Company Logic and Innovation Strategy

Abstract

The reasons and ways in which innovation is pursued are different, depending on whether it is a large or a small company.

In the context of innovative development, strategic choices change in terms of investments, alliances, and the various operations that companies put in place to achieve their goals.

This chapter examines precisely these important factors. The objective is to focus attention on the “ratio” that influences the choices of small and large companies.

The result is a careful analysis of the factors that influence company logic, a term introduced by the author that clearly differs from the term “business logic,” found in the environmental context in which the company operates. In addition, this section highlights how much company logic plays a crucial role to pursue an innovation project or preclude development opportunities.

1 What Is the Logic Behind Corporate Behavior?

Before making any other considerations, it is interesting to stress how the Founding Father of Italian Business Economics, Professor Gino Zappa, had a considerable interest in institutionalist economic theories (Biondi 2004).

Pursuing a holistic and ever-changing vision, Prof. Zappa developed his own conception of business economic activity by observing and relating it to other elements but above all to the system itself, understood as an organized and evolutionary whole. The concept of company in Zappa’s thought served to better understand company interactions in their economic aspects but also the noneconomic ones, as well as the interactions between company and markets, and between the company and the social and institutional environments; interactions that manifest themselves over time and also involve future trends and expectations about them. Therefore, in light of this global and interdisciplinary vision, it is appropriate to investigate the company logic in a broader context than the purely quantitative business one.

But let us take a step back and first explain what we mean by business logic. In today’s context of crisis, talking about “logic” may seem obvious and in some ways superfluous. Doing business or starting an entrepreneurial activity is generally assumed as an alternative to employment, as a way of having one’s own business in order to avoid constraints or subordination. Therefore, apart from specific and enlightened cases in which the “entrepreneur” creator has a deep passion for an activity and believes that he has the skills to provide a significant innovative contribution to what is already on the market (or yet to be developed), the panorama of entrepreneurial initiatives does not, in principle, include any real awareness of the logic underlying the principle of enterprise and its management.

This logic is the result of an evolutionary process that has taken place over the centuries; what is more, it can express the characteristics of the economic context in which companies operate, but above all of the economic flow understood as the background to business decisions and strategies. In light of this assumption, it seems clear why the complex corporate system must be primarily contextualized in the panorama of economic changes and developments of reference, i.e., in the so-called environmental system within which it operates.

To study the “phenomena” and the “relations” (Zappa 1957) existing in the environmental system means, therefore, to understand what the company receives from the exogenous context, elaborates in its own endogenous context, and refers again to the exogenous context. It is a process in which the company logic is transformed and completed. The current conformation of the environmental system is, in fact, the result of the historical relationship with the company, and thus it has evolved at the same time as the metamorphosis of the company itself.

The history that has shaped over time the role of the entrepreneur and later that of the companies, but especially the context of economic development in which companies have achieved their evolution, are elements that must be considered in depth to gain a better understanding of the present and to foresee with greater lucidity the future. Today, as in the past, there are elements of economic development that are essential and, therefore, must be duly considered even if contextualized.

In short, it is possible to identify the factors or elements determining the development to which the company logic inevitably refers. We can summarize these as follows:

• Human resource development

• An enhanced and appropriate technology

• An increase in savings and investment

• Foreign trade

• The business-to-bank relationship

Beyond the other very important factors that will be examined later in this work, it is unlikely that development will be able to take place in a phase of growth if the quality of human resources is not improved. There is, in fact, a general consensus that human capital in terms of education and specialization as well as the satisfactory maintenance of the population through adequate nutrition and credible health care ends up making work more productive and employable with a concomitant increase in business performance. Education is one of the most important elements of human capital. It has always been proven that greater structural endowments and educational capacities can provide an adequate explanation for a part of the existing gap in national per capita income between the least developed and most advanced countries. In the same way, food and sanitation conditions are reflected in a series of preliminary and preparatory conditions relating to the growth and development phase of companies and, more generally, of a specific country. Another important component of development is technical progress or increased and appropriate technology (Solow 1970). Much has been written on this element, and we are proposing further elements of analysis here.

Furthermore, the technological issue must be addressed in the right dimension. Etymologically, the term technology is derived from Greek “techne,” which means “ability” or “art.” It is precisely in this meaning lato sensu that we should address this factor of development.

An increase or improvement in technical capacity or the ability to produce a good or perform a service leads to an increase in productivity. Today, when we talk about technological progress, we immediately think of great revolutionary processes in the ways of producing or approaching a problem. In fact, experience can teach us—and it is also our personal conviction—that a change or progress in the state of the art may also depend on the different organization of markets and simple changes and improvements made to physical capital, new ways of sponsoring business, marketing, and so on.

Unfortunately, a large part of the economic literature in this sector has accustomed us to considering technical progress in an antithetical sense to that here represented, considering only the “great changes” in techniques or, in other words, those destined to significantly upset the way of producing with the alternativeness of employment between work and capital.

An increase in savings and investment is certainly the most important, or at least one of the most important, factors in economic development, and therefore attributable to the element conditioning the company logic. As we all know, saving a portion of income through investment develops productivity by stimulating the growth process. The savings-investment process is the means by which physical capital is formed (machines, tools, stocks, and infrastructure) and, in the final analysis, human capital increased. This is easily ascertainable in developing countries where capital is too often a scarce factor. In these countries, there is less equipment per work unit, fewer stocks, inappropriate technology, an unsatisfactory quality of life, and inadequate transport and infrastructure.

