Strategic Management of SME's
SME: Definition and History
Small and medium sized businesses (SMEs) are defined based on their number of employees, annual turnover, annual balance sheet total, and level of autonomy (2006). It is defined by the European Commission (2006) as: “an enterprise which employs fewer than 250 persons and which have an annual turnover not exceeding EUR 50 million or an annual balance sheet total not exceeding EUR 43 million”.
Aside from the general definition, there are also specific definitions for two enterprise types in SME – small and microenterprise. The European Commission (2006) defined small enterprise as an enterprise which employs fewer than 50 persons and whose annual turnover and annual balance sheet does not exceed EUR 10 million. On the other hand, a microenterprise is defined as an enterprise that employs fewer than 10 persons. Also, their annual turnover and annual balance sheet total does not exceed EUR 2 million.
(2005) provided some insights on why small firms are desirable. One is that it promotes competition and employment and because a few of them may innovate and grow into large firms that potentially produce even more of what SMEs can offer. Also, for some individuals, it can be a means to achieve independence and self-expression and even wealth (
2005). The presence of SMEs also serves special social purposes and helps to avoid an over-concentration of political and economic power (2005)
The history of small business can be traced as early as the first time man learned commerce ( 1999). The distinction between SMEs and corporations has only been made however during the second half of the nineteenth century when mass production methods were introduced in the United States and the United Kingdom (1999). Big corporations started to evolve including management practices and new forms of labor relations (1999). However, because of the constant pour of new products, small businesses indeed survived and have become important contributors to the economy.
In the UK, during the advent of industrialization in the late nineteenth century, the focus of economic research has shifted to it and taken away from the role of the small firms (1999). However, the role of SMEs under the emergence of the industrialization has been asked to be defined by the Committee which was established in 1969. It was set up under the Labor government to enquire into the role of small firms at a point in time which in retrospect can be seen to have been a watershed for small firms (1999). In 1971, the Bolton report provided some interesting facts about the contributions of small firms in the UK economy. They include: the filling of niche markets that would not be worthwhile for a large firm to enter; their role as providers of actual and potential competition; and their innovation in products, techniques, and services. The concentration of small firms was on the textile industry, where during that time are employing not few than 100 laborers. However, in summary, since 1970 there has been a remarkable reversal of the decline in the relative share of manufacturing attributable to small firms. Between 1970 and 1990 the share of small firms rose to about 30 per cent of total manufacturing employment (1999).
Today, SMEs are considered vital to the UK economy because they are being seen as future corporations that may contribute greatly to the economy in the future. In the advent of the 21st century, it was reported that there were 3.7 million SMEs in the UK ( 2001). They employ 55.5% of the private sector workforce and account for 44.7% of business turnover. 96.5% of companies employing ten or more staff are SMEs (2001).
Differences in SME and Large Firm Resources
Although it is commonly viewed that small firms lacks the financial capabilities to invest in more resources, it has not been the actual case in today’s business environment. For instance, (1999) stated that in the UK, small firms are being seen as more innovative than their large firm counterparts. Also, in the study released by the (1999) of the U.S. Department of Commerce, it has been reported that small firms are as capable of winning advanced technology awards as large firms. Furthermore, small firms also pursue new-to-the-world” solutions and aggressive performance goals, and on large numbers of applications, than larger firms which mainly concentrate on less ambitious technology enhancements and R&D (1999). The report also shows that small firms are more into licensing than large firms. This is the case because licensing allows small firms to produce a product in-house while also providing its customers with the security of a second source (1999). Like in large firms, small firms also perform collaborative R&D and production of product in-house.
One difference in terms of resources between small and large firms is the great difference in the quantity of their employees. Small firms do not exceed above 200 employees, while large firms usually have 600 or more employees (1999). Another is hierarchy within the company. Large firms rely on hierarchy of employees while small firms rely on a linear management system (1999).
