Customer dependency in manufacturing SMEs: implications for R&D and performance

In the now global business environment, SMEs are being subjected to increased pressures. In the manufacturing sector in particular, increased requirements for information and knowledge management, innovation, quality, and flexibility within new organisational forms such as the network enterprise entail organisational developments that can affect critical business processes, R&D in particular, and business performance. Hence, the customer dependency of manufacturing SMEs on certain important customers or the absence of diversification in their customer base can have significant impacts on the R&D activities, the productivity, and eventually the profitability of these organisations. Through an empirical study of 179 Canadian SMEs, it was found that more commercially dependent firms allocate more financial and human resources to product R&D. These firms are also less productive in that they have relatively fewer sales per employee. While customer dependency seems to negatively affect the SMEs’ profitability, firms whose product R&D activities are more intense report significantly higher gross margins. R&D activities could allow manufacturing SMEs to counter the influence of their major customers, by reversing the direction of commercial dependency, and thus to reduce their vulnerability.