The lack of capital is due to a low level of savings, and therefore of investment. The Keynesian analysis has allowed us to ascertain that savings are more difficult when the general level of income is low, foreign debt is often too expensive, and assistance for know-how in each sector is very difficult to obtain. Whatever the source of the savings-investment process, whether endogenous or exogenous, the latter must be sufficiently present to be able to increase the stock of capital, which, in turn, is a fundamental prerequisite for increasing the productivity of the workforce. If these assumptions have proved to be consistent with the reality for developing countries, it is nevertheless fair to point out that even in so-called developed countries or countries with mature economies, in times of crisis (such as the current one), there may be an inability to manage this flow. The latter, in fact, is a necessary condition for obtaining higher per capita incomes, which represent a manifestation of economic growth, and therefore of economic development itself.

A further factor mentioned above as an element of development, essential to the company logic, is foreign trade. The guiding idea that foreign trade represents an incentive for growth comes from David Ricardo. The distribution theorist of classical economic theory maintains that, in the absence of obstacles to trade, countries end up specializing in the production of goods that they produce more cheaply than other countries do, while they will import goods from other countries in which the latter have a comparative advantage.

This principle, even though stated by a great economist, has shown all its limitations and indeed has had strong negative repercussions for different countries. This logic implies that consumption and real income could be higher in the presence of foreign trade than in its absence. The rationale lies in the principle that, thanks to the policy of comparative advantage, a country can achieve higher rates of income growth than if it were only active domestically. It follows that the absence of exports would hinder the purchase from abroad of goods necessary for domestic development.

Company logic, therefore, interfaces and is shaped by these and other important factors. As we shall see below, it expresses a form of adaptation of companies to changes in the environmental context. Therefore, if logic means adaptability, only a “correct company logic” dictated by an awareness of the general economic flow will lead to winning new business initiatives—or to consolidating companies already established—in the current global economic context.

Another element can be identified in the business-to-banking relationship. Traditional macroeconomic and business economics analyses have often overlooked the analysis of the relationship between bank and business. Nevertheless—as studies on money as an endogenous element of the economic system seem to confirm—the bank–business relationship appears to be becoming increasingly important. The circuit that identifies the banks (and not the central bank of a country) as the engine of economic development itself sees the banking system as the initial engine of the circuit of development.

Banks grant credit to companies, through which the company acquires the various production factors (raw materials, goods, capital goods, and labor). With the availability of wages, the workforce will devote part of its income to consumption and part to investment. Through consumption by the workforce, companies will be able to collect and then meet their commitments to the banking system for the initial advances received.

Given the above, it should be underscored that an interdisciplinary vision is successful not only for the adoption of strategic solutions but above all for the more general progress of the company. The company logic contains heterogeneous elements coming from those doctrines that more convincingly explain the economic development over time. Therefore, in its changing forms, the company logic underlies the strategic business choices themselves.

It is therefore clear that the study of company logic cannot be separated from an interdisciplinary analysis that highlights all the interconnections of a systemic nature. In other words, the interdisciplinary analysis referred to cannot disregard the concern for business and human aspects deriving in a broad sense from economic science, sociology, law, and political science (Fig. 7.1).

Fig. 7.1

Example of correlation between business aspects and some social sciences (Source: Author’s elaboration)

In order to implement a renewal plan, therefore, an intellectual and academic effort is needed which, rejecting selfishness and individualism, allows for joint analyses to be carried out without delay.

Our assumption is based on the awareness that without such approaches it will be difficult to obtain sensible solutions for the understanding of a world—the economic and business world—that has become overwhelmingly different, difficult to understand, and difficult to frame in traditional patterns.

It should also be pointed out that Gino Zappa and his authoritative successors—albeit with differing positions and proposals—have already gone in this direction, studying very special aspects that affect the social responsibility of the company, the relationship between company and state, as well as the corporate governance in a global context with all the sociological and economic issues involved (Fig. 7.2).

Fig. 7.2

The environmental system that influences and characterizes company logic (Source: Author’s elaboration)

It is of crucial importance to understand the way in which the company relates to the various environmental subsystems (Consorti 1991). The performance standards and strategies that the company intends to follow are inevitably conditioned by the type of stimulus received and the ability to exercise control over such exogenous influences (Sargiacomo 2003, 1998). By way of example, let us take the case of international finance, which has acquired such a high degree of autonomy and absolute freedom of movement on international markets—not dissociated from extreme volatility—as to transfigure our system. Too many countries—considered very reliable by rating agencies because they possess excellent “fundamentals”—are dragged into situations of “default” just because the wind of international speculation begins to blow in the opposite direction.

Too many companies with impeccable economic accounts and more than solid balance sheets are attacked on the capital stock market for speculative purposes, and acquired and dismembered only to make profits in the short or very short term, neglecting the social, economic, and political context of reference.

Too many companies considered strategic are attacked by others to meet the mercantilist objectives of strong and powerful states that do not hesitate to violate the most common rules of international competition. Too many times, states that are indifferent to their internal situation abandon companies that deserve to be defended to the bitter end or strengthened for the strategic nature that distinguishes them, in order to favor international contexts. As we shall see, the critical issues in terms of corporate governance are a more than obvious example.

Managers from previous generations were certainly more under control of the share bases of the companies and, although they did not frequently have as their main objective the maximization of short-term profits, they still had greater and healthier principles of corporate representation, concerned with distributing stable dividends together with a constant growth of the companies they administered.

On the contrary, the new management class seems to be characterized by the evilest cynicism and to have no interest in the development of the companies they manage. The most important thing is the share price of the companies under their control and management, leading to a deep and uncontrollable market myopia. Companies may have rather modest profitability ratios but if stock exchanges around the world applaud mergers and acquisitions, business dismemberment and the dismissal of tens of thousands of workers to reduce costs, the stock prices of the companies concerned grow and CEOs are sheltered from criticism that could occur as a result of rigorous analysis of financial statements. It is also clear that in situations of this kind, a sociological and, more importantly, a juridical analysis is required to support the company’s analysis in order to formulate operational proposals aimed at mitigating the evident and macroscopic distortions currently underway.

