Factors of Development and Implementation of Effective Strategies in SME - Essay Example

Entrepreneurship: what factors affect the development and implementation of effective strategies in small businesses (SME Introduction In order to understand the strategies followed by small businesses around the world it should be necessary to refer primarily to the main characteristics of these businesses, i.e. to present an appropriately customized definition. In accordance with the definition used by the Ministry of New Zealand, businesses can be divided into categories based on the number of their employees. In this context, small businesses are considered those that employ 0-5 FTEs while medium businesses are those with 6-19 FTEs (Ministry of Economic Development, 2008). It is clearly noticed however that banks can set different criteria in order to characterize a business as small. The survival of SMEs within the modern market is a challenging task: the increase of competition globally has led SMEs to change their strategies in order to meet the demands of the market. Despite the fact that SMEs operate locally (i.e. only within a specific country, with exception in case of online activity) they should continuously review their strategic choices in order to ensure the effectiveness of their plans in terms of the market’s demands and the customer preferences. Current paper refers to the factors that can affect the development and the implementation of effective strategies in SMEs. There is no reference to specific country; rather a series of data and findings related with SMEs that operate around the world will be employed in this study. Potential suggestions will be also made under the terms that the strategic restructuring of a small firm is feasible under the conditions of its market and its financial strength to respond to the demands of the relevant effort. 2. Entrepreneurship in small businesses As already noticed above small businesses have a limited number of employees – that could be depended on the relevant governmental regulations (in the example mentioned above, the New Zealand, the number of employees of SMEs cannot be higher than 5). In this context, entrepreneurship in SMEs has to be appropriately customized in order to meet the demands of the market but also to respond to the needs of the firm. In SMEs their owner is usually actively involved in all operational activities; he’s not just a supervisor of the employees (although this option would be also available). In accordance with the above, entrepreneurship in SMEs should focus on the design and the development of the appropriate strategies that would support the increase of the firm’s productivity towards the stabilization of the firm’s position in the market. If the above target is achieved, the entrepreneur should focus on the potential expansion of the firm’s activities within the international market taking always into consideration the fact that in this case specific monetary fund would be available in order to cover potential losses but also all additional expenses until the successful completion of the relevant project. Entrepreneurs in SMEs could be supported to the realization of their plans primarily by the state (as the case of British SMEs presented analytically in the section that follows) but also by the private sector. For this reason, entrepreneurs in SMEs should have specific skills/ qualities; they should be able to identify the potential chances in the market, to locate the funding necessary for the realization of the various strategic plans and they should have well developed communication skills being able to identify and proceed to strategic cooperations with the competitors in case that such a choice is strategically appropriate. 3. Development and implementation of strategic plans in small businesses The development of SMEs within the market has to be supported primarily by the state. In this case, the strategies that should be implemented by SMEs for the achievement of the relevant target should be set by the state through the appropriate regulation. We could refer to the example of British SMEs. In order to support the expansion of these firms in the international market the relevant authority (the trade and investment committee) decided to support actively this initiative. In a relevant article published by the Business High Street (7 June 2007) it is noticed that ‘business groups have welcomed the findings of the Trade & Industry Select Committees report on UK trade and investment (UKTI); the report said that small and medium-sized enterprises (SMEs) looking to expand overseas should focus their efforts on emerging markets like those in India and China; to facilitate investment in these markets, UKTI said that it planned to increase the number of staff positioned in India and China by 20 per cent - while there will be fewer staff stationed in the US and Europe’. It is not clear however whether other potential projects related with SMEs (or specific initiatives of SMEs in Britain) would be supported at the same level by the British government. Referring also to potential chances for SMEs within the international market, Agndal et al. (2007) examines a series of 116 strategic changes that could be possibly applied by SMEs that are interested in entering the international market. Through the above research it was revealed that ‘existing relationships play an important role in 59 market strategy changes and 57 mode strategy changes; the main findings are that business relationships are more influential in internationalisation strategy changes than social relationships, especially with regard to mode changes in foreign markets; most mode changes are reactive; market strategy changes, however, are evenly balanced between proactive and reactive changes’ (Agndal et al., 