In terms of financing resources, however, it seems that small firms are on the disadvantage. (2004) reported that smaller firms finance a lower proportion of their investment externally, particularly because they make use of bank finance to lesser extent. Compared to large firms, SME firms use significantly more informal finance. Furthermore, small firms do not use disproportionately more leasing or trade finance compared to larger firms. Small firms also finance their investment significantly less from government sources or development banks despite the fact that such programs are often politically justified as increasing financing for small firms (2004).
(2003) stated that among the weaknesses of SMEs is their difficulty in financing and using of external knowledge resources. That particular task is stronger in large firms. However, (2003) stated that the most important advantage of SMEs is their flexibility which allows them to react immediately to changing environments. Flexibility is basically what is lacking most of the large firms.
Definition and Brief History of Strategy
Strategy is elementarily defined as a long term plan of action designed to achieve a particular goal (2003). The concept, however, is not originally made for business. Rather, the business industry borrowed it from the military to help organizations in bridging the gap between policy and tactics ( 2000).
Strategy is a word adopted from the Greek word strategia, which means “generalship”. It basically refers to the military act of deploying troops as well as how it affects policies (2000). Over the years, the concept of strategy has been exported to different industries, including business and politics. (1967) provided this early definition of strategy: “the art of distributing and applying military means to fulfill the ends of policy.". A few years later, (1979) provided the following characteristics of strategy in management application: strategy is that which top management does that is of great importance to the organization; strategy refers to basic directional decisions to purposes and missions; strategy consists of the important actions necessary to realize these directions; strategy answers the question: What should the organization be doing?; and strategy answers the question: What are the ends we seek and how should we achieve them?
From then on, the concept of strategic management in business application has evolved into two mainstreams of theoretical approaches – the “content”; and “process” view of strategy (2005). The first one focuses almost entirely on the internal analysis of the firm; while the second one concerned mainly with the "process" of managing change and, from an external perspective, on how companies compete ( 2005).
Strategic Planning: Advantages and Disadvantages
(2005), president of ABARIS Consulting Inc. provided an interesting assessment on the advantages and disadvantages of strategic management or strategic planning. According to (2005), the advantages of incorporating strategic planning in firms include: discharging the responsibility; provides a discipline that enables the board and senior management to actually take a step back from the day-to-day business to think about the future of the organization; provides a framework for decision-making; allowing the board and staff participation in the strategic discussion enables them to better understand the direction, why that direction was chosen, and the associated benefits; forces an organization to set objectives and measures of success, and; providing an organizational perspective and looks at all the components and the interrelationship between those components in order to develop a strategy that is optimal for the whole organization and not a single component.
On the other hand, (2005) stated the following of strategic management: requires the organization to anticipate the future environment in order to develop plans, which can be difficult; it can be expensive; lack of visibility of immediate results because the focus of such management is on long-term benefits; and impedes flexibility.
Strategy and SME: Relationship
(2003) examined that relevance of current management trends with SMEs and found some interesting results. First and foremost, (2003) stated that strategic management is becoming more and more important to SMEs. Then, (2003) stressed that the characteristics of strategies in SMEs include: generally more informal, unstructured, irregular, and incomprehensive; have very often a tacit character and are incorporated by the entrepreneur and are not documented in strategic plans.
Strategies in SMEs are also important to bring innovation to company, which is needed in order for the company to become competitive. (2006) stated that many SMEs seem to fail to innovate in time, because they seem to be locked in a vicious circle of being fully occupied with solving short-term operational problems. Furthermore, (2006) stated that SMEs often lack the necessary resources to invest in strategic development operations. They stated that SMEs need to strategize its concepts in order to be innovative.
On the other hand, (2001) also related SMEs with knowledge management. According to them, in order for SMEs to be successful in managing the knowledge they learn and experience along the way, they should have a sound strategic knowledge management practice. According to them, SMEs should manage knowledge intentionally and establish a formal knowledge system to
An example of a popular strategic management approach for larger firms is the balanced scorecard approach whereas it helps firms articulate, communicate and monitor the implementation of strategy using a system inter-linked with the long-term vision of the organisation. (2001) argued that the Balanced Scorecard approach is as applicable to small firms as to large firms because small firms have lesser employees to monitor and communicate with. They emphasized that coordination in small organizations mainly happens through direct instruction and supervision, minimizing the need for formal management (i.e. planning and control) processes. Its advantages to SMEs include: a clear sense of direction; a profound understanding of the business model; an ability to focus and prioritize; and organizational agility.
