The challenges of Small Scale Enterprises in Business Strategy Development and their effect on Performance: A Theoretical Discussion

Introduction

The Context

Small and medium-sized enterprises (SMEs) are vital entities in any country’s economy because of the many economic benefits they generate to such economy. It is logically not untrue that every large organisation started out relatively small before they became what they are today. It was stated that small firm’s “selection of strategy is critical for survival given the disadvantages they face” (Ebben and Johnson 2005, p.1250; cited by Rizzo 2011). Small and medium-sized business strategy has been widely studied as evidenced by the volume of available literature on what informs small business strategy and its concomitant business performance. However, there does not seem to be any concept, which assesses directly the influence of both the merits and demerits of the characteristics of Small and medium sized business on the strategic decisions they make to improve performance.

Moreover, the fact that small businesses are unique is a challenge to make conclusions about some generic characteristics about them. In order words, issues like industry specificity due to the nature of business, the ownership and management issues, the business peculiar environment, organisational structure, the personality of the owner-manager; their personal financial status, goals, values, beliefs, philosophies, skills and so on, are to be considered when generalising a certain characteristic of a ‘typical’ small business.

Appreciating the diversity of small businesses generally, will enhance the discussion of how a small business can manage the characteristics of being a small sized business and make its strategic plan to fit its peculiarities and the environment in which it operates. The purpose of this study is to add to the existing knowledge of small business strategies and performance, the concept of integrating diversity issues in addressing the characteristics of a Small business to inform strategic decision making process. This is done by perusing existing literature to find out how strategies employed in the private sector by SMEs impact on their performance and the challenges they face in their choice of strategies, due to their growing nature (size) against large-sized firms. Critical assessment of existing theories, which deal with small business strategic formulation and the concomitant results of such strategies are made, with focus on what drives the strategic choices in practice. The approach is that these theories are relatively considered in the light of the known distinctive peculiarities of any SMEs, some of which are as aforementioned.

Overview of Strategy and Strategic Formulation

What is Strategy?

To gain a quick understanding of the term strategy, and what strategic formulation entails, Meyer et al. (2007, p.241) describe strategy as the “cluster” of decisions and managerial actions toward achieving organisational goals. This definition omits an important feature of a more comprehensive view Johnson et al.(2012) observe in their definition; as the long-term direction of an organisation.

Click on the link What is Strategy to view a diagram that illustrates Johnson et al. notion in more detail.

Strategic decisions seek to attain the long-term goals of the mission statement and vision of an organisation by assessing the gap between the current position of such organisation against its desired state and devising means or actions to bridge the gap. A huge number of literature emphasis the importance of long-term direction in relation to business and corporate level strategies. Jennings and Beaver (1997) call it a “predictive process” but however intimate that in smaller businesses, strategies often emerge accidently in response to a functional or operating situation facing the enterprises. This was named the “adaptive process” (Jennings and Beaver 1997; Gronum et al. 2012).

This school of thought somehome inter-relate two approaches to strategy formulation, which are the emergent approach and the resource-based approach. (Jennings and Beaver 1997, p.64; Garengo et al. 2012), Emergent strategics arise from adhoc (pattern of behaviour)or uncontrolled responses to circumstances to take advantage of immediate benefit usually by manipulating scarce resources. This however is the idea of resource-based approach which emphasises on internal capabilities in strategy formulation in order to gain sustainable competitive advantage. This suggest that the adaptive approach may be a plus rather than a disadvantage to small and medium-sized enterprises. Therefore in order not to downplay on the benefits of a predictive process CIMA (2011) termed as the traditional, rational, formal or top-down, long-term goal approach, small firms may profitably adopt the rational approach and at the same time open to any emergent strategy that may arise.

Long term organisational planning requires a whole process of strategic planning process that takes many things into consideration (Gronum et al. 2005). This process combines 3 approaches, which are rational, resource based, and position based approach. The rational approach involves a top-down comprehensive and systematic steps of determining mission and setting goals and objectives by carrying out strategic analysis to establish strengths and weaknesses internally (resource based), opportunities and threats, competitors analysis in the external environment (position based), stakeholders analysis to incorporate their interest in the mission statement and satisfy key stakeholders with high influence and also a gap analysis (Thomas and Israel 2009; Levy 2009; Silva 2012). The result of these analyses is to present possible strategic options or choices in bridging the gap between the present position (expected state) and the vision (desired state). That is, to basically achieve the goals and the objectives.

