Strategic Issue in Small and Medium Enterprises - Research Paper Example

SMEs Are SMEs (Small and Medium Enterprises) really as flexible and adaptable as conventional wisdomwould lead us to believe? Introduction Being small or choosing to remain as a small company may be taken as a strategic decision because small and medium sized companies are supposed to come with several advantages which larger companies do not have (Hemming, 2003). The advantage is certainly a strategic one since in terms of capital investment, economies of scale and financial strength a larger company would most probably be the winner in comparison to a small company. In recent times, a lot of academic and business interest has been generated by writers and analysts about the adaptability and flexibility of small enterprises. The interest has been taken to such an extent that even larger companies like GE have changed some of their methodologies to match those of smaller companies. Small companies are the envy of the business world since they manage to change their operations on the fly and can enter and exit markets with an ease which is not available to larger companies. On the other hand, there have been arguments against the wisdom that small companies are flexible and adaptable considering the number of SMEs which have been put out of business since many of them were based on trends. It can be shown with the use of studies and articles that the size of the company is often immaterial when it comes to flexibility and adaptability. Rather, it is the technology, the culture, the business environment and the person in charge of the company that lets the company have qualities like being flexible and adaptable to the environment. The Operating System Despite this, there are several interesting arguments which point towards how SMEs are flexible and adaptable precisely because of their size. Or as in the case of Equation Research Inc. the complete absence of size which makes them a perfect example of a small company. Equation Research is a small company which does not have any physical premises at all and manages its entire seventeen person staff from the internet. They specialize in getting research done for other companies and conducting product and service related surveys online (Rupley, 2005). In fact, had it not been for the internet and the various information systems used by Equation Research, it is impossible to think that they could continue their operations. Levy and Powell (1998) made the same deduction that the information systems and the organizational purposes for which the technology is used as well as the technological background in which the organization exists, affect adoption and use by shaping usability and usefulness. Simply stated, if the information system used by the company is adaptable and flexible, the company will become adaptable and flexible as well (Young & Francis, 1993). This is certainly the case for Equation Research since according to Rupley: “The employees — most from project management backgrounds, some with statistical training — are scattered about eight states. A dozen servers (mostly Dell machines), Linux operating systems, SQL databases, firewalls, and password-protected security implementations keep Equations surveys running smoothly (Rupley, 2005, Pg. 84)”. Given the technology Equation Research has at their disposal and with the secure and dependable information framework they have, it comes as no surprise that they manage to deliver for their clients at every turn. Rupley (2005) praises the company for having a high level of flexibility while Levy and Powell (1998) would point towards their information system as the cause of that flexibility. At the same time, a larger company with a physical office and hundreds of employees could have the same level of flexibility if they information systems were the same. Large and Agile The best example of that scenario is GE, which behaved very much like a small company by showing the qualities of adaptability and flexibility even though it is one of the largest companies in the world. Jack Welch, the CEO of the company made it a special focus during his tenure to establish the best information systems and management systems which allowed his company to be flexible and adaptable as the market situation changed over time (Welch, 2005). GE is the best example to show that being malleable is not the sole domain of the SME. At the same time, there are those who say that small companies are adaptable and flexible precisely because they are small. For instance, Eugenio and Pernías (2006) conducted an extensive study correlating production and innovation strategies. They studied the tile industry and found that small companies were more likely to innovate in terms of production and use those innovations to come up with new designs and products. They conclude that “Small firms tend to be more innovative overall (Eugenio & Pernías, 2006, Pg. 1)”. Undeniably, there are several advantages which a company can lay claim to be being small, a flatter, more compact organizational structure is one of the many advantages created by being small. Thackston (2000) recommends that short chains of command would make management easier and would also make the company more flexible in terms of changing business. Naturally, a smaller company would begin with that advantage but it must be noted that a small company can also fail if they do not build on their advantages with other supporting elements. This is the reason that the majority of start-ups fail to get off the ground. Almost 40% of all new companies do not go beyond their sixth year and only one in five live to see their eighth birthday (Hardy, 1996). However, those that succeed often have a lot going for them in overall terms and they can call upon a whole set of factors which help them leverage their advantages. After all, there have been several cases where small businesses have eventually become