(2004) also mentioned the relevance of strategy in the development of ideas for SMEs. In their study, it was found that 65% of the interviewed entrepreneurs in our sample took an important decision in the last three years or will take an important decision in the near future. In their study, it was found that crucial decisions are usually being made through strategic analysis by small firms and only few make important decisions that eventually become successful by chance. The decisive decisions by most of the small firms they covered used basic economic principles to analyze the situation, suggesting a strong relationship between strategy and SMEs.
Benefits of Strategy for an SME
Literatures mostly emphasize the benefit that SMEs can acquire from strategic knowledge management. Although as mentioned earlier, that those strategies can contribute to the organization, decision-making and innovation of SMEs (2003; 2006; 2001; 2004), the emphasis of research is still on benefits of applying strategic knowledge management on SMEs. For instance, (2004) stated that strategic knowledge management can be advantageous to SMEs because: locating and capturing knowledge can help entrepreneurs improve innovativeness, service quality and response time; sharing knowledge in cost-saving can help SMEs achieve substantial savings; and creating a network of new knowledge within small teams can basically lead to profitable product and service innovations (2004).
(2004) mentioned several factors that may affect SMEs and to which strategic knowledge management can help. (2004) reasoned that integration of knowledge management strategies, specifically software tools, they will be on the advantage by understanding and assessing their position within the ‘new’ economic landscape, by enabling them to take the right strategic decisions and therefore to enhance their individual capacity to adapt, and by growing and leveraging their internal (intangible) assets to exploit upcoming market opportunities.
The benefits that SMEs can acquire from strategic management, specifically the management of knowledge can be further explained through the resource-based theory. According to (1999), knowledge management provides a key factor in a firm’s success as a global competitor. The resource-based theory of the firm recognizes knowledge as a new reproducible production factor ( 2000). In a much precise term, investments in intangible assets can lead to economic growth without needing any extra labor power. Furthermore, the resource-based theory thus leads to the point of view that knowledge and technology add value to economic processes, and it states that technology (i.e. knowledge) is the most important driver in economic growth (2000).
Knowledge management portal for acquisition practitioners is also very much needed in order to preserve the intellectual capital of the current workforce, and to enable it with greater efficiency in researching acquisition issues (2000). Intellectual capital has a tremendous value in business organization. To manage it, companies now must start with knowledge management department centers within their firms. In relation to SMEs, (2000) concluded that small organisations can benefit from attention to knowledge management. Their greatest acknowledged need is for effective “knowledge repositories'' (2000; 2000). However, the greatest challenge is the cost of such implementation. Both authors suggested that the acquisition of knowledge management software is the best and easy way to implement KM.
Strategic Management Practices
Earlier, we have defined the term ‘strategy’ and found that it was adopted from the military and is a design to achieve goals. Strategic management, on the other hand, is defined as the “art and science of formulating, implementing, and evaluating cross-functional decisions that enable an organization to achieve its objectives” (2003). It is the formal process, or set of processes, used to determine the strategies (actions) for the organization (2004). It focuses on many areas, including the integration of: management; marketing; finance/accounting; production/operations; research and development; and computer information systems (2003). Its main objective is to help the organization achieve success through the formulation of different strategies, their implementation, and evaluation ( 2003). It is also synonymous with the term “Strategic Planning” ( 2003).
Strategic management, even though there are several definitions provided, is still not adequately defined because of the process and concepts that involves within it. (1979) argued that strategic management cannot be defined by brief sentences or paragraphs, because for him, it involves “plan, ploy, pattern, position and perspective”. One of the ways, however, to look at strategic management in a nutshell, is through the Strategic Management Framework Model (see figure 1) (2003).