As pointed out above, today’s world, characterized by a disruptive globalization, has led to a change in political and economic behavior that affects states, businesses, and society as a whole. Wars previously fought with armies, invasions, and occupations of territories, today, are fought economically.

Today, therefore, countries are confronting each other on this ground, and the objectives are no longer to strike at their opponents politically or militarily but to annihilate them by demolishing their commercial, technological, industrial, and financial presence. The ongoing process of globalization has therefore transformed the old wars of conquest into economic wars for the hoarding of more economic space, more powerful companies, and greater financial resources to support their development process. Frenetic activities by unscrupulous and uninhibited CEOs can sometimes betray forms of industrial paralysis initiated by a country toward strategic foreign industries, resulting in an act of conquest through forms and logic with financial, technological, and economic connotations. As C. M. Cipolla (1974) and Fernand Braudel (1982) have masterfully taught us, the forces of capitalism tend to remove any obstacle that may arise.

Therefore, today’s struggle is fought with economic battles between states that use their enterprises based on their hatred of others and which carry out their own evolutionary or involutionary process according to their political-economic objectives, certainly not for the ability to compete on the market or for productive or technological capacity. Ad abundantiam, we must also stress that the geopolitical and geo-economic needs of the world are no longer a simple prerogative of the classical western world. Groups of countries previously considered to be developing countries, the so-called BRICS, are pressing for rapid changes in what remains of international competition. The conquest of foreign markets by emerging countries ends up prevailing over a better restructuring of domestic markets. These “new” countries see the market as the main tool for increasing their power in the global context and not the other way around. Consequently, as Paul Bairoch (1993) underlined, at the international economic level in a globalized world, it is not the best or the most competitive that win but those who do not respect the rules of the game.

In conclusion, without an interdisciplinary analytical approach, it is difficult to deal with all these issues in depth with profit and in a proactive way. Above all, without considering these environmental factors, it will be very difficult to understand the evolutionary process of companies and, therefore, the logic of operation that distinguishes them.

2 Definition of Company Logic and Its Manifestations

If we want to contextualize the role of the company in the environmental system, it is worth underlining how much it is the company administration itself that is specifically influenced by the various exogenous factors such as politics, sociology, and law, but above all how much it is able to draw from them the most suitable instruments to carry out its task. However, this principle does not separate the administration from the general business context, since the latter can be effectively carried out only in conjunction with other levels (defined as subsystems), composing in this way what is commonly called the business system.

The copious company literature that followed Prof. Zappa’s work has certainly made a more than exhaustive contribution in this regard. Therefore, we will not dwell here on the analysis of the system-company but instead summarize the company mechanism in its most essential components, as described by the traditional doctrine, to illustrate the complex context in which the administration must operate.

The following subsystems are thus to be considered (Paolone 2011):

• Managerial or decision-making, responsible for the implementation of the various administrative policies, as well as personnel policies and development strategies

• Information, which relates to knowledge systems, acquired through the collection, processing, interpretation, and use of information

• Operational, relating to the performance of the company’s actual operations, first and foremost, production. Together with the management subsystem, it is the one most closely connected with the environmental system for the exchange of technological knowledge

• Control, with which the tasks carried out and all the information previously collected to carry out the subsequent operations are verified

Any specific or individual approach to subsystems is therefore considered limiting and conventional, since an accurate analysis must always be related and extended to the more general context that characterizes every business experience. This explains why administrative techniques often show a diversified aspect. Their ultimate purpose therefore varies, the perspective from which the company’s reality is analyzed changes, and the need to investigate specific administrative problems differs.

However, as previously pointed out, among these techniques, the business economy has been abundantly dealt with by the numerous contributions made by the traditional doctrine. Therefore, for the purposes of our analysis of the business logic, it is more useful to focus on a very topical issue, namely, the way in which the legal entity and the economic entity of the company merge into one, thus outlining the powers but above all defining the limits of the company itself as a result of decision-making processes.

In fact, by definition the legal entity determines the choice of the most appropriate form through which the company must operate; in so doing, it conditions the distribution of corporate functions and, even more, the operations of the company within the market context. Instead, the economic subject is the one that obtains the rights but also assumes the obligations deriving from the economic operations of the companies, and therefore has the power to establish the institutional operations of the company, directing its management toward specific objectives. Therefore, legal power and absolute control over the company do not necessarily have to coincide.

The thorniest issues involving the company logic are thus the specific relationships that underlie the exercise of company control, and therefore how to identify the economic entity in relation to the legal form adopted (Paolone 2014). These issues, which in the most recent doctrine are referred to by the term “corporate governance,” deepen the way in which a person, or a group, holds absolute control and exercises it in order to establish the business objectives and, as an obvious consequence, to condition the functioning of the company itself.

Therefore, when it comes to analyzing the logic of enterprise in the various contexts in which it can be implemented, it is extremely important to understand who the economic subject is and how it pursues the objectives of management, and whether this is in line with or contrary to the institutional purposes (originally established by the choice of a specific legal form). At the same time, it is appropriate to determine the level of interest of a given economic entity within the undertaking.

Over the years, this principle has received considerable treatment that has shaped the traditional doctrines (according to which, as we will see later, the concept of administration was exhausted in the techniques of management, organization, and accounting) and led to the most modern configuration in terms of corporate governance. In this sense the doctrines of Berle and Means (1932) constituted a fundamental starting point and were then completed by the studies on “agency” theory and the in-depth study of the concept of “administrative control” of large corporations (Jensen 1986; Fama 1980; Jensen and Meckling 1976). In fact, it should be remembered that the exercise of control by an economic entity expresses only one of the facets that characterize the company, in particular, the principles of corporate governance (Rangone 2018; Paolone 2004).