big businesses and the champions of the industry as well as the economy. For instance, the Herman Group (2004) pointed out that small companies will form the future of the world’s economy and that: “Future economic growth will come from these small enterprises, which are more flexible and mobile than their lumbering big brothers. Communications technologies overcome many of the functional limitations of being small, and micro-businesses can usually relocate quickly to draw from a new labour pool, serve new customers, and contribute to a new regions tax base (Herman Group, 2004, Pg. 14)”. This is a very valuable set of advantages and these are gained in part by the size of the company but the majority comes from other factors. The Small Business Culture Burlingham (2003) argues that the culture of a company can go a long way towards making the company act like a small business or act like a large bureaucratic organisation. Clearly being a bureaucratic system leads to inefficiencies when it comes to decision making and the empowerment of employees. He gives a detailed review of the culture at Zingerman’s Community of Businesses which includes everything from the hippie sandals and casual clothes worn by the CEO to the financial figures of the company showing a huge margin of profits and more than fifteen million dollars in total sales. Keeping the financial information aside (since the company is doing very well as a small business) the focus is on the culture of the company which has built a strong sense of belonging and ownership for the employees, a trust relationship with the owners, excellent management practices and a zeal to provide customers with the best possible service (Burlingham, 2003). Throughout the history of the company, it was able to adapt and change to the business requirements simply because it had an entrepreneurial culture that appreciated change and flexibility. While such situations can be created quite easily in small companies, there is no reason why a larger organaisation can not have a work and social environment in which belonging and ownership are a part of the regular work ethic. In such cases, a match between the company culture and the type of people who work there has to be established closely. A company should seriously look into considering replacements for employees who cause a culture clash rather than a culture match. The company encourages entrepreneurs to come and work for the company with their ideas so they can be invested in and eventually turned into new companies under the same umbrella. Any employee who has an idea for a product can start selling it as their own project, manage it, develop it and if it takes off they can turn it into a new company altogether (Burlingham, 2003). This is how one small company manages to keep itself fresh and young since it is constantly increasing in size with the inflow of new ideas created by the brightest entrepreneurs who are lured to work for Zingerman’s Community of Businesses. Not only the employees, but the community is also happy with the company since 10% of their operating profits always go to charitable causes within the community (Burlingham, 2003). This simply goes to show that keeping the culture of ‘small businesses’ will help a company be flexible even though it may employ hundreds of people and have a huge budget to deal with. In effect, as suggested by MoreBusiness.com (2006) it is business thinking which must be adopted to the small company form rather than the company itself. The Business Environment Other than the culture of the organisation, the business environment might also force the company to act like a small and adaptable firm. There are certain opportunities and positions which can not be taken up by larger firms and the best example of this is the oil and gas industry. Small businesses, by their very nature, are often in diversified industry even when common logic would state that larger companies would have greater advantages. Cecily, et. al. (2004) have created a list of the top small businesses in America and found that the top ten came from nine different industries and seven small oil and gas companies take dominating positions on the list. This is because in 2003, more than $2.8 Billion worth of deals were signed in Africa, the majority of which were taken up by small companies which had intimate knowledge and first hand contacts in the area. The oil business is such that every new discovery requires immediate mobility and quick actions to be taken by any company that wishes to be a part of the business and smaller companies have two great advantages. First, they are more mobile than their giant brothers in the field and they are able to get to a find quickly to set up their operations even if the setup is rudimentary compared to the giants. Second, they are able to take risks which the larger companies do not wish to undertake in the first place (O’Hanlon, 2004). This is why Tullow Oil, an Irish company, has taken over Energy Africa by paying $600 million and now has access to all the operations which were formerly controlled by Energy Africa. From Egypt to Namibia, Tullow Oil has established itself in Africa by developing and further expanding the business of the company they took over. Energy Africa was too small a company for ExxonMobil or Shell to even consider as competition and they overlooked it. As a result, a small company from Ireland now has operational bases in 12 African countries while ExxonMobil has a presence in seven (O’Hanlon, 2004). In strict numerical terms, Tullow Oil does not present any competition to Shell or ExxonMobil. While the large companies in the oil business play with billions, the smaller companies have to be happy with millions. The profits of the giant oil companies and their scale of operations are so vast that they can easily swallow smaller companies through takeovers or by other means. However, in terms of the absolute return on