Strategic Management of Small Firms in the UK - Literature review Example

Strategic Management of Small Firms in UK Contents Contents 2 2 Introduction 3 2.2 Definition of SMEs 4 2.3 Theory of Small Firm Growth 4 2.4 The SMEs’ Strategies 6 2.4.1. Porter’s Generic Strategies 6 2.4.2. Innovation Strategy 7 2.4.3. Network and Cluster Strategy 9 2.4.4. Flexibility Strategy 9 2.5.1. Definitions of Competitive Advantage 10 2.5.2. Balanced Scored Card 11 2.5.3. Porter’s Diamond 12 2.5.4. From Diamond to Clusters 14 2.5.5. Porter’s Five Forces Model 14 2.5.6. Obstacles to Business Growth 16 2.6 Information and Communications Technology (ICT) 16 2.7 Chapter summary 18 References 19 2.1 Introduction In the last three decades the strategic management process has gained importance in small as well as medium sized firms across the globe. Strategy can be stated as possessing an entrepreneurial character that directs the operations of an organization. Since 1980 there has been a rapid increase in the small sized firms in most of the developed economies in comparison to that of large organizations. In the European countries a major portion of employment opportunities are provided by these small and medium sized firms. At the beginning of 2005 there were around 4.3 million organizations that had started off in UK. The majority of these organizations were small and medium sized firms which contributed towards the employment in the private sector by 47% in UK. The small and medium sized firms can be considered as an important engine that drives economic growth of any country. In the present scenario it is very essential that these small firms in UK act strategically so that they are able to compete in the emerging economy in order to grow as well as survive. For a long term performance it is very much essential that small sized firms should not only be focused on financial performance and return on investment for short span of time but should be efficient enough to develop strategies. The major reasons behind the limited success in case of small and medium sized firms in UK is poor capabilities in terms of strategic planning, lack in focus towards external issues related to strategic implementation and short term business operations. The various literature studies states that the strategic management process that is observed in small firms in UK is a unique mechanism that cannot be related to any kind of reduced activity in comparison to the professional management that is witnessed in larger firms. Such literature also highlights that the strategic management in these small firms arise from an intuitive and informal fashion comprising of a fire fighting approach that is based on short time period. The managers of these firms possess the knowledge that strategic management forms one of the most integral activities in business operations that is either performed visibly and consciously or invisibly and unconsciously. 2.2 Definition of SMEs According to Barney (2001), there have been various definitions of small and medium sized firms and each of these definitions clearly indicates different meanings of such firms. As per the Company’s Act in 2006 of UK, small firms can be stated as those which do not have a total turnover exceeding £6.5million and its balance sheet total do not exceed £3.26 million. The total number of employees as per the Act in such small firms is about 50 employees. On the contrary medium sized firms can be defined as those which have a turnover not exceeding £12.9 million and have an employee base of 250 employees or less (Barney, 2001). As stated by Bititci and Ates (2009),on the other hand the BBA or British Banker’s Association has defined SME as limited companies, sole traders and partnerships that has a total turnover per year of about £1million.These definitions states that small and medium sized firms (SMEs) differ from larger organizations in terms of employee base and annual turnover majorly (Bititci and Ates, 2009).Though apart from these two factors there are other elements also which differentiates these firms from bigger organizations such as the process that is undertaken by them in terms of strategic management. 2.3 Theory of Small Firm Growth According to Yu (2001), the total businesses that exist in any particular economy at a specific time are considered to be the business stock. The literature on entrepreneur and small business states that there are various determinants of business growth and success in an economy. There are different influencing factors that trigger the growth of small business. The most important factor is the commitment that is made by the leaders of these organizations towards achieving growth. There exist fifteen such characteristics of an entrepreneur that are greatly linked with the growth of small firms. The characteristics are motivation, education, prior self-employment, management experience, unemployment push, family history, founder’s numbers, training age, and prior failure in business, prior experience of firm size, prior experience of sector, gender, functional skills, age and social marginality. These factors are essentially in setting up small business and at the same time play a critical role in the future growth of the business. However there are certain other