasing protectionism, adverse exchange rate developments, shortage of skilled labor. SMEs were asked to consider these ten risks, assessing the likelihood that they will occur and the extent of the damage they will cause if they do. In addition the companies stated what steps they had taken, or had considered taking, to minimize their exposure to selected risks.