investment, and the price to earnings ratio, a small business can outshine a larger one if it is agile enough to spot and take on opportunities as they present themselves. Undoubtedly, the person at the helm of the affairs is also to be credited for making quick decisions in minutes while larger companies have to make careful evaluations with several executives debating the pros and cons over long lunches. Essentially, the adaptability and flexibility in business is not the sole domain of small companies alone since the commonly visible flexibility and adaptability of the small company often has a lot more to do with the person who is leading the company than simply the overall size of the organisation in question. The CEO Companies take on the culture which is supported and demonstrated by their owners, CEOs and the board of directors. In fact, the company which rewards its employees for upholding the company’s values will simply inculcate those values further with the employees. Perhaps the most successful CEO of our times has been Jack Welch (GE) who recommended flexibility to be a part of the corporate culture by showing it to be a part of his own behaviour (Welch, 2005). In fact, Welch (2005) considers adaptability and flexibility to be as much a part of the CEO’s creed as is remaining profitable and competitive. He discussed change and change management at length and said that entrepreneurs and anyone else who has the responsibility of leading the company must be open to change or not take up the position of responsibility. For all the examples of small companies given by him and others, whenever the CEO of the company was mentioned the quality of adaptability was often assigned to the CEO. Leading by example is the best way to lead a company therefore a good leader or owner of the company will produce the same qualities in him/herself that s/he wishes to see in the company. Conclusion SMEs are an interesting topic since owning a company and being your own boss has been the dream for many young people who have started work at their first position. Perhaps the most surprising thing which I discovered about successful small companies and small businesses is the fact that most of them are not led by young hot shots that have recently graduated and secured a loan from a trusting bank. The reality is quite the opposite since the average CEO of a small business is more than fifty years old and has been in a management or directorial position for more than ten years. To be successful as a small company, it is best to have experienced CEOs and owners who know the ins and outs of the business. It is perhaps even better to have entrepreneurs who have seen their ventures fail so they learn from their mistakes and know how not to repeat them (Hardy, 1996). Overall, I do not think that simply being small could make a company adaptable and flexible. As the research has shown, there is a lot more involved with a tremendous amount of careful planning before a company can be called flexible and adaptable. Elements like the corporate culture, the business environment, the systems used by the company and the person leading the company all have to be in a certain way before a claim of flexibility and adaptability can be made by the company. Works Cited Burlingham, B. 2003, ‘The Coolest Small Company in America’, Inc,. 25(1), p64-72. Description of a good small company to work for in America Cecily, F. et. al. 2004, ‘200 Best Small Companies’, Forbes, vol. 174, no. 9, pp. 180-181. A list of the best small companies and the methods by which they remain competitive Eugenio, M and Pernías, J. 2006, ‘Innovation Complementarity and Scale of Production’, Journal of Industrial Economics, vol. 54, no. 1, pp. 1-29. How larger companies can also show signs of innovation Hardy, E. 1996, ‘Meet the boss’, Forbes, vol. 158, no. 11, pp. 268-286. The effect the individual leading the company has on the overall culture of the organisation. Hemming, R. 2003, ‘Thinking Small has its Advantages’, Aspec Huntley, [Online] Available at: http://www.aspecthuntley.com.au/af/news?xsl-newsID=11&xtm-licensee=aspecthuntley How small companies can gain some capital and investment advantages over larger companies. Herman Group. 2004, ‘Strength in Small Business’, Futurist, vol. 37, no. 4, pp. 14-16. Investments made in small business can have more rewards than investment in large organisations. Levy, M and Powell, P. 1998, ‘SME flexibility and the role of information systems’, Small Business Economics, vol. 11, no. 2, pp. 183-197. One of the key aspects to the flexibility of an SME is the information system used by the company. MoreBusiness. 2006, ‘Management Advantages of Small Companies’, MoreBusiness.com, [Online] Available at: http://www.morebusiness.com/running_your_business/management/d925763929.brc Personal advantages for the CEO in leading and managing a small business. O’Hanlon, T. 2004, ‘Oil Fry’, Economist, vol. 373, no. 8399, pp. 66-67. How small companies are competing with gigantic oil firms and are still able to make a profit in a capital intensive market. Rupley, S. 2005, ‘Running a Small Biz, Virtually’, PC Magazine, vol. 24, no. 2, pp. 84-85. How small companies can be operated in the virtual realm through the effective use of the internet. Thackston, H. 2000, ‘Small Business: Being Small Gives You Big Advantages’, InsiderReports.com, [Online] Available at: http://www.insiderreports.com/department.asp_Q_ChanID_E_SO_A_DeptID_E_GTKN_A_StoryID_E_20001377 More on the advantages of being a small company. Welch, J. 2005, Winning. New York: HarperCollins. A book by the management guru who explains how large companies can also think and act like small companies. Young, C. and Francis, A. 1993, ‘Innovation, high-technology use, and flexibility in small manufacturing firms’, Growth & Change, vol. 24, no. 1, pp. 67-83. The advantages which small companies have in using technology and implementing pilot projects. Read More