Small and Medium Enterprises and Benchmarking, Employee Size and Turnover - Literature review Example

Management Introduction Benchmarking is an effective tool that has been used to drive competition and innovativeness in organizations. The concept had become common since the 80’s and has been widely accepted by the large companies to improve their processes and systems. Benchmarking has been defined as a process by which companies observe best practices in the industry and replicate their systems and processes. According to the definition provided by Camp (1989 cited in Elnathan and Kim, 1995) benchmarking involves the search for best practices in the industry and implementing them which automatically leads to improved performance. Benchmarking has been applied in the fields of planning, projection, new concepts, production process and determination of objectives. Despite the benefits that are obtained from it Small and Medium Enterprises (SME) have been found to refrain from adopting the benchmarking process. SME plays a very important role in national economies and they are considered as engines of economic growth at a global scale. Authors like Zeinalnezhad, Mokhtar and Sahranclaim (2014) claims that lack of time and resources are the main reasons which discourages SMEs from adopting benchmarking. There are many researchers who had undertaken research on SMEs to find the reasons why they have not used benchmarking. Majority of these research works have revealed that lack of resources, lack of understanding of the process and environmental uncertainty are some of the factors which prevents successful implementation of benchmarking (Glen and Weerawardena, 1996). The purpose of this paper is to explore what barriers are involved in the implementation of benchmarking. This report also focuses on the difference between the SMEs and large businesses to understand whether the practices adopted by large businesses are actually transferable to the SMEs. The idea is to explore whether benchmarking can actually help the SMEs in improving their operational and financial performance. SME Definition and Characteristics There is a great debate among researchers regarding the correct definition of SMEs. Some researchers have defined SMEs based on the number of workers whereas, others have based their definition based on the business capital. According to the definition provided by Jafari, et al. (2002) SMEs can be grouped into four types depending on the structure of the market, innovation rate, location and their relationship that they share with the larger organization. SMEs have also been classified as production cooperatives or networks which are largely dominated by large firms. Several attempts have also been made by multilateral institutions like the IMF, World Bank, UNDP to define SMEs on the basis of number of employees. The following chart shows the same: Figure 1: Definition of SME in terms of employee si8ze and turnover (Source: Gibson and van der Vaart, 2008) The disparity in terms of number of employees and revenues can be clearly seen from the chart. For instance, the size of employees defined by the World Bank is three times more than the employees provided by MIF. Additionally, the difference in terms of turnover described by African Development Bank is five times smaller than the definition provided by World Bank. In order to clarify the term which comprises the SMEs, researchers have suggested that definition of SMEs must often be coupled with the characteristics of firms. The characteristics provide a better understanding of whether a firm can be considered as an SME or not (Cocca and Alberti, 2010). Synthesis of the literature points out to the fact that there is a commonality of characteristics of SMEs in terms of scarcity of resources. SMEs have lack of both financial and human resources which results in poor business planning and management (Gadenne and Sharma, 2009). SMEs also have certain strengths which propels their growth. For instance, SMEs have been found to be efficient in disseminating information within the organization due to their small size, they are characterized by faster decision making process, introducing innovation and unified culture. SMEs have flexible structures providing chances to the management to provide immediate feedback, understanding customer needs in a faster manner and impressive feasibility. The difference in the nature and the type of the SMEs makes it difficult to evaluate the problems of implementing benchmarking. It can be argued that, organizations which are extremely small may face resource constraints and staff problems in implementing benchmarking practices. However, same cannot be said for larger SMEs which have adequate capital endowment. The heterogeneity in the structure and function of the SMEs is likely to create different challenges in benchmarking. SME and Benchmarking The structure of benchmarking that presently dominates the literature has shown that, consultancy firms have a major role to play in providing advice regarding the best practices that are used in an industry. The research conducted by Kozak and Rimmington (1998) had found that implementation of benchmarking by organizations can yield multiple benefits for firms like recognition of customer needs, collecting ideas in a cost effective manner, comprehending an organization’s strengths and weaknesses and encouraging continuous improvement. Researchers have also established that benchmarking can bring certain benefits for the SMEs in terms of enhancing their innovativeness and performance level. Despite the benefits of benchmarking the use of it in SME’s has been rather limited. It has been observed that there are rather few examples of benchmarking in SMEs that have been conducted by third parties like universities, industry associations and government (Carpinetti and Oiko, 2008). The reluctance of SMEs to undertake benchmarking activities voluntarily have necessitated the involvement of third parties in the process of benchmarking. The basic problem lies in the characteristics of the SME’s which is significantly different from that of large companies. SME’s differ significantly from the large companies in terms of policy making procedures, structure and nature of organization and endowment of resources which makes it difficult for these organizations to implement