characteristics that link small business with entrepreneurship such as attributes, behaviours and skills which are associated with enterprising person that encompass persuading others and opportunity seeking motive. On the contrary in certain scenario entrepreneurial competence cannot be linked with success of small firms. The focus should not be on personality characteristics of founder but focus should be on business capacity and concept in terms of accumulating capital. There are some important factors that are stated as speculative framework of growth drivers and independent factors that help to drive the success rate of an organization. Such independent factors are the desire of an individual to be its own boss, desire for growth and success, possess personal capital is transferrable, risk taker and possess the required expertise so as to manage business growth (Yu, 2001).There are many authors who have proposed model in terms of small firm performance and entrepreneurial growth but all the factors is needed to be combined in equal proportion so as to achieve growth. The success and growth of small firms are related to the degree to which such firms can adapt easily to the emerging situations in the external environment rather than any well defined stages that needs to be adopted by the firm. 2.4 The SMEs’ Strategies 2.4.1. Porter’s Generic Strategies The Porter’s generic strategies states the essential decisions that needs to opted for by a firm so as to gain position in the industry where the business operates. The decisions are based on either differentiation or low cost strategy, and the width of the market that is aimed to be targeted. According to Kraja and Osmani (2013), Porter proposed a matrix that comprised of differentiation advantage, cost advantage, and a narrow or broad focus to highlight on generic strategic set that enables an organization to achieve competitive advantage in the industry. The generic strategy model is given below- (Source: Kraja and Osmani, 2013) These strategies as designed by Michael Porter are termed as generic strategies because they are not dependent on any industry or firm. The strategy of cost leadership forms the basis of big firms. The cost leadership strategy is dependent on large scale which is not suitable for any form of small firms. This particular strategy denotes efficiency in terms of being the low cost manufacturer and offering desired level of quality. This form of strategy is sustainable or not depends on the other players in the industry to quickly imitate the cost base so as to operate on lower cost in comparison to the cost leader. The other form of generic strategy for SMEs is the differentiation strategy that can be considered as niche or segmentation strategy (Kraja and Osmani, 2013).The focus of the firms adopting this strategy is to segment market and concentrate on smaller portions of the market related to industrial buyers or consumer group. 2.4.2. Innovation Strategy According to Julien and Ramangalahy (2003), the innovation strategy is adopted by a firm only when it aims at achieving a sustainable position in the industry. The major components of innovation strategy as stated in the diagram below are to target market, maximize profit, and understand well the core of business and plan strategies so as to survive competition in the market place. (Source: Julien and Ramangalahy, 2003) In context of SMEs, they set innovation strategy so as to increase the level of efficiency and effectiveness of the innovation management. In such strategy formulation all of the key employees are involved so that appropriate innovation strategy can be incorporated. This strategy formulation encompasses identification of core competencies of the firm, identification of market opportunities, developing targets as well as KPIs for the results of innovation, and at the same times also setting ambition growth within the firm so as to enhance ownership amongst employee base (Julien and Ramangalahy, 2003).The innovation strategy that is adopted by small and medium sized firms helps in terms of financial benefits but apart from this there are certain other advantages of the strategic approach. It helps in spreading awareness about the changing trends that may affect the firm, helps to identify the moves taken by competitors, helps in terms of analyzing core competencies and the lacking capabilities, and facilitates innovation culture in the system as well as team building. In the current scenario the innovation strategy adopted by SMEs are greatly supported by advanced technology and drives towards sustainable growth of such firms. 