Small and Medium Enterprises, successes and failures as a result of their corporate strategy

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One of the prevalent concerns in the present times, for both management academics and practitioners, relates to the principles which determine corporate, and specifically Small and Medium Enterprises, successes and failures as a result of their corporate strategy. Stated as a question, this concern can be expressed as: In the present era of environmental turbulence, why do some small-medium businesses prosper and grow, while others collapse and disintegrate?

The focus and direction to answer this question can be derived from principles and practices which make the businesses successful. Correspondingly, business success has been variously attributed to pursuit of excellence in business strategy (Peters and Waterman, 1982), achieving total customer satisfaction (Horovitz and Panak, 1992), mastering the art of corporate change and transformation (Tichy, 1983; Kanter, 1985), transformational leadership (Tichy and Devanna, 1986), , time-based competition and fast-cycle capabilities (Stalk and Hout, 1990), managing quality (Garvin, 1988), focus on core competence (Prahalad and Hamel, 1990), lean manufacturing technologies and continuous improvements (Suzaki, 1987; Hayes, Wheelwright and Clark, 1988; Harmen, 1992), and so on. These insights are also largely consistent with each other, and provide significant understanding about the dynamics of successful strategies, in that they are consistently and rigorously applied. However, in remaining primarily focused on the successful approach to organisational strategy, they address the issue of corporate failures only by exception, conversely implying that failures result from the absence of one or more of the above attributes and by implication a lack of cohesion and systematic application.

This understandable preoccupation with success is widely shared in the management literature (with some notable exceptions, e.g., Cameron, Sutton and Whetten, 1988; Danny Miller, 1990, Lawrence Miller 1989, Pascale et al 2001, Pauchant and Mitroff, 1992, etc.). Whilst strategic failure of businesses is an age-old reality, its study is a comparatively recent phenomenon, emerging as a reasonably noticeable field only during the 1980s. Cameron, Sutton, and Whetten (1988) found that about 75% of literature on SME decline and failure was published after 1978, possibly indicating greater consciousness among the researchers about the increasing environmental threats to corporate survival, or indeed a recognition that organisations and humans can learn from failure and that there is a direct correlation between the approach of entrepreneurs and the success of their businesses.

Therefore this project aims to explore and compare the approach which is adopted by successful Entrepreneurs and SME's and those in which similar businesses fail and decline. There are two reasons for adapting such an approach. Firstly, from the life-cycle and population ecology perspectives, organisational decline and death seems to be a natural process, and needs to be understood. In a study of UK Corporations, Nystrom and Starbuck (1994) found that close to 90% of businesses fail to survive beyond ten years of their inception. Another study (Pascale, 1990) reported that after within five years of their research, two-third of Peters and Waterman's 43 "excellent" small companies on the AIM were no longer excellent on the six financial criteria which were used for identifying them; eight of them, in fact, were in deep trouble. Similarly, a report in Forbes (Williams, 2008) found that only 22 of the 100 most successful small UK companies of 1997 still featured in the list in 2007. Makridakis (2001) listed out some interesting facts about the prevalence of SME organisational failures from various reports, books and article, such as:

There were close to half a million business bankruptcies in the world in 1998;

On average, it takes 8 years until corporate ventures become successful, while a majority of new ventures never make a profit; between 35 to 85 % (depending on the specific study) of new products fail ever to make a profit;

For every successful SME inception there are two that fail

The second reason for exploring the reasons and relationship between SME approach and strategic application relates to the very nature of success. The Systems view of organisation (Katz and Kahn, 1978) defines corporate success and effectiveness in terms of the extent of alignment and fit between the organisation and its perceived and real operating environments. There can, however, be numerous reasons and ways in which businesses may lose this alignment, and create conditions for failed strategy. One may say that while the determining principles of SME success are more or less similar in all cases, the paths to failure are different and varied.

This project analyses 18 SME's and determines the business relationship within the organisational trajectory model and the strategic leadership style of the business managers and leaders. Analysing the trajectory and strategic leadership style can create an early warning system that gives an indication or signal to the business leaders, and the indication or signal will give the business owners the opportunity to divert the trajectories from failure and realign their approach and application of corporate strategy.

Thus, this project has five main research questions:

What are the key factors which influence SME success in strategy and strategic implementation?

What external factors influence SME / Entrepreneurial success in strategy and strategic implementation?

What approach is adopted by SME's / entrepreneurs with regard to longer-term business strategy?

Why do SME's and entrepreneurs adopt this approach with regard to strategy?

Creation of a framework or paradigm to support SME's / Entrepreneurs in robust business growth

The research questions are created to identify the inter-relationship of the corporate trajectories and leadership styles and how these translate to SME strategic approach and application. The research questions will give a model to plot the types of leadership and ownership styles and the corporate trajectory allowing a health check of the business.

The project consists of 5 chapters. Chapter 2 will review the entrepreneurial leadership style and the impact within the changing business environment, investigating the importance of understanding the location of the business life cycle and the interrelationship (and effect) of the strategic approach within the business. Chapter 3 describes the research methods adopted to conduct the project. Advantages and disadvantages of different methods have been discussed. The author also acknowledges the limitations of the research methods.