Strategy Strategy Strategy
Formulation Implementation Evaluation
Figure 1: Comprehensive Strategic-Management Model (, 2003).
(2003) explains that Strategic Management Model is dynamic and continuous. Furthermore, one major change in one or more of the process can affect the other processes as well. (2003) explained that strategy formulation, implementation and evaluation should be performed on a continual basis.
The vision-mission statement of a firm is one of the factors that create its corporate image (2003). This, in turn, will allow the firm to establish its long-term objectives. There are many factors that build up the image of an organization. (2001) stated that corporations should have economic and legal responsibilities to the public at large. (1996) enumerated seven economic responsibilities of firms, which are to: satisfy customers with goods and services of real value; earn a fair return on the funds entrusted to the corporation by its investors; create new wealth, which can accrue to non-profit institutions which own shares of publicly-held companies and help lift the poor out of poverty as their wages rise; create new jobs; defeat envy though generating upward mobility and giving people the sense that their economic conditions can improve; promote innovation; and diversify the economic interests of citizens so as to prevent the tyranny of the majority. Legal responsibilities, on the other hand, should be to follow the law or the rules that govern firms; while ethical responsibilities involve the use of practices that are acceptable by the society and the business world (1996).
Several studies have proven that not having a sound corporate image can be detrimental to the organization. A number of industry surveys suggest that consumers are willing to make an effort to support proactive corporate citizens. For instance, study shows that 76 percent of consumers are prepared to switch to brands or stores that seem concerned about the community ( 1997). Similarly, a Walker Information national survey showed that 14 percent of US households actively seek do-gooders when making purchases, while similarly, 40 percent judge corporate citizenship as a tie-breaking activity (1997). Similarly, (1997) demonstrate that negative corporate social responsibility associations can have a detrimental effect on overall product evaluation, whereas positive associations can enhance product.
External and Internal Audit
According to (2003), the purpose of an external audit is to develop a finite list of opportunities that could benefit a firm and threats that should be avoided. This may include the evaluation of the legal, economic, political, environmental, social and technological advantages and disadvantages of the firm and doing the needed adjustments (2003). On the other hand, the internal audit concerns with evaluating the internal performance of firm e.g. the performances of employees, the stability of its management system, infrastructure issues, etc ( 2003).
Competitive advantage has always been an issue in the external business environment. This was clearly addressed by Michael Porter in the early nineties, which led to several models such as the Five Forces. His theory of competitive advantage is one of a number of theories that place geographical industrialization and innovation at the centre of the process of development and competition ( 1999). In this theory, Porter mentioned four attributes namely: factor conditions; demand conditions; related and supporting industries, and; firm strategy structure and rivalry (1996). Each attributes are discussed in a national context. Factor conditions basically refer to a nation’s position on factors of production (i.e. skilled labor or infrastructure), which are necessary to compete in a given industry. Demand condition is the nature of national or local demand for both service and tangible products. Related and supporting industries, on the other hand, pertains to the presence or absence in the nation of supplier industries and other related industries that are internationally competitive. Finally, firm strategy, structure and rivalry determines the conditions in the nation governing how companies are created, organized and managed, as well as the nature of domestic rivalry (1996). The four attributes interact with one another. Modeled as the diamond, its systemic nature is indeed variable. Several factors transform the diamond into a system. This includes domestic rivalry and geographic industry concentration. Domestic rivalry promotes upgrading of the entire national diamond; while geographic concentration transforms the diamond into a system because it elevates and magnifies the interactions within the diamond (1990; 1999). This systemic nature then promotes clustering, which enables both vertical and horizontal linkages between industries (1986; 1999).