2.4.3. Network and Cluster Strategy According to Cafferata and Mensi (2000), the network and cluster strategy is adopted by majority of small and medium sized firms that perform well in the industry. The network and cluster strategy enables a firm to achieve high productivity levels and this analytical tool facilitates global reach by the small firms, helps them to increase in size and also gives them the flexibility to adopt different technologies. The major reason for the limitations that is faced by small firms is limited access to resources and since these firms operates on an independent scale so they are not able to access those resources that are generally utilized by larger organizations in the industry. The cluster strategy encompasses economies of scale that enables firm to gain access of those resources that are not easily accessible by small scale firms. This basically involves purchase of technology and raw materials, developing a common pool that comprise of very skilled workforce, and enhancing production capacity and sharing of capital that enables the firm to perform operations on a global context. Through the cluster strategy SMEs share distribution channels and marketing techniques that help to improve upon processes and also facilitate learning from each other so as to achieve greater knowledge about the market (Cafferata and Mensi, 2000).Networking amongst SMEs is the most common tool that also enables a firm to gain competitive advantage and the cluster approach can be related to achieving more of specialization in the field. 2.4.4. Flexibility Strategy According to Whittington (2006), the flexibility strategy is a mechanism through which role and operational flexibility can be achieved by an organization. The flexibility strategy that is adopted by small and medium sized firms comprise of taking initiative so as to segregate workforce and not to follow the traditional approach of having permanent staff, rather this strategy enables SMEs to divide the workforce into two major groups such as core groups and more than one peripheral groups. It even involves outsourcing activities which is incorporated by certain small and medium sized firms so that major portion of work is done through external firms (Whittington, 2006). This approach is often regarded as a cost effective method that enables the firm to perform operations at the least cost possible. The flexibility strategy also enables firms to make their workers multi skilled so that they are able to perform wide range of activities at the same time. This is an effective strategy as it would enable the firm not to loose on any time and make its workforce capable enough to perform wide set of operations. 2.5 Competitive Advantage 2.5.1. Definitions of Competitive Advantage As stated by Barney and Zajac (2001), the term competitive advantage indicates that a firm implements certain strategy associated with creating value which cannot be imitated by any other players in the industry. The term competitive advantage can also be defined as organization’s capability to perform activities in various ways that cannot be easily realized by any other competitors. It forms a base for firms to create unique strategy which in turn helps to provide competitive advantage to the firm in the market place. A competitive advantage can be considered as an objective for the set strategy adopted by a firm. It can be stated that an organization has competitive advantage only when it has the ability to deliver greater economic value in comparison to other players in the industry (Barney and Zajac, 2001).The framework of SWOT analysis that comprises of strengths, weakness, opportunities and threats are utilized so as to evaluate competitive advantage for a firm. The competitive advantage can be defined as factors that are essential for a firm so as to achieve success. The two major factors that help to gain competitive advantage are differentiation and cost leadership. A firm that possesses distinctive competencies that are superior in comparison to other players in the market can obtain a strong position in the market. 2.5.2. Balanced Scored Card As stated by Hudson and Smith (2007), the balance score card can be regarded as a strategic management and planning tool that is extensively used in business activities. The major focus of this strategic tool is to align the business activities in terms of vision and goal of the organization, to improve upon external and internal communications and to monitor various performance of organization with respect to goals of organization. The balance score card is used to analyze the performance of an organization on the basis of four major perspectives such as financial perspectives, growth and learning perspective, customer perspective and perspective of business process (Hudson and Smith, 2007).The learning and growth factor reflects on the knowledge and innovation power that is possessed by the firm, financial factor highlights on financial performance, customer perspective deals with satisfaction level, and business perspective denotes the level of efficiency of a firm. The diagram for the strategic management tool is given below- (Source: Hudson and Smith, 2007) 2.5.3. Porter’s Diamond The Porter’s Diamond Model forms the base of creating a structure that sets the rules for competition in the industry. According to Vries and Margaret (2003), this model plays a critical role for the operations of small and medium sized firms so as to achieve competitive advantage for a long term. The Porter’s five forces model is illustrated in the diagram below- (Source: Vries and Margaret, 2003) The diamond model has four corners that highlights on four conditions that are demand conditions, factor conditions, firm structure, competition and strategy and presence of supporting as well as related industries. In the system however there are two additional factors that government and