What SMEs and small businesses survive in a declining population?

What makes the difference between success and failure for SMEs that lack human resources?

When you think of small businesses, you might typically think of retailers, mom-and-pop eateries, and barbershops in towns, but there are also huge numbers of small businesses in manufacturing, construction, and transportation. In particular, many of these companies have four or fewer employees. According to the “2014 Economic Census for Business Frame” by the Statistics Bureau, Ministry of Internal Affairs and Communications, these companies account for about 60% of the manufacturing industry and about 70% of the construction industry.

While these small businesses operate independently, they form corporate groups such as business cooperatives and shopping district promotion associations to maintain and develop their economic activities. However, the shortage of human resources and business succession are issues that have been faced for many years.

Human resource shortages at SMEs have been pointed out since before the decline in population surfaced. For example, there has been much talk about the “Year 2012 Problem,” in which baby boomers reached retirement age at 65, and the “Year 2017 Problem,” in which managers began to retire at age 70. However, even before that, SMEs had always faced difficulties in recruiting and retaining human resources.

Surveys and questionnaires conducted in the field revealed that the shortage of human resources at SMEs (difficulty in hiring) has not been caused by a declining population, but has been an issue for many years. The gap between firms that have succeeded in hiring and retaining human resources and those that have failed has been widening every year.

I believe this difference is not due to chance, but to the quality of each SMEs’ efforts. Specifically, successful companies have their own strategies and focus on employee education and training. On the other hand, failing companies rely only on help-wanted advertisements and Hello Work, a public employment security office. They seem to lack their own recruitment approach.

Companies that are successful in recruiting and retaining human resources have several things in common. One is the close connection between hiring activities and employee training. They have established departments and assigned human resources to specialize in hiring, and executive team and middle management take the initiative in this process. It is also important for current employees to demonstrate to the outside world that their company is easy to work for and to be able to attract new human resources through acquaintances and networks.

We cannot overlook the need to respond to changes of values in the way people work. Gone are the days of “Can you work 24 hours?” We are moving into an era where people seek fulfillment in work and life. Successful companies are building systems to make their employees feel that work time is valuable. I believe that the key to sustainable corporate management is to create an environment where employees can not only perform their duties but also find meaning and a sense of achievement in doing so.

The declining population and depopulation are not the only causes of succession problems

Succession issues at SMEs differ greatly depending on the age group of the manager. For example, it is common for managers in their 30s and 40s, or second or third generation managers who have just completed business succession, to answer in a survey that they have no successor. They have just taken over the business, and are not yet at the stage of considering their next successor.

On the other hand, the problem is particularly serious among business owners in their late 50s and 60s. There are many cases in this generation where people start looking for a successor but lose their motivation and give up. It is a situation where the survival of the company is in danger as time passes, leaving the matter of who will take over the business unclear.

The severity of the succession problem also depends on how long a company has been in business. In emerging companies founded less than 20 years ago, the founders often have no experience in business succession, and tend to have difficulty in fostering successors. Founders place too much priority on business growth and management maintenance to find and nurture their own successors.

On the other hand, in long-established companies that have been around for more than 100 years, there are relatively few problems with successors. At long-established companies, management know-how and the tradition of family management have been firmly handed down, and families have a strong sense of fostering successors. It can also be pointed out that there is a strong tendency for successors to appear who want to become managers themselves because they grew up seeing managers in their families.

My research reveals that business succession to relatives and employees is the most common practice in small businesses. Business succession through M&A is rare. Behind this is the reality that the needs of the buyer and the circumstances of the seller do not match.

For example, a company with no successor and three consecutive terms in the red is not welcome in the M&A market. While the company’s assets, such as machinery and equipment, and patents, may be subject to acquisition, it is unlikely that the entire business, including employees, will be taken over.

Also, the reasons why business succession to relatives and employees is preferred are largely influenced by the company’s asset management, employee management, and customer trust. In order to protect these factors, SME managers strongly feel the need to foster successors from within their companies.

Succession problems are closely related to the declining population and depopulation in rural areas, but they are not the only cause. What matters in solving the problem is the attitude of the managers themselves, including ensuring the stable operation of business and fostering relationships with employees and customers. I believe that it is important for the future of SMEs to create an environment conducive to fostering successors and to maintain their businesses in cooperation with local communities and employees.

Automatization, IoT, and DX that are especially required of SMEs

Even in SMEs with few employees, if the business is attractive, family members, employees, and even customers may say they want to take over the business. Our survey has confirmed such cases.

For example, at Morihide Orimono, a long-established textile manufacturer in Kiryu City, Gunma, which was founded in 1877, the Morishima founding family has taken over the management of the company for generations, but the current president is the son-in-law, Mr. Hasegawa. Mr. Hasegawa originally worked for a floor heating company in Tokyo, but when he got married, he moved to his wife’s hometown of Gunma and joined Morihide Orimono.

I heard that the previous president, Mr. Morishima, intended to end the company with his own generation. However, when Mr. Hasegawa saw the factory and the Textile Museum for the first time, he was deeply moved by their value and felt that it would be a waste to discontinue them, which led to his becoming the successor. Today, while continuing the company, he is active in restoring traditional doll costumes and kabuki costumes, and other activities.

As the domestic market continues to shrink, SMEs will need a different sustainable methodology from large enterprises. Local SMEs tend to be considered difficult to expand nationwide owing to their small business scale, but there is room for growth by exploiting their characteristics and developing new distribution channels.

For example, Chichibu Nakamuraya in Chichibu City, Saitama, a Japanese confectionery shop founded in 1924, originally focused on souvenirs for tourists. However, a cocoon-shaped marshmallow confection called “Chichibumayu,” which was released in 2007, became a big hit. The confectionery uses locally produced maple syrup and has been awarded a silver medal by the Monde Selection for three consecutive years. It was picked up by the media, and as a result, it was also sold at nationwide retailers.

The hit prompted the small company, with only five employees, to increase production, but the focus was on automation. President Nakamura’s own knowledge of confectionery robots enabled him to automate the process in-house without relying on outsourcing. As a result, the company established an efficient production system even with a small number of employees and expanded its sales channels nationwide through the use of the online system. Chichibu Nakamuraya is a good example of the Internet of Things (IoT) adoption of production facilities and processes by small businesses.

An SME in Aichi Prefecture was implementing its own digital transformation (DX) using freely available IT tools. In order to reduce investment costs and time, other SMEs will benefit from this initiative to automate and streamline business flows by in-house manufacturing as much as possible rather than outsourcing.

Also, from the perspective of sustainable corporate management, it is not desirable for SME managers to be isolated from those around them. In addition to building a relationship of trust with employees, it is important to build a network with managers from the same industry and other industries. This allows them to gather raw, unprocessed information that they can get in the field, and may even give them a new perspective that can help their company.

Even things that are difficult to say to business partners and customers are often exchanged freely in these networks. I feel that SMEs that make active use of these opportunities and that spare no time and effort in their ongoing efforts are more successful.

Thus, it is important for SMEs in the face of a declining population to increase the attractiveness of their businesses in the first place, to take advantage of their own ingenuity, to use automation and AI/IoT to help solve the shortage of human resources (difficulty in hiring), and to build an extensive human network. I believe these are the keys to sustainable and progressive management.

* The information contained herein is current as of October 2024.
* The contents of articles on Meiji.net are based on the personal ideas and opinions of the author and do not indicate the official opinion of Meiji University.
* I work to achieve SDGs related to the educational and research themes that I am currently engaged in.

Information noted in the articles and videos, such as positions and affiliations, are current at the time of production.