In a context of small and medium enterprises the problems in terms of governance are limited if not absent given the autonomous role of the entrepreneurial figure (Fig. 7.3).

Fig. 7.3

Individual company logic (Source: Author’s elaboration)

In the context of a more consolidated and developed reality typical of medium-large companies, there is a need to regulate the balance of power that derives from the presence of different ownership figures (Fig. 7.4).

Fig. 7.4

Moderately shared company logic (Source: Author’s elaboration)

In the event that the ownership is limited and a specific shareholder figure emerges, the company logic will be “moderately shared” because often and willingly the first shareholder embodies the economic subject of control and also the entrepreneurial figure of reference even in the presence of a board of directors.

In this sense, the company has all the characteristics necessary to pursue the corporate objectives as well as all the rights of the economic subject (see the family-owned share control structures characteristic of the Italian market). However, the obligations arising from inefficient management will fall on all shareholders, thereby raising governance issues due to the specific ownership of corporate control. In the latter case, on the other hand, we have a typical situation of US public companies in which the shareholding structure is extremely fragmented.

If it is not possible to identify a reference shareholder, the term “control” will have a different meaning since it is no longer intended as share control (deriving from the number and quality of the shareholdings) but as administrative control (following a principle of delegation attributed by the shareholders) (Fig. 7.5).

Fig. 7.5

Widely shared company logic (Source: Author’s elaboration)

The scenario proposed here, although extreme and merely illustrative, aims to make clear how the company logic can vary and, consequently, how the response to the exogenous conditioning of the latter is in the hands of the economic subject of reference:

• The entrepreneur in the presence of an individual logic

• The controlling shareholder in the presence of a moderately shared logic

• The managerial class in the presence of a widely shared logic

Initially, the company logic is then manifested not only in the governance choices of companies but also in other ways. Through these choices, the logic of the company is manifested, for example, in the choices adopted by the single entrepreneur to search (or not) for new formulas of production to keep up with the market trends; it is also manifested in the partnership strategies of medium-sized companies and in the strategies of renewal and dominion of the large-sized ones.

It therefore seems appropriate to consider the differences that exist between the various formulations of company logic, analyzing in particular the subtle relationship that binds innovation to decision-making processes and, therefore, to the logic that conditions the latter.

3 Understanding the Strategy of Large Enterprises

We can no longer ignore that, for the first time in the history of mankind, an industrial product, a professional service, or anything else can be manufactured and/or sold anywhere. Undeniably, this means that in the capitalist system, the only surviving system, every commodity, every product, every productive, and/or service activity will be produced where costs are lower and sold or allocated where prices and profits are higher.

It is now a generally accepted theory that large companies can benefit from the fruits of economies of scale. In this context, to reduce costs through such a system, a company must design its products and sales organization in such a way that they can serve a large and diversified market (Pasinetti 1981). However, the logic of big companies cannot be limited to this.

Profit maximization has always been the basis of the study of economics and is the inspiring principle of the capitalist system. This principle is, of course, also applied in a global economy. But the globalization of the economy (Mayo 1945) also entails, not by definition but by logical consequence, the globalization of businesses. The presence of so-called “global” or “stateless” companies has created difficulties for the traditional state, understood as an organized form of society, or as the political expression of people living in the same territory. The national state has gone into crisis as a “super partes” force able to regulate other forces, regulate conflicts, promote economic development, and protect the rights of the poorer classes. Why is that? The answer is the change in the world economic order itself that has called the state into question.

The new protagonist is the universal enterprise. Companies, whether private or public, can now move around the globe as they see fit and, in very practical and realistic terms, what hinders these companies in maximizing their profits is only the nation state with the laws, regulations, social, or moral principles this institution embodies with its very existence. According to such a vision of a global situation that is becoming more consolidated, companies, no longer multinational but stateless and global, have an interest in restructuring the same political geography and the global economic map that considers areas of production at “minimal cost” (less rich countries) and sales areas at “maximum prices” (rich countries), perfecting at a global level the basic principle of “maximizing business profits.” However, the shifting of companies from one part of the world to another inevitably has repercussions in the short term, even in those countries that are now considered rich, in terms of unemployment, social exclusion, and so on.

On the other hand, by leaving out emotions and feelings and viewing the problem strictly as a business one, the management of this new type of company can take advantage of the extreme poverty present in certain areas. In other words, companies of this kind can not only escape the control of states in the traditional sense but also undermine their very credibility and existence, thereby thwarting strategies aimed at promoting social and employment policies.

World enterprise, with the dynamism that capitalism itself intrinsically entails, will be able to make poor areas disappear and create new ones elsewhere. This means that the difference between rich and poor can no longer be found between North and South and between West and East. Between the North and West of the world, a strong and worrying gap between the social classes could present itself in a more marked way, with the impossibility for the individual national states to influence the different economic and social environments. The single national state thus appears increasingly at the mercy of the new world economic reality and no longer able to counter unwelcome presences or harbingers of explosive social situations. In the new global or world economy, companies have ended up being dominated as we have seen previously in the area of finance. The domination of the world market seems more and more to belong to financial entities, owners, or managers of money, who tend to behave as if the state were not there. Any government today is unable to control the flow of money (unfortunately many times resulting from transactions that are not always transparent) from one part of the world to another. Thousands of billions of dollars are moved every day from one area to another (Ryan-Collins et al. 2011), at the speed of light, entailing astonishing speculations in favor or against this or that economic system or its currency. These entities can thus determine the growth or collapse of an economy without the national state being able to do anything, demonstrating its powerlessness. Let us reflect briefly on the development of technology.

