Strategy Formulation in Entrepreneurial Firms - Essay Example

? The Extent to which I agree with the claims made Indicating that Small to Medium Sized Business Enterprises are Inevitably Always Better than LargeOrganizations at Making Innovations (Name) (Institution) (Course) (Tutor) (Date) SME ASSIGNMENT What is an SME? SME’s have also been commonly defined as business entities that are independently operated and owned (Karami 2007). Based on an organization’s number of employees, The United Kingdom’s DTI uses the following definitions to define what are SME’s, micro firms are defined as firms employing between 0 and 9 employees, small firms are defined as firms employing 0-49 employees, medium firms are defined as firms employing between 50 and 249 employees while large firms are defined as firms employing over 250 employees (APEC, 2005). Small and medium-sized enterprises are business enterprises which are seen to variously exhibit some common characteristics, which are; these business enterprises employ an average of up to about 250 employees, they have an annual turnover that is approximated as being not more than ?50 million and their management is also seen as largely independent in addition to being free from any outside control and influence in taking various principal decisions (European Commission, 2013). The Role/Place of Small and Medium-sized Business Enterprises in the Economy SMEs are important to all the different economies in the world, this is especially so to those economies found in the world’s developing countries that happen to be struggling with income distribution and employment challenges. During the 1980s, the total turnover, stocks and employment in most of the firms operating a wide range of business activities and services in the United Kingdom was seen to record spectacular growth. This growth was witnessed in the operations of all the large and small business enterprises. However, it was noted that the largest part of this growth, especially as pertains to the stock of business firms, was mainly dominated by SMEs. Small businesses are seen to play an increasingly considerable position in the overall economy of the United Kingdom. Fewer than 500 people are seen to be employed by the majority of the United Kingdom’s over 3.7 million business enterprises, although statistics show that these large firms account for roughly one-third of the total non-government employment rates. The number of SMEs within the United Kingdom has managed to record rapid growth during both the 1980s and the 1990s with estimates showing growth margins of from 57 percent to an average of 67 percent (Analoui and Karami 2003). The United Kingdom’s over 3.7 million SMEs are approximated to account for about 40 percent of the country’s total GDP. The SMEs also generate an annual turn over of about one trillion pounds in addition to employing approximately over 12 million people. Of the 2.3 million jobs that were created in the United Kingdom by the formation of new businesses between the years ranging from 1995 through to 1999, SMEs account for about 85 percent of this figure while they also accounted for more than 50 percent of the more than 3.5 million jobs that were gained as companies in the United Kingdom expanded over the same time period (Analoui and Karami 2003). Despite small firms accounting for such a large portion of the country’s GDP, Britain has been show to be relatively poorly endowed with small firms (Nelson, 1993). As a consequence of the trend showing constant growth of SME’s both in the United Kingdom and the world, SMEs have been noted as accounting for an average of about 99 percent of all businesses in the United Kingdom, while globally, SMEs are seen to account for business enterprise in excess of 99 percent of all the businesses that have been established. It is due to this that SME are considered to be the largest contributor to both the gross domestic product and the employment rates of all the countries in the world (Nwankwo and Gbadamosi, 2010). In order for SMEs to compete successfully and improve their chances of being hugely successful and eventually evolve into large firms, they are largely encouraged to develop core competencies that are valuable, Rare, Inimitable, and Non-Substitutable (VRIN) (Wu?stenhagen, 2008). This requires them to adopt a Resource Based View (RBV) strategy that will help them in adequately emphasizing on the development of VRIN. Medium sized companies based in the United Kingdom have been shown to account for about 11.5% of the total workforce in the country’s private sectors. They also contribute a staggering average of approximately 49% of the country’s annual business turnover of about ?2400 billion. Small businesses and micro enterprises in the United Kingdom combine to contribute about two thirds of not only the country’s employment but also its annual turnover. In respect to these statistics, it is evidently clear that SMEs are sometimes rightly referred to as the lifeblood of the United Kingdom’s economy (Dickinson, 2011). Why SMEs are Regarded by Most Policy Makers are Being Important SMEs are also considered to be a good source of job creation in addition to their contributing to both competition and innovation in various markets around the world. Some SME, although not all of them, evolve and grow to become big business enterprises (Nwankwo and Gbadamosi, 2010). Traditionally, most policy makers within the United Kingdom have been perceived to treat most SME as young and marginal firms that are in constant need of protection in the face of rising competition within the market. Most policy makers are now revising this attitude and have now started recognizing the fact that SMEs are increasingly becoming some of the top most dynamic business enterprises within Europe and are therefore quite central in the sustenance of the competitive position that is currently being enjoyed by the