Small and Medium Enterprises - Coursework Example

Small and Medium Enterprises (SMEs) of Table of Contents Introduction 3 Concept of SMEs 3 Benefits of SMEs 3 Flexibility of organizational activities 4 Better Team Build-up 4 Social Involvement 4 Interaction with the customers 5 Reporting structures 5 Risk management 5 The competitive advantage of SMEs 6 The concept of competitive advantage 6 SMEs and their Competitive Advantage 6 Difficulties of SMEs 8 Financial difficulties 8 Marketing and Management Difficulties 9 Technological difficulties 9 Supporting SMEs 9 Recommendation 9 References 11 Introduction Small and Medium Enterprises (SMEs) are a certain category of organizations that fall under certain specifications and are characterized by certain organizational activities. These firms bear definite criteria that are below a particular threshold level. The definitions of SME vary across several countries depending on the threshold criteria. This paper is focused on the concept of SMEs, their benefits and the challenges faced by them. The paper also discusses about the how SMEs have influenced the economic structure of the nations, which is followed by the general recommendations for SMEs for future development. Concept of SMEs SMEs are enterprises that can be distinguished by certain limiting factors decided by the national government. In US, the SMEs are those firms that operate with less than 500 employees that constitutes of 99.7 percent of the business activities. In china, this definition becomes quite complex and the SMEs are defined not only on the basis of number of employees, but also on the basis of the type of industry it is operating, revenue structure of the firm, total assets, etc. However, in Europe an SME must have less than 250 employees and its annual turnover should not be over 50 million Euros. It is evident that the SMEs play an important role in the development of the economic structure of a nation, particularly that of a developing country (Ayyagari, Beck & Demirguc-Kunt, 2007). The SMEs are greatly responsible for the improvement of the employment condition and alleviation of poverty. The rise of several SMEs has lead to the increase of job availability, thereby improving the economic condition of the nation. Moreover, the firms have also attracted several investors owing to the attractiveness of the future prospects. The World Bank has recognized the importance of SMEs in development of the national economy and has approved several financial supports to alleviate the conditions of the SMEs. It has also helped new entrepreneurs to start up new SMEs. In terms of economic recovery, the SMEs also play a vital role, particularly in the developing nations. Despite of the attractiveness of the SMEs in the global market scenario they often face challenges while obtaining loans or credits particularly in the start up phase. The weaker financial condition of the firms often limits their access to technological advancements (OECD, 2000). Benefits of SMEs Establishing a large number of small firms of diverse nature is the key to achieving a sustainable economic growth. The more the number of SMEs, the higher its economic implication, which improves the overall production network of the firm. The higher the diversity among the SMEs, the more robust is the overall structure of the nation. This allows the nation to improve its comparative advantage. It has been mentioned that some of the developed countries has attained the economic strength mostly because of SMEs and more than 98 percent of the firms in those countries come under the category of SMEs (Lewiatan, 2011). The advantages of SMEs are not only limited to its influence on the nation but also on the firm and the employees as well. Flexibility of organizational activities Small and medium sized firms have the ability to make quick responses to market changes and adapt itself accordingly. Owing to the smaller size of the firm and lack of steep hierarchy, the decision making process becomes easier and the firm is capable of involving the employees to it. This as a result helps the employer to get to a decision quickly. Moreover, the employer does not need the approval of the board to implement a particular decision. The job description of the employees can also be made flexible to adapt to organizational changes, this as a result increases the output of individual employees. The flexibility of the employees’ job description increases the employee engagement to his roles and duties. Moreover, the ability to easily involve the employees in the decision making process also increases their motivation levels. On contrary, the large and well established firms find it quite difficult and cost extensive to make even minute changes in the organizational structure, which as a result decelerates the growth potential of the employees (Nouel, 2010). Better Team Build-up The smaller size of the company and a smaller employee base helps the staffs to build a close communication among each other. The employer also finds it easier to connect to the subordinates at a personal level; this in turn helps him to give proper guidance and monitor activities. In large organizations, the internal communication is often a big problem. Owing to the large number of employees in bigger organizations, it is difficult for the supervisors to create a proper communication with all the employees. Thus in SMEs building an effective team is much easier, where all the subordinates can have a close communication with each other and are committed to work as a team. Moreover, the interdepartmental rivalry is also low, which as a result increases the bonding between the employees, thereby improving the overall performance of the firms. It has been evident that in certain cases, a smaller firm is more efficient than a bigger one in terms of productivity and profitability (Wehinger, 2014). In a SME, the employer realizes that each employee is vital to the organizational success and building a team that is self sustainable creates an organizational competitive advantage. Self sustenance can only be attained by creating a close relationship among the team members, which will allow the members to train and guide each