practices that are applied in large companies. Researchers like Hashim and Wafa (2002) has pointed out that SME’s face certain weaknesses like inadequate financial resources and lack of accessing rights to commercial lending which in turn constricts the effort of SMEs to invest resources in staff training. Also there are problems related to the shortage of skilled labour and lower wages compared to large companies. SMEs also face constraints in terms of poor inventory management, poor stock of raw materials and limited bargaining power compared to large companies which makes it unsuitable for them to invest resources in the benchmarking processes. Despite the potential gains that can be obtained from the implementation of improved technologies, SMEs do not have the means to afford them (Zeinalnezhad, Mukhtar and Sahran, 2011). The research conducted by Deros, Yusof and Salleh (2006) provides a useful insight by highlighting the problems of SMEs in adopting a framework for benchmarking. The researchers had observed that there are practically two group of frameworks of benchmarking that dominates the existing literature namely consultant’s framework and academics framework. Both of these frameworks have been criticized to be complicated and prescriptive in nature. These frameworks have been developed by keeping in mind the features of the large companies which makes it unsuitable for the SMEs. For instance, the research conducted by Crow (1999 cited in McAdam and Kelly, 2002) had focused on the product development aspect of benchmarking. The framework had 5 benchmarking dimensions that comprised more than 270 best practices measures. Other frameworks developed by researchers have only provided the steps that could be taken for implementing benchmarking for SMEs but they do not provide the overall guideline for SMEs to follow it practices. In a research that was conducted by Sarkis (2001) had shown that shown that there are four main challenges which cripples SMEs from adopting benchmarking practices. Firstly, it has been observed that there is no universal system of adopting benchmarking in case of manufacturing process. Secondly, there is a dearth of tools that supports the system of benchmarking. Thirdly, most of the SMEs do not have the necessary resources to collect data for benchmarking and finally there is a shortage of databases which can be used by SMEs to benchmark their performance. The views of researchers have also expressed doubts regarding the effectiveness of adopting benchmarking. Barriers to Benchmarking There are multiple barriers to benchmarking for SMEs pertaining to different areas. The following barriers are observed in case of adopting benchmarking: Poor Planning: SMEs have been found to be poor planners of strategy and they rarely engage reviewing business practices. In a research that was undertaken by Monkhouse (1995) it was observed that SMEs do not take up any non-financial measures to review their business performance. Under such a circumstance, it is rather unlikely that they will undertake benchmarking process which requires both resources and time. SMEs are often characterized by failure to establish clear business goals which can be often correlated to their poor performance. Business plans of SMEs are not based on accurate data which makes it difficult to predict future goals. The techniques that are required in the application of benchmarking are often not available to the SMEs. The issue of cost: Lack of financial resources is one of the factors which prevent SMEs from hiring external consultants to assist them in the benchmarking techniques. It has been observed that smaller organizations do not have the resources to gain membership to the associations which provide benchmarking services to large companies. Additionally, SMEs do not have access to credit which makes it difficult for them to finance benchmarking. It has been estimated that the cost of membership for obtaining services of benchmarking ranges from £300 per annum to £3,000 per annum which prohibits SMEs to obtain these services (Ellis, Elnathan and Raz, 2002). Improper Understanding: Managers of the SMEs often does not have the understanding of the way in which they should implement benchmarking practices. The SME’s are often run by single managers who have poor understanding about the ways in which they should use the available data to improve their business practices. According to the research conducted by Cassell, Nadin and Gray (2001) it has been found that most of the managers do not believe that it is not appropriate for their organizations to implement benchmarking due to the heterogeneity of factors involved in the benchmarking process like sales volume and ownership, structure, number of employees, age, size and location. Lack of skills in managers can also be cited as one of the main reasons that prevent managers from adopting benchmarking. According to the research conducted by Rothman (1992), it has been found out that lack of management experience is the basic factor in SMEs which hinders the benchmarking process. Dearth of Human resources: Many SME’s have been found to be employing less than 20 people and the staffs is often engaged in multiple activities like administration, financial management and operational activities. The staffs often lack the time to perform their pre designated duties due to labour shortage. This in turn makes it difficult for SMEs to implement benchmarking (Kim and Suh, 1991). Furthermore, according to researchers it is difficult to determine a standard size of staff for SMEs. The United States Census Bureau states that, companies with an employee size of less than 500 should be classified as SMEs whereas Australian Bureau of Statistics considers only sole proprietorship and partnerships without employees as SMEs (Zeinalnezhad, Mukhtar and Sahran, 2011). Therefore, staff shortage for some SMEs may be extremely severe prohibiting benchmarking yet for others the staff problem may be less than severe. Poor skills of communication: The research conducted by Elmuti (1998) had shown that the attitude of the SMEs towards the benchmarking process is often marked with certain negativities which deter them from adopting benchmarking activities. The fear of implementing change, loss of focus from customer driven process, resistance on part of the employees are some