European Union. The importance of SMEs is also being acknowledged by policy makers due to the fact that SMEs currently account for over 70 percent of all the employment within the United Kingdom (Hauswirth, 2006). Policy makers all over the European Union are now increasingly pushing for the success of all of Europe’s SMEs by attempting to encourage them to try and exploit the current trend that favors the internationalization of markets all over the world. This move is seen to represent a rather significant strategic shift as most SMEs have traditionally been mainly focused on the regional/local markets. Narrow markets are perceived as being mostly inadequate if SME on the whole are to be able to greatly aid in improving the general competitiveness of the entire European Market (Johnson and Turner, 2000). There are two main key difficulties that have been shown to invariably be facing SMEs in Britain. These are access to adequate financial resources as well as the existence of extensive red tape in government (Dickinson 2013). Due to the increasing importance of SMEs in the United Kingdom, the government has set up the Business innovation and skills department so as to help small businesses in accessing funds. This department sits at the very centre of a vast organizational network that works towards the continuous promotion of Business, innovation and skill. In order to achieve its aims of investing in education and skills so as to boost innovation, promote trade and help people in growing and opening up businesses, the department has been allocated a budget of ?17.6 billion by the government so as to be able to attain its objectives (DBIS, 2013). In the years 2010, the United Kingdom’s DBIS commissioned a report that attempted to establish just how important SMEs were to country’s economy. In its findings the report identified that of the about 4.8 million private sector enterprises that had been established in the United Kingdom. Out of the 4.8 million private sector enterprises, about 99.9% of them were classified as being SMEs. The percentage that was identified by this result was seen to match figures that were produced by a report that was released by the OECD. The OECD’s report indicted that Europe had approximately about 20.7 million SMEs which together comprised of about 99.8% of the total number of enterprises on the continent (Dickinsons 2011). Are SMEs Particularly Important Where Innovation is Concerned? SMEs are regarded as being particularly important in respect to innovation. Large firms have been shown to have various cumbersome structures that serve to generate a myriad of bureaucratic systems that in term generally freeze both individual creativity and personal autonomy. In contrast to this, SMEs are seen to provide a friendlier environment where the organizational structures are seen to be adaptable, simple and flexible. Innovation is largely driven by an enterprise’s ability of being able to not only spot the possible opportunities and see the connections but to also fully take advantage of them (Tidd, Bessant and Pavitt, 2009). Innovation is also perceived as accounting for a considerable proportion of economic growth. The formulation and implementation of decisions in SMEs is a highly centralized affair due to the fact that most SMEs generally have relatively few levels of decision-making. As a result of the more adaptable and dynamic structure of SMEs in comparison to the rigid formal structure of Large firms, SMEs can be easily classified as firms having High Involvement in Innovation principles due to their adoption of Learning Organizations (LO) and Kaizen principles. It follows that SMEs are normally perceived as being much better and fertile ground aiding the nurturing and subsequent development of various innovations as compared to large firms. Moreover it can thus be concluded that the prime importance of SMEs are pertains to innovation is mostly based on the ability of SMEs to be able to innovate much more naturally, efficiently and instinctively (Analoui and Karami 2003). It should be noted that certain organizations have developed systems that allow them to adequately bypass the normal bureaucratic organizational procedures. An illustration of this being The Toyota company’s “Toyota way”. The Toyota was is seen to focus on continuous improvement, also dubbed as “Kaizen” and respect for people. The Toyota way is a system that has been keenly designed so as to provide adequate tools that enable people to continuously improve on their work performance. It empower the company’s various section employees to stop production if they happen to notice any quality issue. This is despite Toyota’s tedious bureaucratic processes. In recent times there has been an increase in the number of large firms opting to develop in-house R&D; this is due to the fact that it is relatively more difficult for one to effectively control a contract R&D as compared to controlling an in-house R&D department (Howells, 2005). Despite this, only very few large organizations have developed and manage a holistic approach that is seen to combine and go beyond the people or the process approach and hence achieve innovation as infusion (Stamm 2008). SMEs that happen not to have any formal R&D resources can resort to bricolage and make good use of the resources that are already available to them. So as to effectively compete with the innovative spirit of most SMEs, companies such as Google have been noted to further bolster their R&D by allowing and supporting their workforce in the pursue of their own creative interests. This has resulted in the company growing to becoming more than just a simple such engine as it not incorporates various innovations such as Google maps, Google earth as well as their Android Operating system platform. SMEs are also regarded to be important in respect to innovation due to their relatively High Involvement in Innovation (HII) as compared to large firms. Are all SMEs Proactive and Innovative? Not all SMEs can be defined as being proactive and innovative. Various government policies and legislation can be designed and implemented so as to encourage all SMEs to become not only proactive, but also innovative. Innovation in SMEs can potentially occur in relation to any of the 4Ps of Innovation which are identified as being; Products: Products are referred to as the things that an organization offers to the world. This may be in the form of creating new items or improving on the already existing things. Process: Process describes how things are created and delivered. Position: Position is the targeted location of the product offering. Paradigm: Paradigm is seen to describe how companies frame what they do. By becoming proactive and implementing a simple strategic innovation process as indicated in the diagram below, non innovative SMEs can adapt and become more innovative. Innovative strategies help organizations by helping them concentrate n innovations and perceive them as processes as opposed to assuming them to be mere one-off events. Innovative strategies are unique to each organization and the belief that they can be copied is one of the principal barriers to innovation. When implementing innovation strategies, it is vital that firms realize that innovation strategies are invariably driven by both market pulls and technology pulls. If SMEs fail to become innovative or fail to capitalize on their innovations, they quickly become at risk of falling behind technologically. This is a factor that not only affects SMEs but also Large organizations such as the Kodak Eastman company. Kodak was seen to fail to quickly innovate and move into the digital age as fast as was required. One of Kodak’s engineers, Steve Sasson was the main inventor of the digital camera. Although the innovation originally came from the company, it was not well capitalized and as a result this technology that was not properly capitalized is a crucial factor that contributed to the failure of the company (Wharton, 2012). There are several innovation strategy models that SMEs can be able to implement. These include: Teece model: This model argues that both complementary assets and imitability have a strong influence in the eventual determination of who will eventually profit from a certain given innovation. Imitability establishes how easily various competitors can be able to successfully duplicate or copy a certain given process or technology. It is necessary for companies to ensure that they employ various barriers such as the registration of their new innovation’s intellectual property rights so as to effectively protect themselves from imitation. Complementary assets refers to activities such as marketing capabilities and distribution channels that happen to gravitate around a specific given core innovation (Afuah, 2009) It is important for organizations to ensure that they adequately shield their innovations form imitation by competitors by employing tools such as intellectual property rights as well as various complex internal procedures. The importance of this can be illustrated by RC Cola Company putting into place several adequate protection barriers to protect their diet cola innovation. This resulted in the duplication of their innovation by Coca-Cola and Pepsi companies who by effectively utilizing all their complimentary assets, managed to size all the profits for the innovation. The complementary assets utilized by the two companies involved strategic alliances, customer relations, distribution channels and marketing potential. Complementary assets freely available tightly held Difficult to make profits Holder of assets profits Innovator profits Highest bargaining power profits As illustrated in the table above, innovation is found to only be beneficial to a firm if it so happens that complementary assets are freely available in addition to its having high imitability. It is possible for an innovation to become more profitable to a given asset holder as opposed to the innovator when there exists relatively high immutability and the relevant complementary assets happen to be held rather tightly as was the case in the innovation of the diet cola. It therefore follows that low immutability is key in the placement of the innovator at a generally improved position. Rothwell also developed five different models that attempt to describe where innovation happens to come from. These models start quite simply from the push and pull factors but progressively become more complicated as they gradually advance to models three, through to model five. In order to properly advance networks, it is vital that SMEs realize that the concept of innovation is a multiplayer game and not a solo act. It is essential for SMEs to break down barriers and promote team working both inside the organizations as well as between the different organizations. Over the centuries, different networks have constantly been evolving and developing and as a result, networks now come in diverse shapes and sizes, a factor that poses a special challenge in regards to their management. The concept of open innovation is all about using the wheels of other people so as to get moving. The process is seen to start with the basic step of looking outside one’s organization as one attempts to think of the things that they will do on the inside. Several companies such as Proctor and Gamble have successfully managed to adopt open innovation/networking strategies. The company currently has over 200 different brands on offer and firmly relies on R&D as their main basis of success. After the company’s share price slid from a high of US$118 to a low of about US$52 per share, the company adopted a new strategy which they tagged as the “Connect and develop” program. This open innovation program actively links about 10,000 researchers from all over