other. Moreover, it is easier for the company to induce a sense of ownership among the employees. According to ODonnell et al, (2002) the group of employees having a sense of ownership towards the organization is more likely to show higher level of commitment towards the organizational welfare. Thus it can be stated that the strong team build up in a small enterprise helps it to increase its productivity more than a relatively bigger firm. Social Involvement The SMEs realize that in order to ensure a long term sustainable business operation, it needs to create a positive impact on the society and the industry in which it is operating. The smaller firms often take a lot of initiatives to develop the social structure which in turn improves the brand image of the company and also increases its attractiveness to the investors. Social involvement not only increases the brand awareness but also ensures that marketing strategies of the firm is sustainable in nature. The bigger companies often gets blinded by the short term financial goals and overlook their social responsibilities. However, it is evident that there is a growing trend towards CSR (Corporate Social Responsibilities) activities (Carson & Gilmore, 2000). Interaction with the customers It has been reported that the SMEs are highly interactive with the customers and are mostly focused on generating value addition for the customers. This is mostly because, the small firms seeks out new ways to gain competitive advantage in the increasingly competitive market environment and one of the most effective ways is to develop customer loyalty which ensures retention of customers (Wehinger, 2014). The SMEs create a close relationship with the customers so that they can quickly spread the brand awareness of the firm. Moreover, the customers are the most important factor for the revenue generation of a small firm. The company has to ensure that the customers keep coming back by getting attracted to the value proposition and strong relationship build-up. The larger firms on the other hand, owing to their large customer base does not have to worry about the repeated purchase, as a few dissatisfied customers may not put severe infuence on the business operations. However, being complacent has resulted in the downfall of several big firms, so the SME’s always make sure that they are capable of building a strong trust among the customers and they can provide the services that the customers do not get from the bigger firms. Reporting structures Owing to the long hierarchical structure of the bigger firms, the employees often face a multiple reporting authorities. Moreover, it also leads to a longer chain of command, which as a result leads to ambiguity of roles and lack of clarity in the job description leading to reduction of the employees’ productivity. Moreover, several financial documents and regulations need to be audited and approved by the higher authority before their implementation. Therefore it takes a lot of time in executing a plan. On contrary, the smaller firms have very small hierarchical ladder, which as result limits the reporting authority to one. This helps the subordinates to focus on particular organizational requirement. Moreover, due to short chain of command, there is no ambiguity in the job roles. The operational activities of the SMEs are mostly conducted in a fast manner, due to the lack of a long chain of approvals. Thus SMEs, owing to the short reporting structures are more effective in increasing the organizational output and resource efficiency (Jiang et al, 2014). Risk management Risk management is one of the most important proactive measures taken by a firm. The firms are mostly exposed to financial risks, political risks and risk of facing high competition. The larger firms owing to their massive operational activities are more prone towards getting exposed to several risk factors. However, on the other hand the smaller firms which are equally prone to the same risk factors also have the ability to recover quickly. This is mostly because the firms are small in size and any damage inflicted cannot have much impact on the firm. Moreover, being a small firm it does not easily become a target for the major players of the industry (Hilmersson, 2014). The competitive advantage of SMEs The concept of competitive advantage A competitive advantage is exclusive to a particular firm. The value generated by the firm either for itself or for the customers or for both is hard to imitate by the competitors or they do not have access to them. The competitive advantage allows the firms to strengthen its position in the highly competitive market environment. The company with a particular competitive advantage allows it to strengthen its business operations and ensure sustainability in the long term perspective. Creating a particular competitive advantage is only possible when the firm is able to differentiate itself from the rival firms in terms of value proposition, organizational activities and financial status. This will allow the firm to ascertain what the competitors are contributing to the industry and what value is it proposing to the customers. Only after getting a clear insight of the other firms’ competitive positioning, the prospect of creating new competitive advantage can be ascertained (European Commission, 2015). SMEs and their Competitive Advantage Jennings and Beaver (1997) have mentioned that there has been very little research done on the sources of competitive advantages for the small firms. They further opined that this is mostly because the competitive advantage appears in a random or accidental manner out of particular circumstances. Moreover, the traditional models of competitive advantage do not fit for small firms, as these models perceive that the smaller firms cannot compete with the larger firms in term of economies of scale. Moreover, it is commonly stated that the smaller firms often faces lack of resources, are more vulnerable to uncertainty of market scenario and often take reactive approach to the changing market environment. This as a result, makes the smaller firm less fit for the prescriptive models (ODonnell, 2002). The competitive advantage for the SMEs arrive from four