2007, 1449). The reference to the prospects for SMEs within the international market is made because this is a problem quite often in SMEs operating around the world. The major problem for SMEs that seek to enter the international market is the fact that in most cases those firms do not have the appropriate support in order to attempt the specific initiative. Of course, the development of appropriate strategic plans in this case is significant however there is equal need for other types of support like the financial one. Indeed funding has been proved to be one of the main problems for SMEs that are seeking to differentiate their strategic plans especially when these are related with the expansion of the firm within the international market. It should also be noticed that the lack of skills/ abilities by the firms’ employees has been proved to be another constraint towards the achievement of any strategic target. In this context, we could refer to the study of Bee (2007) who noticed that the effectiveness of business plans applied by SMEs are depended on a series of factors; the most significant requirement for the successful completion of the business plans of SMEs is the alignment of the firms’ business plans with the market demands; a relevant concept, this of strategic alignment is then proposed by the above researchers. More specifically, it is noticed that ‘the concept of strategic alignment advocates that decisions on business strategy, information and communication technology (ICT) strategy, business infrastructure and ICT infrastructure need to be coordinated in order to better realize the benefits from ICT investments’ (Bee, 2007, 157). The application of the above method when designing and applying specific business plans related with SMEs has been found to be particularly effective regarding the performance of SMEs. More specifically, when the above concept was applied to a series of Singapore based SMEs the following results were revealed: ‘(1) targeted schemes need to be set up to address the specific needs and concerns of the micro and small enterprises; (2) the two common alignment perspectives adopted by the larger designer and builder SMEs are strategy execution and competitive potential; and (3) the medium-sized designer and builder enterprises are shown to favour technology leadership and customer satisfaction’ (Bee, 2007, 157). Other strategies possibly applied on SMEs could be proved effective; however they should be appropriately designed and monitored making sure that all potential risks are minimized. The effectiveness of strategies of SMEs has been extensively examined in the empirical research. In this context, Greiner et al. (2007) focused on the examination of the effectiveness on SMEs of a particular strategy: the knowledge management strategy that can be applied effectively on all firms operating in the modern market. In accordance with the above study: a) there is a relationship between the success of knowledge management and the alignment of knowledge management and business strategy; b) an organization whose business strategy requires process efficiency should rely primarily on a codification strategy; c) the most successful knowledge management projects are driven by a strong business need and with the goal to add value to the organizational unit operations’ (Greiner et al., 2007, 3). The effectiveness of knowledge management strategies (as in all business plans) is related – in accordance with the above – with a series of factors, like: a) the skills of the manager (ability to align the specific knowledge management strategy with the business plans), b) availability of other strategies (in case of failure) and c) the knowledge management strategy applied in the specific case should be also aligned with the firm’s targets. In another study conducted among a series of SMEs operating in Sweden it is noticed that ‘in recent years electronic business has been adopted by many corporations to improve operational efficiency, profitability, and to strengthen their competitive position; the SMEs in the sample have benefited from e-business implementation in both operational and performance areas of their organization’ (Beheshti et al., 2007, 233). The above study focuses on the use of technology in the development of performance of SMEs. There is no particular implication regarding the adoption of IT systems by SMEs; similar rules with those applied for firms of other sizes would be applied for these firms also. There are no specific factors that could influence the effectiveness of the IS strategies applied on a specific SMEs apart perhaps from the skills of the employees to use the relevant systems. Any such problem could be easily resolved with the adoption by the SME of the appropriate training and development scheme. Referring especially to the improvement of SMEs productivity, a series of strategies could be available to SMEs. These strategies should be carefully reviewed regarding their appropriateness for the firms of the specific size. A specific type of SMEs strategies, those targeting the increase of SMEs manufacturing performance have been examined by Yasin et al. (2007). The above researchers found that ‘recent developments in manufacturing and business operations have led to the adoption of Computer-Integrated Manufacturing (CIM) technologies that are based on systems and processes that support global competitiveness, especially for Small and Medium Enterprises (SMEs); organisations and SMEs in particular need to reevaluate every aspect of their manufacturing strategy and quickly move towards a CIM-based environment where manufacturing technologies, business strategies and processes are integrated together’. It is clear that strategic planning in SMEs has to be aligned with specific principles; when the demands