the world around given core themes via several internet-based “communities of practice”. The company also employs over 80 innovation scouts to act as innovation brokers, gatekeepers and prospectors all over the world. The company also employs the use of “innocentive’s”, this problem solving concept is employed whereby the company posts problems and offers awards if they are successfully solved. All SMEs are potentially innovative and proactive due to the fact that SMEs are more normally associated with entrepreneurship as compared to large firms. As a direct consequence of their close association with entrepreneurship, SMEs are expected to embrace the concept of international entrepreneurship which is described as being a combination of risk-seeking, proactive and innovative behavior that attempts to cross various national borders with the core aim of creating wealth for the firm (Peng, 2010). Of particular concern to the government is that recent figures indicate more non-residents are innovating new products and registering them as compared to the residents. This trend is depicted in the diagram below. This trend has consequentially resulted in the need for the government to involve various players in attempting to encourage SMEs in the United Kingdom to become more Innovative. Various organizations are actively encouraging SMEs to become more proactive and innovative, an example of this being the European commission has planned to hold a high level conference in Dublin, Ireland in June 2013. The Conference which will focus on establishing exactly what it takes for one to effectively become a thriving entrepreneur in the current 21st Century, how small companies can evolve to becoming more competitive in our increasingly globalized word in addition to ascertaining exactly how these small businesses can be able to gain the maximum benefit via the support of the existing and future varied private and public support features (European Commission, 2013). The event is envisioned to attempt to bring together hundreds of various policymaker, entrepreneurs, intermediary bodies and SME support organizations that will be drawn across the private and the public sectors. These organizations will present ideas on how to best improve on the European Union’s eco-system so as to make it more conducive for the emerging innovative enterprises. Among the themes that the conference aims to focus on includes: SMEs in regards to innovation during the 21st century (European Commission, 2013). By focusing on this theme, the conference hopes to effectively explore the business side regarding the integration of technology into today’s SMEs. This factor has been proven to be quite problematic for today’s SMEs that are constantly challenged by on all sides by ailing markets and customer, increased competition, constantly changing technologies as well as dwindling or lacking resources (European Commission, 2013). The NIS and Innovation The National innovation System is also commonly referred to as the National System of innovation. The Terms NIS refers to a systematic approach that keenly stresses on the flow of information and technology among institutions, enterprises and people, these three are considered as key to the overall innovative process. The development of technology and innovation is a result of a rather complex set of various integral relationships that happen to exist among different actors in the system. These actors variously include government, universities and business enterprises and private research institutes. A national system of innovation generally comprises of about five key main elements, these elements are Various government polices and Support systems, Established financial systems, Educational systems, the support that the entire system receives from various NGOs and other support systems and at the very core of the entire setup is the information system. This is illustrated in the following table. Britain’s department of Business Innovation and Skills (BIS), aims to invest in education and skills so as to boost innovation, promote trade and help people in growing and opening up businesses, the department has been allocated a budget of ?17.6 billion by the United Kingdom government to be channeled towards the attainment of these objectives (DBIS, 2013). Conclusion As is evidenced by the various arguments presented in this paper, it is evidently quite clear that small to medium sized enterprises are served by various factors that help to make them better at innovation as compared to larger organizations. The growth of SMEs should thus be encouraged so as to ensure the United Kingdom’s growth in innovation. However, the importance of innovative leadership in SMEs cannot be over emphasized. As the culture of innovation continues to emerge, the role of innovative leadership has continued to steadily grow in importance. It is difficult for an innovative culture to be adequately sustained without the support of innovative leadership. If business enterprises attempts to introduce various innovations into a traditional culture without attempting to provide adequate transition support and making appropriate modifications to the existing network, the innovations being introduced will eventually be dismissed as a result of their being considered to be mere fads (Porter-O'Grady and Malloch, 2010). Leadership that is not innovative tends to perceive new ideas as burdens as opposed to identifying them as opportunities that can help the organization remain competitive in addition to enabling it achieve the highest quality outcome (Porter-O'Grady and Malloch, 2010). Bibliography: Analoui, F., and Karami, A., 2003. Strategic management in small and medium enterprises. London [u.a.] : Thomson. Johnson, D., and Turner, C., 2000. European business: policy challenges for the new commercial environment. Routledge. 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