More than fifty years have passed since the term “global village” was coined (McLuhan 1964). At the beginning, general optimism made us think almost exclusively of the advantages and positive effects that information technology and the development of telecommunications would have had. We were led to believe that every man would feel close to any international event and that every problem, perhaps identical throughout the world, could be solved in a spirit of universal solidarity and that the global economy would lead to a standardization of the lifestyles of people in the “global village.”

To date, it does not seem that this heavenly vision can still be generally shared without great reservations. In a global economy, the other productive factors (natural resources, technology, and labor), in addition to capital, also have international mobility. Therefore, not only does capital move where goods and services cost less and goods, services, and natural resources are sold where they are most expensive, but also technology is used in countries that pay most for it and workers move to places where the workforce is better paid. In this race for the highest possible yield, in an economy that has become global, all factors of production will tend to level out.

In a relatively closed economy, an average worker in a wealthier country could earn higher wages on a permanent basis than workers in a less wealthy country or in a developing country. In the new global village, these niches of privilege tend to disappear. Real wages in such a general context only tend to fall, and any increase can only be justified by better professional skills, which will lead to higher productivity. In addition, although we cannot foresee, even with a big approximation, what the technological development of the near future will be, it is easy to deduce that with such a situation there will be an increase of technology with a high content of qualified work. This requires governments to put in place policies and investments aimed at more qualified vocational training, research, and the creation of a strictly appropriate labor market. The alternative is to move down the social ladder of labor toward less skilled and lower paid jobs. Even in the most industrialized countries, high wages for unskilled workers are no longer automatically guaranteed due to the presence of a larger global force, which has been defined in traditional economic analysis as the “leveling of the prices of production factors.”

With such a logic, global companies can easily face the innumerable problems that frequently block small companies, i.e., they are able to obtain a wider knowledge of the regulations of the countries in which they want to enter, they are able to overcome the protectionist barriers of foreign countries, they are able to face the need for financial resources, and they are able to obtain all the information necessary to be able to conform as much as possible to the customs and habits of the markets of interest.

Therefore, these results imply the fusion of two logics, the political and economic influence discussed above and the strategic one aimed at satisfying the business needs. Through internationalization processes, large companies can benefit from the advantages provided by different markets, obtain know-how at lower costs, enter new markets where there is no competition in the specific sector, and thus maintain a market leadership position. In order to achieve these benefits, large companies are more likely to use strategic processes. We are here referring to the strategic elements including:

• Centralized functions

• System of company dominance

• The interrelationships between the strategic business areas

• Portfolio strategies

• Strategies for the renewal of the enterprise

• Organizational philosophy

In order to be effective, every internationalization project must, in fact, include an accurate strategic analysis in terms not only of initial development but also of business control and maintenance (Fossati 2004; Haspeslagh 1985).

This process, which is more difficult to implement by small and micro companies, is commonly implemented by large companies, who are able to better manage strategic business areas (Hofer 1977) by making conscious use of D.F. Abell strategic model (1993, 1980). In order to define and manage the strategic areas of interest in the best possible way, it is necessary to have a managerial figure who takes responsibility for the strategic planning and performance results. This function is difficult to find in small companies and even less so in micro ones; in fact, it must identify the optimal path to answer the questions who, what, and how (Fig. 7.6).

Fig. 7.6

Abell’s three-dimensional model for the definition of ASAs (Source: Adapted from Abell’s model)

As can be seen from the above model, the strategy requires logical ramifications and analytical developments related to the three areas of who, what, and how.

For the purposes of a complete analysis of the strategic business areas, it is not possible to disregard certain aspects (which condition the “where”) such as:

• The competitive dynamics of the reference market

• The specific environmental (sociocultural) context

• Entry barriers such as hostile taxation of the countries of interest

The analytical activity in this sense requires obtaining and evaluating a considerable amount of information relating to the characteristics of the various markets.

Large companies have the ability to evaluate the important statistical elements related to the population and the market to estimate with an appropriate degree of approximation the size of the market in the current phase as well as the short-, medium-, and long-term trends. They aim to develop monitoring processes with reference to population trends in order to better quantify the target audience and, in the same context, calculate the degree of competition, the willingness of the market to accept new entrants, as well as barriers to entry and exit. Together with these preventive analytical operations, it is also necessary to understand the needs of the consumer in the relevant segment in that specific market in terms of services expected from the company (here we mean the pre- and post-sales assistance services in terms of technical information, general details, warranties, maintenance, and spare parts service). These aspects—defined as context variables—redefine more broadly the set of strategic business areas and increase the perspectives from which an investment or a business process reengineering can be analyzed (namely the “why”).

Large companies thus have the capacity and the human and financial resources to obtain the analytical tools needed to assess the initiatives to be undertaken in the best possible way. In these cases, the reality linked to business operations and management is largely subservient to a central corporate logic that outlines the reason for an investment or a corporate restructuring plan (“why”) (Fig. 7.7).

Fig. 7.7

The ASAs according to the interrelation system (Source: Author’s elaboration)

Another determining factor in the logic of large companies is their ability to better manage their relationship with their stakeholders.

It should be stressed that decisions taken by large companies to pursue corporate objectives in terms of expanding size, maximizing the use of production potential, and possibly not regressing often meet with the support of the political class that is involved in the definition of relations with stakeholders such as the employees, trade unions, public administration, and even credit institutions. In general, these stakeholders—and even more so the political class—are well aware of how profitable it can be to support the growth of a large company rather than just a small- to medium-sized one. This is implicit in the impact that the success or decline of a large company has on the local economy or even at the national level depending on the goods or services offered.

Small and medium-sized enterprises are the antithesis of this reality. They can hardly enjoy the same advantages as large companies do, and if the weight of the activity becomes too onerous and unsustainable, they disappear without leaving behind a trace. Therefore, what logical principles can they benefit from? Or better yet, is there a logic behind small and medium-sized enterprises?