Porter’s theory provides an interesting framework on how the conditions of industries are shaped and influenced. However, many factors or competitive advantage determinants are missing in the theory. For instance, O’Shaughnessy (1996) mentioned that Porter did not give importance to the culture or politics, while (1999) criticized that Porter failed to provide a comprehensive explanation on how clusters are developed. Another missing factor is the competitive advantage of alliance or strategic alliance. Porter’s theory offers an incomplete framework, but serves as a reminder that rivalry is not the only means for survival. Furthermore, it suggests that through rivalry partnerships or alliances can arise, leaving more space for competition.
Another specific example of a framework that can be used for external audit is the 4Cs developed by (2004). (2004) stated that the competition is now in the global scale, and hints that explaining competitive advantage in the national context may already be obsolete. To make up for the limitations of competitive advantage models of the past such as Porter’s theory, (2004) integrated different theories and created the 4Cs. Here, views of pro-coordinated marketing proponents such as are integrated with competitive advantage theory of Porter. This new 4C model features integrated attributes such as: creation and innovation; competition; cooperation; and co-option.
In the internal audit of the firm, two specific examples of concerns are the issue of culture and the management of staff, specifically how the staff can be motivated. One of the ways to assess culture is to take heed of its value dimensions. As explained by (1980), there are four cultural value dimensions:
Ø Large versus small power distance. Large power distance is the extent to which the members of a society accept that power in institutions and organisations is distributed unequally; while small power distance is the extent to which members of a society or organization accept that power is distributed fairly (1997).
Ø Strong versus weak uncertainty avoidance. Strong uncertainty avoidance means the degree to which the members of a society feel uncomfortable with uncertainty and ambiguity, which leads them to support beliefs promising certainty and to maintain institutions protecting conformity; while weak uncertainty avoidance is the degree to which members tend to be relatively tolerant of uncertainty and ambiguity and require considerable autonomy and lower structure ( 1995).
Ø Individualism versus collectivism. Individualism is the preference for a loosely knit social framework in society; collectivism stands for a preference for a tightly knit social framework.
Ø Masculinity versus femininity. Masculinity is the preference for achievement, heroism, assertiveness and material success; while femininity refers to a preference for relationships, modesty, caring for the weak and the quality of life.
Cultural dimensions can help the firm assess the culture of their employees (1980). This can help management strategies easier to implement and execute (1980).
Motivation is also in an issue in the internal management of the firm. It is important because it manages and controls the turnover rate and productivity within the firm’s internal environment. define motivation as “the set of processes that arouse, direct and maintain human behavior toward attaining some goal” ( 1997). This definition contents three key essential aspects: arousal, direction and maintaining. Arousal is to do with the drive/energy behind people’s actions such as their interests to do the things or they do it just want making a good impression on others or to feel successful at what they do. Direction means the choices people make to meet the person’s goal. Maintaining behavior could keep people persisting at attempting to meet their goal hence to satisfy the need that stimulated behavior in the first place ( 1997).
Theories of motivation that organizations can use are divided into two categories: the content and process theories of motivation (Mullins, 1999). Content theories emphasize the factors that motivate individuals. Examples of content theories are Maslow’s theory, Alfelder’s theory, McClelland’s theory, and Herzberg’s theory ( 1999). On the other hand, the emphasis on process theories is on the actual process of motivation. Examples of process theories are Expectancy theories, equity theory, goal theory, and social learning theory.
(2003) stated that there are a total of 11 types of strategies that a firm can use to gain advantage over competitors. These are: forward integration (gaining ownership or increased control over distributors or retailers); backward integration (seeking ownership or increased control of a firm’s supplier); horizontal integration (seeking ownership or increased control over competitors); market penetration (seeking increased market share through greater marketing efforts); market development (introducing present product’s or services in new geographic areas); product development (improving present products or services or developing new ones); concentric diversification (adding new but related products or services); horizontal diversification (adding new but related products or services for present customers); retrenchment (regrouping through cost and asset reduction to reverse declining sales and profit); divestiture (selling a division or part of the organization); and liquidation (selling all of the company’s assets, in parts, for their tangible worth).
(2003) stated that several means to achieve those strategies are through joint venture/partnership or merger/acquisition.
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