Click this link to view a diagram illustrating an overview of the Strategic Planning Process

Small and medium-sized enterprises (SMEs)

 The Context

Small and medium-sized enterprises are sometimes referred to as small firms or small businesses in this literature and of course in its general perception of the small size of employees registered, asset base, turnover and level of simplicity involved in their business processes and organisation structure- put together, size of firm. Maximum care was given to the choice of literatures reviewed in relation to the size of firms the researchers and authors considered in their own study, in the necessary areas of this review that requires this context. This means, some theories and general concepts (applicable to all cases), which do not need this specificity (size of firm), are also reviewed without minding the context of the size of firms the researchers and authors referred to.

Also there is no restriction as to the industry, sector, or geographical location these SMEs are based since the idea is to generally deal with these peculiarities or better put, relativities as they affect the choice of strategies being put in place by these ‘small firms’. It is worthy of note also that the bases of classifying a firm as small and medium sized is relative regionally or nationally(European commission 2013). For instance, according to European Commission (2013) firms are classified as SMEs in the EU on the basis of number of employees, and turnover or balance sheet total, whereas in Nigeria, the basis of judgement is firm’s asset base and number of staff. This is the case too at some other countries like Canada where a firm that has below 100 employees is considered as a small business only if the business is a goods-producing one, and not the case if the business is service-based unless its employees are lesser than 50. This implies a SME in a country could be categorised as large firm in another.

General characteristics of Small and Medium-sized Enterprises

It is generally believed that SMEs are characterised by some features with merits and mostly demerits compared to large firms. Financial constraints, limited resources, core incompetencies and lack of managerial skills are frequently mentioned in the literatures and also the issue of understaffing, which causes overworking and stress leading to performance ineffectiveness (Pettigrew 1977; Mintzberg et al.1995; Mintzberg 1973; 1978; 1987; 2001; Johnson et al. 2008; Veettil 2008; Grant 2009; Barney and Hesterly 2010; Silva 2012).

The most commonly discussed is the issue of Owner-manager phenomena. Because the manager is not differentiated from the owner, personal values and aspirations sets into business, and thus firm organisational culture is weak due to organisational politics. This is nothing far from an informal organisational structure. Business processes are unstandardised and firms lack effective corporate strategy. Rizzo (2011, p.2)observed that “small firms have no strategy, that the firm simply follows the whims of its owner-manager, acting heuristically and basing its decisions on instinct, gut feeling, and circumstances.” The major merit the above characteristics presents to SMEs in relation to strategy formulation and implementation is the fact that organisation could be flexible and adaptive to their environment by for example matching their limited resources to the opportunities and threats in their outside environment (Jennings and Beaver 1997; Veettil 2008). One of the major disadvantages is formal strategic planning procedures that large firms apply are not relevant to small firms because of owner-manager’s lack of adequate resource capacity for such activities as formal strategic planning, and will act most of the time on “intuition, experience and instinct” (McCarthy 2003 p.2; cited by Rizzo 2011).

Peculiarities of Small and Medium-sized Enterprises and their Strategic choices

The point made by a number of researchers regarding the generic characteristics of SMEs is that not all SMEs are characterised by the features discussed above. It was established that the business environment in which SMEs operate for instance is totally different based on geographical location. Not all owner-managers are informal in their processes or influences business decisions based on their personal preferences (Jennings and Breaver 1997; O’Regan 2000; Kuckertz 2012). Some SMEs even have their owners separated from their managers. In this case, owners are seen as entrepreneurs while they employ the service of qualified and competent manager (Jennings and Breaver 1997). Although Veettil (2008) noted that owners preferences influence their choice of strategy.