Chapter 4 is devoted to analysing results and the findings from the research have been discussed. Finally in chapter 5 recommendations and conclusions are drawn based on the main findings from the project, culminating in a framework to propose systematic strategic application.

1.2 Entrepreneurs

Entrepreneurial businesses are generally regarded as the lifeblood of any economy, as they act as a catalyst for change, (Burns, 2001). An entrepreneur can be regarded as someone who "undertakes a new venture or enterprise and accepts full responsibility for the outcome", (Deakins and Deal, 2005), thus through the creation of new ventures and organisations the economy is offered fresh opportunities for growth and gain. To refer to someone as an Entrepreneur is also to imply that they are possessed of certain personality traits or characteristics such as an increased propensity to risk, or a creative approach to an existing difficulty. Whilst there is strong debate as to whether the skills of a successful entrepreneur are inherent or can be taught, or indeed whether they are the result of a combination of external factors, there is consensus as to the dynamic capabilities of entrepreneurs who are able to derive recognition and success from business opportunity, (Sexton and Landstrom, 2000; Ucbasaran, 2001; Gartner, 2001).

Frequently an entrepreneurial business will grow rapidly. This is unsurprising as the entrepreneur has typically based their business on a market niche or opportunity that they have then capitalised upon. Thus their business begins to reach critical mass and the need to formalise parts of the business processes becomes a concern, (Barrow, 1998). However, empirical evidence suggests that the very characteristics which enable the entrepreneur to grow their business opportunity also hinders them in their ability both to strategise and to run their business day-to-day, (Venkataraman and Shane, 2000). Therefore this research aims to explore the approach which SMEs and entrepreneurs adopt when planning and implementing strategy to understand how systematic they are in their approach and why.

1.3 Small and Medium Enterprises

SME's [1] have an unfortunate track record of a failure to successfully implement organisational strategy, which in businesses and elsewhere is best described as a deviation from expected and desired outcomes. For SME's this includes both avoidable errors and the unavoidable negative outcomes of experiments and risk taking, or in this case a failure to apply a systematic approach. Schumpeter (1934) and Easterbrook (1990) suggest that for SME's this is an essential component of an efficient market economy, allowing the recycling of financial, human and physical resources into more productive organisation, however, many stakeholders including owners, providers of debt finance, employees, suppliers, customers, managers and auditors have an interest in the financial and strategic health of businesses as poor business strategy can impose significant financial, emotional and physical costs on all these groups. If a trajectory to SME strategy divergence can be identified early to allow successful intervention, these costs can be reduced. Hambrick and D'Aveni (1988) suggest that indicators or signals can be present up to several years prior to major strategic diversion and this potential lead time can provide opportunities to construct models and tools to predict SME divergence and create interventions and diversions to avert the strategic problems.

SME's are encouraged to learn from their situations, adapt and capitalise on the organisational market - it has been described as adaptive management as opposed to organisational management, however Pascale et al (2001) notes that this is easier to espouse than to effect. The idea that businesses and their people should learn from externalities has popular support and it seems obvious. Cannon and Edmondson (2005) research concludes that businesses systematically learning from externalities is rare. This idea that individual businesses learn originated with Cyert and March (1964). Cyert and March (1964) stated that organisational learning involves changing goals and forecasts to reflect experience and current perceptions, adapting decision rules to suit circumstances, modifying goals to make them realistic, and searching where previous searches succeeded. Especially relevant to this subject is their claim that businesses learn mainly by encountering and solving problems rather than by experiencing successes.

While businesses are beginning to accept the value of learning in the abstract, at the level of corporate policies, processes and practices - it's an entirely different matter at a personal level. Everyone hates to fail, yet Entrepreneurs are more adapt at learning from failure than others. We assume rationally or not, that we will suffer embarrassment, loss of esteem and stature. Farson and Keyes (2001) observed that nowhere is the fear of failure more intense and debilitating than in the competitive world of business, where a mistake could mean losing a bonus, a promotion or even a job. As with all things in the world, there are lifecycles. Birth will lead to death, start must have a finish, a beginning will have an end and if a business has growth it will have decline. This is an understood cycle of life. The important aspect of species (business) survival is to continuously change and adapt to the surrounding. Thus the ability to learn from externalities and apply this learning systematically will enable Entrepreneurs and SME's to learn, grow and flourish.

1.4 Conclusion

Toynbee (1998) suggests that if we understand the causes of integration and application, of emergence and strategy; we can alter our behaviour and achieve an ever advancing civilization. It is the failure to recognise and respond to new challenges that lead to a condition of ease, to the loss of muscle and will, and in consequence the failed or weakened application of organisational strategy. The frequently publicised reasons for a limited systematic approach to strategy by SME's and entrepreneurs is that of macro factors and the need to respond to external demands in the immediate term. It is the suggestion of the author that this current and rather simplistic explanation does not result in greater business understanding, as they hope that this research will demonstrate and attempt to rectify. As managers, leaders, and owners, it becomes our obligation to maintain the energy of creativity; to constantly strive to grow a sustainable and robust business for all stakeholders and future economic growth.