perspectives, competitor analysis, defining sources of advantage, defining positional advantage and performance outcomes. Identifying competitors are slightly different from just merely counting the industry players who are offering identical products or services. According to (Pakroo, 2012) a manger or owner of a SME considers a small number of firms to be its competitor. The start-up businesses that operate in the industry with very low barrier to entry are often run by a very small base of staffs and all of them are mostly business partners. Owing to the low over head, these firms are able to offer low price, however, these business houses are not capable of producing high quality products or services. Thus they are not considered as the competitors. Moreover, the bigger firms who operate by utilizing the economies of scale are not considered to be the rivals, since the SMEs operate in a completely different market segment. The target customers for both of these types of firms are different. This leaves with a smaller number of firms that operate in the same market and offers identical products or services. This as a result reduces the number of direct competitors for the SMEs thereby increasing its competitive advantage (Tasevska, Damij, & Damij, 2014). The manager of the SMEs defines their competitive advantage by two key factors, which are their personal and employees’ networks and the set of internal competencies. The network of contacts acts as an extremely valuable resource to the firm. The wide network of contacts helps the managers of the SMEs to gain knowledge regarding the changing market environment and helps them to make accurate decision making. Moreover, the managers also focus on the internal competencies. These competencies are mostly inherent in nature and are developed over time. It helps the firm to build a differentiation factor that as a result attracts new customers and retains the existing ones. Owing to the smaller size of the firm, it can easily recognize its strengths and weaknesses in perspective to its competencies and it also allows the firm to react quickly to the market environment (Gundala & Khawaja, 2014). The advantage of position or the positional advantage can be leveraged by a SME in a numerous way. The company can create a competitive position in a several ways, improving the quality of the products and services. Although the quality is mostly subjective in nature but in most cases its definition can be standardized based on the industry in which the firm is operating. The quality development always takes place in relation to that of the competitors. The SMEs always try to provide a better quality than the rivals. This as a result increases the switching cost of the customers and helps in customer retention. For a smaller firm with relatively small scale of production it is effortless to keep close monitoring on the quality, thereby making it easier for them to maintain a better quality than the larger firms. For the larger firm, quality maintenance is highly cost extensive owing to their massive scale production. Offering a better customer service also provides a robust competitive position in the industry. The SME is able to commit deeper focus on individual customers owing to the smaller customer base. This as a result, helps them to attain stronger customer loyalty building relationships. Moreover, most of the SMEs focus on a small market segment and try to cater to the unmet needs of the customers. The narrow market customer focus helps the firm to develop a specialization on a particular product or services (Zhu, 2014). The outcome of performance of a company is usually measured in terms of market share. However, for a smaller firm calculating its market share or measuring its contribution in the entire market is irrelevant. So, the performances out come for the small firms are measured in terms of the profitability, which acts as a key indicator. More than the growth of the firm, the managers identify their performance through customer loyalty and customer retention. Thus it can be stated that the concept of competitive advantage generated by the SMEs acts as their key strength to ensure their sustainability in the increasingly competitive market place. The benefits generated from the competitive positioning can be of various forms and are mostly different from the traditional methods or prescribed models. Difficulties of SMEs The SMEs may have a lot of advantages owing to their smaller sizes and highly focused market segments. These factors poses to be advantageous to the company, however, there are certain difficulties faced by the SMEs as well. The SMEs are often handicapped in terms of resource availability and financing of operations. The difficulty further extends to finding the qualified human resources to run the company. There are certain industries where the barrier to entry is quite high which makes it challenging to the SME to survive in a long term perspective. Moreover, the small companies find it difficult to gather enough data about the market environment. Gathering market data requires extensive research which takes a lot of effort and time. Moreover, hiring a third party market research company is highly cost extensive. Thus the limited market knowledge leaves the company prone to making wrong decisions. In most cases, the company is only concerned with a particular market segment; this not only limits their growth opportunities but also makes them over dependent on that market. Any unexpected changes in that market can potentially lead to severe downfall of the company (Huyghebaert, 2009). Financial difficulties In order to make a business run sustainably, the company needs to maintain a differentiating factor. Although the firms are able to provide better focus on the customers, but in terms of product or service development the smaller firms need to have financial support and create innovative value propositions. The emergence of venture capitalists has to some extent helped the start up firms by providing financial support, but convincing a venture capitalist is also a challenging task, particularly in the increasingly competitive market environment. New start-up firms are emerging