4 Is There a Logic Behind Small and Medium Enterprises?

We have seen before that large companies operate to maximize profit by benefiting from economies of scale and, above all, in a context of unscrupulous freedom thanks to the support of unscrupulous finance that allows them to act without being held accountable for social repercussions.

Micro-small enterprises and sometimes medium-sized enterprises do not share the same possibilities as large companies do. Specialization in certain market segments is in clear opposition to a policy of diversification implemented on an international scale and is the main characteristic that distinguishes the logic of small businesses. In order to benefit, these companies are encouraged to concentrate on a small market, i.e., on limited product lines.

If, as we have seen above, the market today is influenced by global—or at least transnational—companies, what development solutions remain in favor of small and medium enterprises?

Are there still many companies left of this limited size? What portion of the European economy do they occupy today and what can be done to preserve their survival? These are the questions we need to ask ourselves in order to understand the real situation and how this type of enterprise can survive in the consolidated process of globalization. In order to take a serious approach, it is essential to use a series of data and figures that the European Commission can provide better than any other body. Who would believe that 99% of all companies in the European Union are small and medium-sized enterprises? Yet this is the stark reality.

The European Commission states (2019):

Small and medium-sized enterprises (SMEs) are the backbone of Europe’s economy. They represent 99% of all businesses in the EU. In the past five years, they have created around 85% of new jobs and provided two-thirds of the total private sector employment in the EU. The European Commission considers SMEs and entrepreneurship as key to ensuring economic growth, innovation, job creation, and social integration in the EU.

However, the above figures should neither surprise nor frighten anyone in the face of globalization. These figures represent a constant throughout the European economy.

The structure that we have reported is, in fact, a business feature common to all the Member States of the Union. But experts do not seem to be concerned about this business fragmentation; however, the small number of small and medium-sized enterprises that continue to develop is worrying. The aim of Community economic policy in the recent past has been to promote conditions conducive to the removal of obstacles to continued expansion, with the full knowledge that:

• In order to be able to go beyond the simple local market, knowledge of sales in the export and language sectors is required.

• In order to move from simple assembly to vertical production, it is absolutely necessary to have technical expertise, which is not the property of most European SMEs.

• Adequate basic training is absolutely necessary in order to take over new production techniques and/or new technologies.

• A constant problem for SMEs is that of being able to establish themselves on the international market.

• The expansion of SMEs is nevertheless linked to the availability of risk capital and/or access to the debt capital market.

In other words, the internationalization of European SMEs is necessary. Usually, when we talk about internationalization, we refer to a strategy typical of large companies. The difficulties and obstacles to be overcome by SMEs are, in fact, related to their size. The theme that is harked on by economists in every single European Union country is that the SMEs are characterized by a chronic lack of financial and human resources that would impede their process of internationalization. Investigations carried out abroad and their prohibitive costs, the establishment of a network of contacts and distribution, the lack of an ability to raise capital on the international market, the marked shortage of staff, and the need for specific training for persons in charge of international affairs are just a few examples of a lack of such resources.

Although we do not want to deal too summarily with the problems here, we will limit ourselves to reporting recent analyses by the European Commission on the business performance of European SMEs (Table 7.1).

Table 7.1 Criteria for the identification of micro, small-, and medium-sized enterprises

SMEs can counter their chronic limitations by a number of strengths, linked both to their specific structure and to the current market conditions, even if they have become global. The flexibility and elasticity of SME strategies allows it to seize the opportunities offered to it in the market and to rapidly exploit the advantages of international cooperation linked to user licenses and to issues of a participatory nature such as industrial agreements, corporate agreements, etc.

Above we have mentioned the information society that is characterizing the whole world. How is productive Europe organizing itself in this respect?

The information society is no longer a dream; on the contrary, it presents a new and inevitable reality. For more than twenty years, political leaders in the USA and Europe have been trying to raise civil society’s awareness of the new challenges ahead.

In this sense, the various international summits that have followed each other have almost always stressed the need to:

• Promote dynamic corporate competition

• Encourage private investment

• Establish a flexible regulatory framework with free access to networks

• Ensure universal provision and access to services

• Promote equal opportunities for citizens

• Promote the diversification of contents also in cultural and linguistic terms

• Recognize the need for global cooperation with particular attention to the least developed countries

The abovementioned international policy guidelines, which in very concrete terms mean that market forces must actually build a global information structure, represent a major task in terms of engineering, economics, and global regulation. The private infrastructure of companies must be able to access public infrastructure, consisting of a global network connecting the different networks and applications operated by a multitude of service providers.

This particular moment could favor SMEs, in particular, the most dynamic ones, as they could emerge from their traditional isolation and enter the global market. SMEs should take advantage of these opportunities because they are the most flexible and will no longer be hampered by distance in business relations and by all the other obstacles that have always penalized them the most (Sylos Labini 1964).

The use of new technologies facilitates access to information, allowing SMEs to receive up-to-date information on markets, products, competitors, and legislation in the various areas of concern. In addition, it is possible to acquire a sufficiently complete knowledge of technological innovations, of the world, and of the means to access the accumulated know-how.

The information society forces SMEs to keep up-to-date on a permanent basis, something they are not used to at all. The greater this capacity for permanent change, the less important the particular innovations will seem. In other words, as technology evolves more rapidly, the importance of secrecy as a development strategy is bound to diminish in part. This also means that the benefits of cooperation and the exchange of price-sensitive information between small and medium-sized enterprises will outweigh the short-term benefits of a particular invention. In other words, we can also stress that the successful transition of small and medium-sized enterprises to the information society is essential not only for them but also for civil society as a whole. Small and medium-sized enterprises are closer to the markets and can better adapt to them by identifying key trends. As a result, their success is the best way to achieve demand-driven technological innovations. On the contrary, a market dominated by large companies, for the reasons expressed in the previous sections, can only produce innovation strategies based on supply.

