Much of what has been written about strategy and strategic management is based upon the assumption that strategic choice is actually a viable option for most firms and that resource issues are non problematic. That assumption may hold for large firms but not for SME’s. The vast majority of firms are SME’s and a large number of these are in fact micro enterprises. Whilst one may talk about geographic diversification and market expansion so readily for large firms based on a premium image and heavily differentiated service, the options for SME’s can be severely limited due to a number of factors:
- Lack of time to explore new opportunities
- Limited market information and research capability
- Lack of marketing and management expertise
- Money restraints
- Lack of accessibility to investment
- Lack of human resources
The list is not exhaustive but essentially highlights the key factors that affect a SME from being able to consider opportunities in the same way that larger firms can. These issues become even more pronounced when the SME is considering internationalization. Bearing in mind the resource limitations often faced by SMEs, this article will provide knowledge to the owner/operators of these firms that can help them to overcome such barriers and compete effectively.
I Strategy for the SME
I have criticized a number of existing strategic management concepts in terms of their applicability to the dynamic environments that most businesses operate, this questioning can be extended to their application to the SME and indeed the issues faced by such firms exacerbates the problems inherent in the concepts so readily applied to larger firms. For example, use of portfolio management tools (such as the BCG matrix or the GE matrix) are problematic for the SME. Classifying a business based on such concepts as market share or growth have inherent limitations for smaller firms. The very nature of such firm means they tend to operate in only a few service markets and it is quite possible that the majority of their revenue could stem from markets that would be considered declining ones under portfolio prescriptions yet still highly profitable. If one wanted to take a poorly performing business (as prescribed by a portfolio approach) and divest of it, where would one get the money to invest in growing markets that were not yet profitable? Similar problems can be found in the use of Michael Porters three generic strategies. For example, if a niche strategy is successful and hence the niche market itself becomes attractive to other larger firms, what stops the larger firms acquiring the needed expertise in that market and hence competing directly with the SME? It is exactly these types of issues that face small firms and little direction is given to them in traditional writings in strategic management and marketing.
In their excellent book, Competing for Markets: Growth strategies for SME’s, Khai Sheang Lee and colleagues identify a number of generic strategies that can be utilized by small firms (Asia focused) and in particular, consider the reaction of larger incumbent firms. The generic strategies described by the authors are:
- Niching – if the SME can offer a service to an ignored segment of the market that is differentiated and provides a competitive advantage, then it can use a niche strategy. For example, small architectural and design firms rely heavily on the knowledge and creativity of the founding partners and through work have gained prominent positions in niche markets even on a global scale.
- Substitution – a small firm can enter a currently served market by offering a substitutable, but differentiated, service, particularly if a niche strategy is not sustainable over the longer term. Basically, the firm is a second mover and benefits from the market development activities of larger firms. The firm should take care to differentiate its service from competitors either through the service itself or through marketing activities. For instance, new health clubs in China could take advantage of the growing fitness market developed by offering a similar service to larger international chains (with a lower price) but differentiating itself through a focus on local cultural knowledge. It would be self defeating for the larger firms to copy this approach as they focus on their international experience and scale of operation.
- Free riding strategy – in product marketing there are various forms of free riding but in services it tends to be limited to an imitation strategy. A SME can benefit from second mover advantages by entering a market that is already developed and well served by larger firms. By offering a service that is the same as the incumbent firms the SME does not need to bear the costs of market development and the risks associated with being a first mover. A small firm can take a small piece of a market (or its associated service market) by riding on the coat tails of the development efforts by larger firms. An obvious example would be the growth of coffee culture led by Starbucks that allowed numerous local brands in various markets to benefit from the market development efforts of Starbucks.
These generic strategies take into account the resource limitations often faced by smaller firms and the fact that creating a competitive advantage is not always as easy as it seems when prescribed by consultants and other expert sources. They also take into account competitive reactions of the incumbent firms in terms of their ability to retaliate or accommodate. Again, it should be stressed that strategy is not a static concept and whilst a small firm may pursue one of the generic strategies discussed it will, over time, need to adapt to changing market conditions and adopt an alternative strategy altogether if necessary.
In reality, a particular strategy may not fit neatly in to the three generic strategies prescribed but that does not devalue them. Small firms tend to be more limited in their strategic choice than larger firms and by using the strategies described and their appropriate decision frameworks a smaller firm should be able to enhance their strategic decision making in line with what the firm can offer and the conditions of the competitive environment.
II Marketing Effectiveness and Success/Failure in the SME
It has been well documented that marketing in small firms is quite different from marketing in larger firms. The inherent resource constraints that small firms face means they rely heavily on networks of contacts and although they are aware of general marketing concepts they do not apply them in the same way that larger firms do. For example, planning tends to be a more formal process in larger firms yet more ad hoc in small firms. Whereas certain marketing experts may lament the lack of formal planning in smaller firms, much research supports a less structured approach in smaller firms. This is known as entrepreneurial marketing and in fact can be just as readily applied to large firms as well as smaller ones.
Not only do the marketing practices of small and large firms differ, they should, the limited resources of SME’s means they cannot adopt scaled down practices of large firms or text book theory and expect to achieve satisfactory outcomes. The marketing competencies often associated with SME’s are:
| knowledge | |
| experience | |
| communication | |
| managerial judgement | |
| networking |
When considering the success or failure of SME’s, there are essentially two categories to be considered: external and internal. External factors would consist of environmental factors such as the economy and competitors. Internal factors include things such as management, availability of resources and strong leadership. Much research has examined the main factors that affect SME performance and includes both service firms as well as manufacturing firms.
Research in Singapore by Theng and Boon (1996) examined the failure of SME’s and the factors perceived to be the most important causes of such failure. The results found that external factors (finance and labour issues) were important, but that internal factors (short sightedness, lack of management expertise, low initiative and entrepreneurialism) were more important in determining the poor performance of a small firm. Lin (1998) also reached a similar conclusion in her study of SME’s in Taiwan as management skills and concepts of the business founders were considered the most important factors when compared to employee skills and concern for production. This was also related to superior business performance.
III Conclusion
The SME faces a different environment to that of large firms and hence its decision making should be based on the resource limitations often facing such firms. Such firms should take an entrepreneurial approach to marketing and strategy and strive towards developing those competencies that create successful SME’s. Moreover, when looking to external resources to enhance the firms marketing capability, the SME owner/partner should seek expertise and education that is rooted in the context of the specific situation they face. Scaled down text book theory offered by many institutes (such as trade associations and private firms) is not wholly applicable to the smaller firm and indeed may even be detrimental.
Strategy & Competitiveness 