quite frequently with innovative ideas to attract the venture capitalist which as a result increases the competition even further. Moreover, the owners of the SMEs do not have the necessary track record or good will to avail large credits. According to OECD (2000) more than 60% of the start up firms comes up with innovative ideas, but most of them do not have the necessary financial resources to implement them or make their initial business grow. This is mostly because innovative companies require a huge volume of capital to invest in research and development. The small firms that show promising prospects are often acquired by larger companies and cease to exist. In order to improve the business activities, the SMEs need to recruit good employees who have the required skills and experience to push the business towards its growth. Hiring such employees can be challenging, as good employees are less likely to get into a smaller firm and even if they do they need to be paid high enough to ensure their retention. Marketing and Management Difficulties The SMEs although focus on a niche market segment which is relatively smaller and are apparently isolated from the grip of the well established firm, but it still faces certain challenges from them. The major market players often expand their business by horizontal diversification thereby increasing their product and service portfolio. Thus a major well established firm offering a product identical to that of a SME can pose a severe problem for it. The customers will have a low switching cost and it will be more difficult for the smaller firms to maintain customer loyalty. It has been evident that there is a growing trend of brand consciousness among the customers that leads to higher preference towards bigger brands of larger companies. This as a result leads to overlooking of the smaller firms. With the rise in globalization, the number of large companies entering a nation is increasing by the year. These as a result are drawing the attention of the customers away from the SMEs. The increasing number of acquisition in the global business market has made it challenging for the smaller companies to survive. Technological difficulties The technological advancement of the bigger firms has created a strong competitive position in the industry for them. Using management software to make decisions and tracking the consumer behaviour with CRM applications has led the bigger firms to improve their service and product quality. Moreover, these softwares are allowing them to manage the customers better and give proper focus on them. Thus the handling large number of customers is not a big problem for them. This as a result reduces the uniqueness of the SMEs who are well known for their focus on customers. The SMEs on the other hand also does not have proper access to the technological advancements due to high cost of softwares and recruiting skilled employees to use them. This as a result limits their growth and makes them vulnerable to the competitive environment (Zhu, 2014). Supporting SMEs Owing to the large number of SMEs, they positively impact the national economy of a country. The governments of several countries have taken initiatives to help the SMEs to grow and help the society to grow as well. The governments have eased off certain trade laws and reduced the credit interests for them. This helps the SMEs to some extent in the financial perspective. The venture capitalists are also gradually changing their policies and are offering financial help as well as guiding them in their business activities. Recommendation The government of all the developing nations should take initiatives to support the SMEs so that they in turn can improve the economic and employment condition of the nation. The adverse impact of globalization cannot be avoided but can be used in favour of the SMEs. The small firms can make business collaboration with the bigger firms to strengthen their business and gain competitive advantage. Moreover, several SMEs can opt for a joint venture to build a stronger business unit that can easily be supported financially by the companies together. Moreover, the SMEs can offer certain social services that will attract the customers and increase their brand awareness. The SMEs are also required to have a strong persistence to ensure their long term sustainability. References Ayyagari, M., Beck, T. & Demirguc-Kunt, A. (2007). Small and Medium Enterprises across the Globe. Small Business Economics. 29(4), 415-434 Carson, D. & Gilmore, A. (2000.) SME marketing management competencies. International Business Review. 9, 363–82. European Commission. (2015). Enterprise and Industry. Retrieved from http://ec.europa.eu/enterprise/policies/sme/facts-figures-analysis/sme-definition/index_en.htm Gundala, R. R., & Khawaja, H. (2014). Brand management in small and medium enterprise: evidence from Dubai, UAE. Global Journal of Business Research, 8(1), 27-38. Hilmersson, M. (2014). Small and medium-sized enterprise internationalisation strategy and performance in times of market turbulence. International Small Business Journal, 32(4), 386-400. Huyghebaert, N., (2009). The Determinants of Financial Structure: New Insights from Business Start-ups. European Financial Management, 13(1). Jiang, P., Cai, C. X., Keasey, K., Wright, M., & Zhang, Q. (2014). The role of venture capitalists in small and medium-sized enterprise initial public offerings: Evidence from China. International Small Business Journal, 32(6), 619-643. Lewiatan. (2011). 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Project planning practices based on enterprise resource planning systems in small and medium enterprises—A case study from the Republic of Macedonia. International Journal of Project Management, 32(3), 529-539. Wehinger, G. (2014). SMEs and the credit crunch: Current financing difficulties, policy measures and a review of literature. OECD Journal: Financial Market Trends. 2. Zhu, T. (2014). The Innovation and Development of the Small Micro-finance: the road to a Win-win Situation of Small Micro-enterprise and Small and Medium-sized Bank. In 3rd International Conference on Science and Social Research (ICSSR 2014). Atlantis Press. Read More