of the market are taken into consideration, any plan developed by entrepreneurs in SMEs is likely to be successful. In the area of the empirical research it has been proved that ‘business level strategy variables have a significant influence on performance whereas functional levels do not when their combined effects are analysed using hierarchical regression modelling; the importance of business level strategy generally and its specific elements are considered with a view to providing guidance to management decision makers and policy advisors’ (Megicks et al., 2007, 484). On the other hand, because there are many factors that can intervene in the realization of any project (including a business one), entrepreneurs in SMEs should take into consideration when designing and applying a particular strategy that the following criteria have been examined: a) the firm’s financial performance up to now, b) the skills/ abilities and experience of the manager (usually the owner), c) the skills/ abilities of employees and d) the market’s current conditions. Furthermore, the general trends of the international market could be also taken into consideration (global financial pressures are likely to have an impact on the value of currencies influencing the profitability – but also the credibility – of commercial transactions around the world. From a different point of view, Westerlund et al. (2008, 342) try to identify the response of SMEs to globalization. Their study leads to the conclusion that ‘firms emphasising the international expansion strategy distribute standardised offerings with additional services, provide tailored offerings through international multitier networks, or specialise in customer-specific offerings with additional services through dyadic international relationships’. In general, it could be concluded from the findings of the above study that the business model followed by a particular SME defines the form of the strategies used by the specific firm towards the achievement of its short or long term targets. 4. Conclusion SMEs that operate within the modern market have to face a series of challenges; the most important of which is the competition. Apart from that, there are certain factors that modern SMEs have to take into consideration: these are the market, the employees, the environment and the society (see also Figure 2). In order to respond effectively to the demands of all these sectors, the firm needs to develop an appropriate corporate social responsibility strategy that will be applied simultaneously with the business plan. The application of other strategies apart from the ones developed through this paper could be also proved effective for SMEs. However, in any case appropriate measures should be taken in order to minimize the chances for any potential risk by the relevant initiative. In accordance with Karaev (2007, 818) ‘there is strong evidence to suggest that a cluster policy brings additional positive effect to existing SME policy in industrialised economies, but such effects have not been extensively researched in developing (transition) countries, particularly from the point of view of the SMEs, which are the main actors in the cluster development process, in relation to whether their performance has been improved as a result of cluster effects’. On the other hand, it is suggested by OECD (2007, 104) that ‘business and industry are a primary source of innovation and provide optimum benefits when short- and long-term enabling frameworks encourage the development, commercialisation and dissemination of technologies; business does not do this in isolation and they form partnerships with a variety of other players and thus leverage resources and benefits’. In other words, business decisions and plans should be carefully reviewed and evaluated trying to align the current market trends with the firms’ targets. In this case the effectiveness of the strategies of SMEs would be more likely to be achieved; any potential risk would be minimized in accordance with the terms and conditions explained throughout the paper. References Agndal, H., Chetty, S. (2007) The impact of relationships on changes in internationalization strategies of SMEs. European Journal of Marketing, 41(11-12): 1449-1474 Bee, H. (2007) Applying the strategic alignment model to business and ICT strategies of Singapore’s small and medium-sized architecture, engineering and construction enterprises. Construction management and Economics, 25(2): 157-169 Business High Street (2007) SMEs encouraged to focus on emerging markets, online, available at http://www.businesshighstreet.com/news/18172148/SMEs+encouraged+to+focus+on+emerging+markets Greiner, M., Tilo, B. (2007) A strategy for knowledge management. Library High Tech News Incorporating Online and CD Notes, 11(6): 3-15 Karaev, A., Koh, S. (2007) The cluster approach and SME competitiveness: a review. Journal of Manufacturing Technology Management: 18(7): 818-835 Megicks, P. (2007) Levels of strategy and performance in UK small retail businesses. Management Decision, 45(3): 484-502 Ministry of Economic Development, Australia, available at http://www.med.govt.nz/templates/MultipageDocumentPage____950.aspx#3.1 OECD (2007) Effective Technology Transfer and Stimulating Entrepreneurship: Strategy and Examples. OECD. Emerging Economies, 10: 104-113 Westerlund, M., Risto, R., Seppo, L. (2008) SME business models in global competition: a network perspective. International Journal of Globalisation and Small Business, 2(3): 342-358 Appendix Figure 1 – Bank Lending Activity of SMEs in Canada (source: Government of Canada, 2008, available at http://www.sme-fdi.gc.ca/epic/site/sme_fdi-prf_pme.nsf/en/01393e.html#2.1) Figure 2 – Corporate Social Responsibility in SMEs (source: http://www.csr-in-smes.eu/index.php?tab=5) Read More