The Significance of Strategic Management to SMEs in Contemporary Business Environment (Essay Sample)

The Significance of Strategic Management to SMEs in Contemporary Business Environment
By Firstname Surname
BUS: 5062 – Strategic Management
Prof. John Stuart
New Academic University
Inner Road, RT34 H46Z, North Alton
31 October 2014The Significance of Strategic Management to SMEs in Contemporary Business Environment
As a process by which resources are efficiently allocated and goals formulated through planned courses of action; conversely, business strategies create unique and elevated position(s) that differentiate an enterprise from its competitors (Gibcus & Kemp, 2003). However, for a business strategy to translate into improved firm performance; the strategy has to be clear, concise and consistent. Invariably, this implies that a firm’s entrepreneurial strategy has to be preceded by an elaborate plan. Accordingly, Liao and Gartner (2008) posits that strategic ‘planners are doers’ (Kraus & Kauranen, 2009, p.46). Consequently, Lebas & Euske (2002) defines performance oriented strategic management as “doing today what will lead to measured value outcomes tomorrow” (Neneh & van Zyl, 2012, p. 125). This notwithstanding, it is important to note that the performance of an SME is determined by a confluence of the business environment, resource constraints, the entrepreneur’s personality and leadership style (Kraus & Kauranen, 2009; Mugler, 2005). In effect, it is highly probable that SMEs will record higher performance when a configuration approach to strategic management is adopted by the industry.
An analysis of previous case studies reveals that the SME sub-sector has increasingly contributed to the development of “modern, dynamic and knowledge-based’ economies across the world (Govori, 2013, p. 2). This phenomenon can be attributed to the SMEs’ ability to adapt quickly to market dynamics thus intuitively nurture entrepreneurship and promote industrial productivity. The OECD holds that over 95 percent of businesses in the OECD countries are SMEs and that this industry accounts for approximately 60 percent of employment in the private sector (Dalberg, 2011; Govori, 2013). Japan’s SME density is over 99 percent while UK, India, Kosovo, and South Africa’s SME proportions stand at 99.9 percent, 80 percent, 99 percent, and 91 percent of respective industrial inventory. Although SMEs are characterised by high failure rates (e.g. South Africa – 75% and UK - 65% by third year) their GDP contribution GDP is as low as about 16 percent in developing countries (e.g. South Africa – 36%) and 51 percent in the developed world (Edinburgh Group, 2013; Govori, 2013; Kingston Smith LLP, 2012).
Conceptual Framework: The Integrated Strategic Orientations Management (ISOM) Model
The Miles and Snow (1978) typology illustrates that in order to effectively determined the impact of strategic management on a firm’s performance, SMEs should be analysed as “a complete and integrated system in dynamic interaction with their environment” (Aragon-Sanchez & Sanchez-Marin, 2005, p. 290). This typology classifies SMEs as a “prospector, analyser, defender, or reactor” (Gibcus & Kemp, 2003, p. 15). While firms that adopt the ‘prospector’ orientation are innovation driven and regarded best performers, a ‘reactor’ strategic orientation is associated with internal inconsistency which predisposes these SMEs to decimal performance (Aragon-Sanchez & Sanchez-Marin, 2005; Gibcus & Kemp, 2003). Therefore to better understand the effect of strategic management on corporate performance, this analysis has to be preceded by determining performance predictors and followed by identifying the mechanisms of improving organisational performance. Hence the ISOM Model posits that performance will be determined by the type(s) of orientation(s) adopted by the company (Herath & Mahmood, 2013).
Firstly, entrepreneurial orientation (EO) includes three key dimensions: innovativeness (i.e. pursuit of novelty, creativity, & new ideas), proactiveness (i.e. anticipating & acting on future market needs) and risk taking (i.e. deviating from the ‘tried-and-true’ path and exploring the unknown) (Patel & D’Souza, 2009; Wiklund, Patzelt, Shepherd, 2009). To achieve better results under EO, the SMEs are required to strategically reconfigure their “internal resources, routines, and processes” (Patel & D’Souza, 2009, p. 1). The second organisational resource relates to the relationship between market orientation (MO) and SME performance. MO refers to the drive that compels SMEs to develop products that meet the consumers’ needs. As a result, the MO ensures that the firm continuously innovates so as to manufacture goods or services that are in tandem with the clients’ aspirations. Ultimately, this translates into higher sales and consistent profits. Thirdly, the relationship between learning orientation (LO) and firm performance is based on the fact that LO mediates both EO and MO (Herath & Mahmood, 2013; Rahab, 2012).