luck factor. The factor conditions of the model states the infrastructure and production facilities in terms of staff and knowledge that would contribute towards competition in any particular industrial sector. The demand conditions relates to the consumer market demand that is created in a specific region where the business operates. These demand condition has an effect on the direction and pace of product development and innovation. The related and supplier industry forms the third dimension of Porter’s model and is greatly linked with the allocation of activities in the value chain of the firm with the common aim of achieving competitiveness in the market place. The strategy, rivalry and structure of a firm have a great effect on the performance level of a firm (Vries and Margaret, 2003).These factors denote the competitiveness of a sector and at the same time sets forth the opportunities for future through obtained competitive advantage. 2.5.4. From Diamond to Clusters The diamond model states that there are four specific conditions through which competitiveness is achieved by a firm. As stated by Cafferata and Mensi (2000), in the present context however such an approach has totally diminished as more number of small and medium sized firms focuses on cluster strategy to perform its business operations. The cluster strategy has gained its importance in the last few decades where more number of firms thinks that performing business operation collaboratively is more advantageous in comparison to giving focus on individual conditions (Cafferata and Mensi, 2000).The SMEs specifically shifted to clustered approach as that facilitates economies of scale which cannot be achieved to a great degree through adopting diamond model as a strategy tool. All of the conditions as stated in the diamond model are now in a clustered form based on more of networking amongst the firms. 2.5.5. Porter’s Five Forces Model The Porter’s Five Forces Model states that rivalry in an industry is associated with five major forces that have an influence on the industry such as that of bargaining power of suppliers, clients, extent of rivalry within the industry, threat of substitutes and new entrants in the industry. The Porter’s Five Forces Model is give below- (Source: Kraja and Osmani, 2013) According to Kraja and Osmani (2013), the power of buyer reflects the impact that is created by clients on the industry. There exists a need to have a power balance between client and producer which determines the degree to which organization has the freedom to set prices. The suppliers power of the model states that when the suppliers exercise greater power then they often dominant producers so that they are able to gain maximum percentage of profit share. The rivalry factor mainly comprises of various strategies that are adopted by firms so as to gain competitive advantage in the industry. The most common techniques are in the form of differentiation and cost leadership strategy that creates more of rivalry in the industry. The factor of barriers to entry states that there are certain elements that restricts business operations and pose a barrier for a firm entering into a market place (Kraja and Osmani, 2013).Such factors of barriers are generally originated from economies of scale, patent knowledge and government regulation that enhance the competition level in the industry. The last factor of this model is threat of substitutes which indicates that product demand of a small and medium sized firm is affected to a great degree when there are substitutes present in the market offered to customers at a low price. 2.5.6. Obstacles to Business Growth According to Cohen and Levinthal (2000), the major forms of growth obstacles are in terms of financial stability of firm. Often as stated in some research studies the major factor that becomes an obstacle for business is not the financial conditions or declining rate of sales but is rather the business operations. The growing competition in the industry makes it very difficult for small and medium sized firms to survive in the industry (Cohen and Levinthal, 2000).The risk factor that is the main obstacle noticed by such SMEs are difficult to be tackled and at the same time it cannot be completely eliminated from the system. As per Entrialgo, Fernandez and Vazquez (2000), the other factor is low level of confidence amongst entrepreneurs which restricts these small and medium sized firms to explore opportunities. The financial obstacles comprise of low availability of funds or lower profit margins that make these firms reduce the investment level in other form of business activities. The other obstacle is in the form of operational risk that indicates that any such operational failure may hinder business operations which would restrict the firm from performing in the market place (Entrialgo, Fernandez and Vazquez, 2000).One of the most important obstacles is that government can come up with various budget issues that would hinder further growth of the business. 