Strategic choices are complex because they are being determined by so many factors which could either be qualitative or quantitative or both. A number of tools, techniques or methods are adopted. Apart from influences within, organisations are more faced with external forces such as “risk of entry, Bargaining power of buyers, power of complement providers, threat of substitutes, and bargaining power of suppliers”(Jones and Hill 2013). These are opportunities and threats to SMEs regardless of either their generic or peculiar characteristics.

Strategic choices according to Veettil (2008) is also be determined by implementation issues confronting SMEs in relation to envisaged inability to implement such strategies.

Strategies Choices and Performance

Jones and Hill (2013) argues that strategies have major impact on companies performance relative to its competitors. This implies that if strategies are not competitive and give competitive edge, superior performances cannot be attained. This is in congruence with Porter’s(1980) postulation which identified 3 business strategies firms can generally adopt to gain sustainable competitive position in its industry. These are cost leadership, differentiation, and focus. This strategic theory suggests that threat from the five competitive forces can be mitigated if organisations can reduce it cost well enough to give part of the premium to end customers to satisfy them, present products and services they produce uniquely, and focusing on major value adding activities of the business. However, Veettil (2008) intimated that apart from viewing performance from competitive point such as sales growth, market share and so on, performance can also be measured by objective fulfilment. This idea is the goal initiated concept of formulating strategies as presented by the classical model where rational and formal approaches are laid on.

The theory that addresses small business strategic peculiarity issues

Against the generic strategies put forward by Porter, Strategies should consider specific current and emerging issues which are peculiar to the particular firm. Their negative characteristics could be seen as weaknesses and they should device strategies that will convert such weaknesses to strength. Just like limited resources could be manipulated and matched to opportunities and threats hence being proactive and adaptive at the same time. Mintzberg (1973) considers the environment of the business as a factor to be monitored and controlled by searching for opportunities being proactive in the face of risks and uncertainty. This he calls Entrepreneurial Mode of strategy making. This is part of the three modes of strategy making theory he formulated.

This theory is so comprehensive such that any SMEs can adopt in the strategic planning process, regardless of its peculiarities and challenges posed by its characteristic. It combines all the available approaches together in one place while considering the relative characteristics of a typical organisation, and conditions for use. Three modes which can be mixed depending on the organisation need and circumstances are displayed in the table below. The Planning mode is the systematic attainment of goals and comprehensive involving scientific techniques to develop strategic plans. It uses majorly the formal approach discussed above. It is analytical, too rigid especially for SMEs and demanding time, funds and other resources. In the Adaptive mode, strategies are not made rigidly following a procedure but “shrewdly”, resourcefully and to solve problems as they emerge (reactive). There are no clear goals, thus, unrelated decisions are made. The third one is the Entrepreneurial mode which is more applicable in a centralised system, and it sees the environment as a factor to be monitored & controlled. Business growth is the main goal as firm searches for new opportunities in an uncertain but proactive manner (Mintzberg 1973; Veettil 2008). For the purpose of this research, this model is being adapted to incorporate characteristics of SMEs discussed here while considering the uniqueness of any SMEs.

Click on this link to download Mintzberg’s three modes of Strategy Making

Conclusion

Small businesses are reactive in their approach to strategy. They do not adopt formal approach but emergent because of certain characteristics such as managerial incompetence, informal structure, the owner-manager lacks sufficient time due to workload, limited employees to implement formal strategies at functional level and so on. Small businesses operate in a dynamic environment such that is not stable and this make formal planning inappropriate for them because of its inflexibility.

Short term orientation is most times driven by the owner-managers selfish interest as the key stakeholder. However, an advantage this provides is sustainability of emergent strategies that could as well be consistently successful due to effective allocation of scarce resources to deal with circumstances. This promotes the resource-based approach.

Small businesses with informal organisational structure who also have limited resources including small size of workforce, may adopt the adapted Mintzberg three mode of strategy making above, regardless of the challenges they face in assigning responsibilities for implementing strategies as they can mix modes to fit their situation, and different conditions are met. So small business can only choose strategies that they are capable of managing (Resource based view).

Advertisements

Leave a comment

Filed under Academic contents, Business support related issues

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.