of the internal characteristics which prevents SMEs from taking part in benchmarking (St-Pierre and Delisle, 2006). The above points show that apart from the problems of time and cost attitude of the management and lack of knowledge are also reasons that acts as barriers to benchmarking. According to the research conducted by Ogden (1998), it has been found that benchmarking is often considered sceptically by SMEs. There is a difficulty in finding partners for SMEs against which the performance can be compared. The research conducted by Francis, et al. (1999 cited in Motwani and Sower, 2006) had shown that SMEs often find it difficult to assess information from their competitors due to the strict confidentiality that is maintained by SMEs. In case of financial institutions, it has been observed that getting comparable partners and information from competitors is extremely difficult and this in turn makes it difficult to obtain best in class industry practices. In case of SMEs the business environment is highly marked by protectionist nature where the members show reluctance to share primary data (Smith, Ritter and Tuggle, 1993). This makes understanding of best practices difficult. Altering Benchmarking Frameworks for SMEs The research conducted by Garengo, et al. (2005) had provided a good classification of benchmarking for SMEs. Their research had found that the system of benchmarking can be broadly classified into two groups namely analytical benchmarking and synthetic benchmarking. Analytical benchmarking is a rather detailed process and there are ten stages in which the benchmarking process can be implemented. The researchers have pointed out that it is rather difficult for SMEs to implement analytical benchmarking owing to the plethora of resources that is required in the process. Analytical benchmarking has been described as a process which requires involvement on the part of the internal and external professionals and huge involvement of the human resource in the process. All these factors make it difficult for the SMEs to introduce analytical benchmarking. On the other hand, synthetic benchmarking is a process that does not require the help of external consultants and they are structured on the basis of a short time span which makes it suitable for the SMEs. The research conducted by Voss, Chiesa and Coughlan (1994) had found out that use of scorecards in the self assessment can help in finding the best practices without employing a variety of resources. From these arguments it can be stated that, the use of benchmarking depends on the way in which it is modified for the use by MNEs. The difference in the nature of the SMEs heavily influences the type of external benchmarking that is needed by them. The research of St-Pierre and Delisle (2006) had identified a PDG system that can be used by SMEs to improve their performance. The PDG system provided a significant watershed from the traditional system of benchmarking that is used by large companies. This approach can be considered as a customized one that assesses the needs of SMEs before developing benchmarking. It can be stated that the nature and size of the sample considered by researcher in their study have a significant impact on the outcome of the results and in the works of the researchers. For instance, the research conducted by Zeinalnezhad, Mokhtar and Sahranclaim (2014) had considered only Malaysian firms in their study that may have inflated the results. Despite the limitations in the research there is a common consensus that benchmarking does benefit the SMEs in improving their performance. The research conducted by Cassell, Nadin and Gray (2001) had shown that many managers gives the excuse of time, relevance and resources for adopting benchmarking yet those who have adopted the process have benefited greatly from it. There is a dearth of research work that has focused on the particular approach that should be adopted by SMEs in particular to benchmark their performance. It can be argued that specific framework has to be developed for the SMEs by considering their unique characteristics to make the benchmarking process successful for them. Few of the research works have considered the heterogeneity of SMEs and the specific challenges that are faced in implementation of benchmarking practices. Both operational and financial performance of SMEs has been reported to be improved from application of benchmarking practices. Though the traditional models of benchmarking that are applicable for the large firms are not applicable for the SMEs, the later can benefit greatly from the application of benchmarking. Conclusion It can be concluded that benchmarking has a critical role to play in enhancing the competitiveness of SMEs. In majority of the research work that has been undertaken in the field of benchmarking in the SMEs have shown that resource and time constraints are indeed the biggest challenges that are being faced in implementing benchmarking. Apart from these constraints, the problems in the attitude of the management and lack of awareness are also reasons which create a barrier for adopting benchmarking. Many of the researches that has been undertaken in regard of benchmarking has shown that the differences in the characteristics of SMEs from large organizations makes it difficult for them to use benchmarking for retaining competitive advantage. Synthetic benchmarking is the widely accepted form of benchmarking that can be used by SMEs in reducing the barriers of financial cost in implementing benchmarking. It can be argued that barriers to benchmarking can effectively be removed if the framework is developed based on the needs of the SMEs. The issue of cost can be effectively reduced by using the process of synthetic benchmarking. It is important for researchers to consider ways in which proper guidelines can be developed for adopting benchmarking in SMEs keeping in consideration their heterogeneity. It can be stated that, the types of benchmarking that may be suitable for the larger companies may not be suitable for the SMEs mainly because the existing structures are highly complex and prescriptive in nature. The characteristics of SMEs are quite different from large companies which make it inappropriate to use benchmarking practices adopted by large companies. 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