2.6 Information and Communications Technology (ICT) According to Guarda, Santos, Pinto, Augusto and Silva (2013), the incorporation of information and communication technology in an organization has become one of the most critical elements in terms of achieving competitive advantage. The solutions in terms of business intelligence are very limited in context of small firms. This is simply because of the fact that the target group of such business solution firm is larger enterprise and not smaller firms due to more of financial stability and greater receptiveness (Guarda, Santos, Pinto, Augusto and Silva, 2013).However in today’s scenario of a highly complex external environment of business it is essential that firm becomes proactive and agile in terms of decision making. According to Jarzabkowski and Wilson (2006), the concept of ICT has various advantages to business such as that of reduction in information dispersion, greater scope in relation to user interaction, accessibility ease towards information, real time availability of all kinds of information, triggers flexibility and versatility and enhances decision making mechanism of a firm. ICT is a framework that is required to analyze different form of information available that would be beneficial for the firm and also help to reduce time that was initially wasted in doing paperwork for such tasks (Jarzabkowski and Wilson, 2006). According to Jeronimo and Medeiros (2012), the small and medium sized firms that have been able to such technology its organizational system has witnessed the fact that they are able to compete more efficiently and effectively in the industry. This technology has helped the firms to gain more knowledge related to customers, requirements and patterns, and has also facilitated financial management. The ICT framework helps the small firms to explore maximum amount of historical data that is related to customers which in turn helps in framing planning strategies. Such benefits that are given by the technology enable visualization as well as extraction of large volumes of important data related to business operations (Jeronimo and Medeiros, 2012).The appropriate framework that is adopted by small firms in order to support such advanced technology comprises of planning, technology, intelligence and dissemination. According to Julien and Vaghely (2001), the first phase of the framework encompasses defining the required data, the second phase comprises of data analysis and mining, dashboards and scorecards. The next phase is determining the essential elements that need to be assessed as well as evaluated, and the last phase comprises of dissemination that deals with interpreting all the data that is obtained throughout all the stages (Julien and Vaghely, 2001). 2.7 Chapter summary The strategic management of small firms in UK has been witnessing diverse changes majorly due to increased competition and extensive pressure that is resulted from larger organizations. In order to handle such competition many firms adopts innovative strategy on the other hand some firms still continues with traditional approaches. The literature review has stated the various strategic management approaches that help a firm to overcome competition as well as maintain a strong position in the industry. The growth of small firms in the UK market has increased at a faster pace in the last few years where more number of entrepreneurs is evolving with new set of ideas. These firms though they operate on a small scale forms a major portion of the economy and are the key drivers of an economy. The firms still have a large scope to improve upon strategic management so that they are able to overcome obstacles that restrict their business growth. References Barney, J. B. 2001. Is the resource-based "view" a useful perspective for strategic management research. Academy of Management Journal. Vol.26(1). Barney, J.B. and Zajac, E.J. 2001. Competitive organizational behaviour: Toward an organizationally-based theory of competitive advantage, Strategic Management Journal. Vol. 15(4). Bititci, U., and Ates, A. 2009. Strategy management in small to medium-sized enterprises: Evidence from UK manufacturing SMEs, 16th International European Operations Management Association Conference. Cafferata, R. and Mensi, R. 2000. The role of information in the internationalisation of SMEs: A typological approach, International Small Business Journal. Vol.13(3). 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A., and Ramangalahy, C. 2003. Competitive Strategy and Performance of Exporting SMEs: An Empirical Investigation of the Impact of Their Export Information Search and Competencies. E T & P. Vol. 1(1). Julien, P.A. and Vaghely, I. 2001. From weak signals to decision making: Information acquisition and use as the entrepreneur’s source of opportunities. Babson International Conference for Small Business. Vol. 1(1). Kraja, Y., and Osmani, E. 2013. Competitive advantage and its impact on small and medium sized enterprises. European Scientific Journal. Vol. 9(16). Vries, H. D., and Margaret, J. 2003. The development of a model to assess the strategic management capability of small- and medium-size businesses, Journal of American Academy of Business,Cambridge. Vol.3(1/2). Whittington, R. 2006. Completing the practice turn in strategy research, Organization Studies. Vol. 27(5). Yu, T. F. L. 2001. Toward a capabilities perspective of the small firm. International Journal of Management Review. 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