Small and medium-sized enterprises are also of fundamental importance for employment. Their success is a condition for the harmonious development of the new opportunities provided by the information society. From a macroeconomic point of view, small and medium-sized enterprises are the best way to avoid unbalanced development and to promote homogeneous modernization throughout the European Union. As we have reported above, small and medium-sized enterprises are the main source of job creation in Europe (see data from the European Commission). In the European Union, small and medium-sized enterprises account for almost all enterprises and about 65% of total turnover.

Despite the incontrovertible importance of SMEs, Community policy has not always been consistent with the objectives to be achieved in this sector of the European economy. In order to obtain EU funding, small enterprises have to deal with a still massive bureaucracy both at home and in Brussels. Small and medium-sized enterprises are the victims of an excessively complex legal, fiscal, and administrative environment which still today entails exorbitant costs which discourage new initiatives, innovations to existing enterprises, the recruitment of new staff, and so on. In the age of globalization and the information society, it is high time that the European Commission began to act, and not just in words, to stimulate the creation of new small and medium-sized enterprises, based on new technologies and better access to financing and the marketing of research products, in order to set up instruments to facilitate research and innovation and promote the use of new information technologies. As outlined above, on the international financial markets banks and other financial institutions now tend to move further away from the events of the real economy, and the relationships between those who provide capital and those who use it become increasingly anonymous. It is precisely small businesses that suffer from this lack of personalization of the economy and finance.

The depersonalization of relations that is becoming increasingly popular in the international markets cannot and must not also creep into European banking culture. The bank that does not forget its relationship with the customer, that maintains a long-term relationship of trust, is one of the essential characteristics of the culture of the financial market in Europe, which must not give way to any other temptation or fashion that characterizes the new globalization of the economy. The fundamental task of the European banking and financial system is also to promote the establishment and consolidation of an independent middle class in the countries currently undergoing transformation in Central and Eastern Europe. These same institutions, in fact, as we have pointed out above, are able to promote the local savings market. In other words, there must be a close relationship between small and medium-sized enterprises and the financial and banking sector.

The creation of a small business, its development in terms of efficiency and productivity in a continuous and constant regime of competitiveness that globalization imposes, cannot be separated from a vision and a financial direction. In the absence of a return to an optimal bank–business relationship, the only solution for innovative development and business progress is therefore to move from an individual logic to an average shared logic that can provide suitable financial instruments. In this sense, the examples of the current global giants born as start-ups and the data on the level of diffusion of private equity in Europe are significant.

In addition to adequate management, small and medium-sized enterprises are often held hostage by conditioning factors that do not allow them to arrive at a competitive environment worthy of the market. It is necessary to make a few observations on this subject.

5 Important Company Logic Conditioning Factors

The birth or restructuring of a company is certainly complex stages, and to obtain benefits a careful and considered search for the various possibilities available is required. The choice of the most suitable form of investment has its importance for the success of the investment itself. The state of health of a company therefore remains closely linked to the possibility of receiving financing from credit institutions or of allocating new shares on the market. The interaction between companies and credit institutions has a long tradition (Bank of England 2014), and in Europe, it has certainly gained predominance over the search for capital in the financial market (Tarantola 2007).

For small and medium-sized enterprises, the banking system is perhaps the only point of contact with the financial world. However, the international economic crisis has made this relationship weaker and more difficult, dictated by a substantial decrease in the supply of credit. In this context, we believe that it is interesting to understand how the company logic progressively relates to the evolution of the system of indebtedness useful not only in corporate restructuring actions (for companies already started) but also in providing capital for new initiatives. In order to develop this analysis, we must first identify the main criteria that influence the choice of financing from a business point of view:

• The cost of the loan, expressed as the cost of capital, which varies according to the products obtained, and the related administrative costs

• The terms of financing. These can be short or medium term if the project has a high rate of return or long term for less profitable projects that involve more expensive transactions

• The effects of taxation, which allows tax deductions to be made on part of the interest earned on loans

• The value of the company assets used to guarantee the financing

• The special conditions imposed by the lenders

• The ability of the company to have sufficient liquidity to repay the financing

• Specific market conditions The latter point, understood as the general situation of financial offers on the market, may in the first instance appear to be the least relevant for the development of a business financing plan. On the contrary, we believe that it expresses an enormous conditioning factor, especially for companies that do not have sufficient capitalization to emerge in the market economy

However, the relationship that connects the business world with financial capital to develop its projects is not unique, and thus cannot be observed only from a business perspective. It is therefore important to understand whether and to what extent the degree of access to credit is constrained by the performance of companies or, in the current context, whether financial trends in the supply of credit by the system have become a predominant variable. In essence, the solutions are based on the degree of risk involved in the business initiative and the company’s presence on the stock market. For the purpose of granting a loan, the latter condition certainly has a considerable impact as it is better able to attract backup facilities, merchant banking operations, or simply the attention of international investors. However, for a more complete analysis, macroeconomic variables cannot be ignored, which are understood here as conditioning variables and which in certain contexts may themselves be conditioned (for example, inflation trends may vary depending on access to credit, fiscal policies, and the consumer price index). A further factor of influence is the development of forms of private equity investment which, as noted above, are quite common in the Anglo-Saxon and Nordic countries to support start-up initiatives (primarily technological ones), while they are less common on the financial markets of Central-Southern Europe, where they arrived only in the 1980s. Private equity, which has been better analyzed over the last few years, is proving to be an essential resource.