The Relevance of Strategic Management to the Performance of SMEs
Strategic management has long been held as a preserve of the large enterprises with active planning functions and not a niche for SMEs since it is assumed SMES are by nature pre-occupied by daily operational problems hence lack the derive to strategically management their businesses. However contrary to this assumption, strategy scholars like Porter (1996), Chandler (1962), Mintzberg (1990), and Miles and Snow (1978); confer that the pursuit of internal and external organizational strategic fit, is a pre-requisite to an SME’s growth and sustainability (Gibcus & Kemp, 2003). Irrespective of size, it is held that firms with clear growth and differentiation strategies outperform enterprises that emphasize low-cost strategies such as SMEs. Thus based on the uniqueness of a firm’s resources and the operating environment, the aim of strategic management is to institutionalize a leadership style that enhances profitability, competitiveness, and organizational effectiveness by allocating resources efficiently, integrating processes, and creating a vision and action-plan that is market-oriented (Gibcus & Kemp, 2003).
Strategic planning is based on the firm’s desired vision, objectives, and its key purpose is to determine the company’s current status and develop a framework that forms basis of guiding an SME to realise the high performance targets (Neneh & van Zyl, 2012). In effect, it is argued that the drive to achieve such measurable and actionable targets increases the firm’s competitive advantage and this translates into an SME’s high profitability. Additionally, results of empirical studies conducted in the US (e.g. Kargar & Parnell, 1996), Germany (e.g. Scholz, 1991), Australia (e.g. Gibson & Cassar, 2002), and UK (e.g. Gibb & Scott, 1985) revealed that planning indirectly contributes to a firm’s success by reducing uncertainty levels in company, propagating long-term thinking, and focuses on strategic alternatives over operational details; and this enables a better understanding of the business and the operating environment (Kraus, Reiche, & Reschke, 2007). Despite these benefits, planning among SMEs is unstructured and this impairs long-term systemic entrepreneurial thinking and hence leads to informal strategic management.
The sustainability of SMEs’ depends on the quality of business relationships between these firms and their stakeholders, especially the consumers of there products. These commercial relationships are built through effective marketing, advertising, client relationship management and communication of the organisation’s brand equity (Chakraborty et al. 2013; Popescu et al., 2013). By virtue of size and operational scale, SMEs are customer-oriented and technically endowed but lack the funding and marketing ability to create, package, brand, and transmit value to their esteemed clients (Popescu, 2013; Cioppi & Buratti, 2009). It should also be noted that most SMEs operate in highly competitive environments – their market share threatened by large corporations and numerous other SMEs against a constrained demand (Havlicek, 2011). Hence the strategic management of the marketing mix has proven vital in creating awareness to potential customers on the price, quality, distribution networks, and the availability of the SMEs’ products. This increases sales, competitiveness, necessitates innovation, and more so, network marketing increases the SMEs relational capital (Havlicek, 2011; Neneh & van Zyl, 2012).
For an SME to sustain its profitability it needs an adequate supply of skilled, motivated, and innovative human capital. Therefore strategic human resource management (SHRM) entails the application of a “set of distinct but interrelated activities, functions and processes that are directed at attracting, developing, and maintaining (or disposing of) a firm’s human resources” (Neneh & van Zyl, 2012, p. 123). The characteristic small size, limited economies of scale, and the fact that most SMEs are family owned or managed predispose SMEs to numerous SHRM challenges. This includes lack of funds to hire equally qualified professionals, recruitment and talent management problems and disinvestment in SHRM information systems (Kishore, Majumdar, & Kiran, 2012). It is important to note that business success is hinged on the effective people management. Hence since firm performance is positively correlated to SHRM, SMEs are obliged to re-engineer their HRM practices so as to improve on their internal processes, service delivery and sustainably increase productivity (Aragon-Sanc...