However, it is precisely because of the limited vision of an individual company logic, typical of SMEs, or the criteria by which private equity firms make their investments that this resource is not yet being fully exploited. This very quick excursus on the factors that can influence the financial market offer allows us to better contextualize these opportunities always from a point of view outside the “business system” but in relation to the destination of the investment. We are referring to cases in which the company has to carry out a reengineering process (Sargiacomo 2008, 2018), when there is a request for capital in the start-up phase, or when the company simply has to make new financial investments.

Today, companies have countless solutions to meet their different needs. If the investment is aimed at purchasing fixed assets, capital goods, or production factors, bank debt solutions such as borrowing (generally an industrial loan), leasing (both financial and operational), or project financing are recurrent. If the need consists instead of mere financial investment projects, the range of opportunities available is more diversified and the range of options focuses on whether or not the applicant company should operate in the financial market. In the event management decides to proceed with financial investments without necessarily operating through the stock market, there will be specific forms of financing such as Stand By or Evergreen Financing, as well as forms of guarantee or endorsement.

If, on the other hand, a company with a certain amount of capital decides to operate on the stock market for growth initiatives or M&A, it may use various financial products such as Leveraged Buyouts, Backup Facilities, Shareholder Leasing, Merchant Banking, and Private Equity transactions (growth, buyout).

As we can see, the tools useful to small and medium-sized companies (which in the Italian economy corresponds to most of the companies) mainly refer to common debt capital. We mentioned above that the initiatives promoted in the private equity sector in Europe for support during the early stage of a company are still limited today. What scenario, then, can emerge if the banking system, for macroeconomic reasons or for eminently speculative needs, drastically reduces credit and adopts a strict policy of selecting companies deserving of access to credit? In recent years, marked by economic and financial crises, some studies (Morettini 2013) have dealt with the reduction in the credit supply, highlighting the possible conditioning factors. Our studies on the conditions of access to credit have been confirmed.

The survey of a sample of 200 companies in the construction, manufacturing, transport, and business services sectors with fewer than 50 employees and a turnover of less than 10 million¹ Euros revealed that the main cause of credit impediments are high interest rates (59%), followed by higher costs (23%) and reduced quantities (10%), with a last factor being the increase in required guarantees (8%) (Fig. 7.8).

Fig. 7.8

Factors affecting the use of credit (Source: Author’s elaboration)

However, are there categories of companies for which access to credit is more available and others for which it is more difficult? Looking at the data provided by the Bank of Italy (Table 7.2), the answer seems obvious.

Table 7.2 Bank interest rates on short-term loans in 2016

The Bank of Italy survey clearly shows how unfavorable access to credit is for the category of small enterprises which, in the case of the takeover under examination, includes partnerships and sole proprietorships, which are already unlikely to be able to compete with medium and large enterprises under global market conditions.

The financial crisis that started in 2007 has taken on “systemic” connotations due to its global dimension and conditions of both the public and private sectors. Italy is not the only country to face difficulties in accessing credit, and in case of a prolonged indecision in banking strategies toward small and medium enterprises, a progressive mistrust of the system with all this entails can only be expected. Studies as of 2007 had already shown that the percentage of companies willing to worsen their conditions in order to obtain greater debt was decreasing. The European institutions are therefore hoping for powerful measures. “That’s it, if you like,” wrote Luigi Pirandello in one of his plays.

This brief examination of how business needs change in light of the financial possibilities on the market does not intend to argue that the banking system is no longer worthy of its former function. However, we believe it is useful to underline how much it can no longer be considered as a successful stakeholder, at least for small and medium-sized companies. However, it must be acknowledged that it is often difficult to admit or openly confess to the wrong choices, or at least to the highly questionable choices made by states and the banking system, which inexorably fall on companies.

Having highlighted the general context in which banks and businesses relate, we draw some conclusions on what has been discussed in this section. The company logic is the main architect of the business operation, and therefore the engine that enhances or inhibits the propensity to invest. Since this is closely linked and stimulated by exogenous factors, we have also shown that in a highly evolutionary system such as today’s, the variables that affect the performance of the company’s investment are innumerable and often go beyond the company’s own assessment. In some situations, especially those characterizing small and medium enterprises, the company logic is, in fact, forced to deal with multiple factors such as the trend of the supply of bank credit (or its accessibility in light of the size of the company), or the type of financial products more, or less developed in the market of issue. It has the effect of a vortex into which less flexible or less enterprising enterprises fall, but also those enterprises which, by type of product or service offered, are anchored in the reference territory. Consider, for example, a small company that operates in markedly traditional sectors which rarely resorts to the transfer of its registered office, to the opening of foreign branches, or to the creation of production units abroad (Table 7.3). In this case investment must be limited to the financial offers provided by the system in which it operates and, as is often the case, the company may not be able to access these due to the inability to sustain high rates, management costs, or the rejection of the banking system, which does not consider the company sufficiently performing.

Table 7.3 Comparison of control logics in terms of the potential for innovation

On the contrary, a company operating in the hi-tech field will be able to seek in the global financial system the most suitable condition for its development provided that the company logic is aware of this. Therefore, in a country such as Italy, which is still too much characterized by small and medium enterprises with local and territorial traditions, the following solutions can be successful:

• A return to the attention to local needs in a “global” context, where the banking system proposes financial instruments aimed at continuing the original function of supporting the birth of a company and then supporting business development through the application of more favorable and sustainable conditions.

• If the solution proposed above is not feasible because the banking system is evolving more and more in accordance with global trends, and thus the local context cannot be catered to, the hope would be for the massive development of incentives that can facilitate investment in private equity, as has been happening for some time in the Anglo-Saxon countries, obviously induced by an adequately shared company logic.

In order to achieve this evolution, it is extremely important to bring the analysis back to the level of governance, which is the highest expression of company logic.