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JEIM
19,3 Supply chain management
practices of SMEs: from a
business growth perspective
292
Paul Hong and Jungsik Jeong
Department of Information Operations and Technology Management,
College of Business Administration, University of Toledo, Toledo, Ohio, USA
Abstract
Purpose The purpose of this research is to show that small or medium enterprises (SMEs) have
significant impacts on supply chain performance. They may take the roles of suppliers, producers,
distributors, and customers. In this paper large firms and SMEs are compared in terms of strategic and
operational choices.
Design/methodology/approach SMEs are classified on two dimensions chain relationship
position and strategic focus. Four types of SME characteristics are discussed: efficiency, coordination,
collaboration, and innovation. Also presented are the five possible growth paths of SMEs, along with
theoretical and managerial implications.
Findings The theoretical contribution of this paper to the nature of SMEs and their supply chain
relationships is threefold: the differences between large enterprises and SMEs have been examined in
terms of key management practices; key characteristics of four types of SMEs have been identified in
terms of their supply chain relationship position and strategic focus; and the transition paths that
SMEs may follow in moving from one type to another have been shown. The models presented in this
paper give an informed insight and understanding of the dynamic changes that can transform SMEs
within their supply chain relationships.
Research limitations/implications The growth paths that have been outlined for SMEs display
diverse patterns. In view of the sheer numbers of SMEs that comprise the global economy, and their
strategic roles as suppliers, component manufacturers, service providers, and distributors, their
growth patterns may not be easily discernible over a short time period.
Practical implications Managerial implications of the study include: SME executives may
diagnose their current business position and strategically plan intended changes by enhancing their
operational capabilities and chain relationship positions, in view of changing market realities; most
importantly, they may strive to take practical steps to evolve from Efficiency SMEs all the way to
Innovation SMEs. The road-map presented in this paper may be helpful in benchmarking current
operations and in planning future transitions. In this way, SME management may take practical steps
to implement desirable growth paths through appropriate management practices that utilize
appropriate intra- and inter-organizational capabilities.
Originality/value These SME growth patterns provide a useful framework for meaningful case
studies that illustrate the potential for the dynamic transformation of SMEs.
Keywords Small to medium-sized enterprises, Supply chain management, Strategic objectives
Paper type Research paper
Competitive priorities
Unliked large firms, most SMEs may not compete directly against large enterprises
because of their limited resources (Cooper et al., 1986). Competitive priorities of SMEs
JEIM
Category SCM by large enterprises SCM by small/medium enterprises
19,3
Competitive priorities Market dominance through Market niches through sustaining
sustaining large market share profitable market position
Key strategies Exert influences in supply chain Focus on specialized market; build on
both upstream and down stream; unique competencies; effective
294 strategic alliances with suppliers and customers/suppliers management
distributors
External control Command and control toward their Either accept command and control
structure small suppliers and distributors; by OEM or 1st tier suppliers or
collaborate with more dominant utilize their negotiation strengths;
suppliers and distributors pursue collaboration with other
SMEs
Internal control Decentralized, structured and highly Centralized, semi-structured and
structure specialized; multiple core moderately specialized; specific core
competencies development competencies development
Goals of supply chain Operational effectiveness with Operational effectiveness with
Table I. management processes multiple performance outcome focused performance outcome
Comparison of supply requirements (e.g. cost, quality, requirements (e.g. specific definition
chain management delivery, time, customer value, and of order qualifiers and order
practices large v. small disposal) bigger scopes of winners); smaller scopes of
and medium enterprises information flows and product flows information flows and product flows
are protecting their specialized niche market through which they generate sufficient
profits, regardless of the size of their market share (Lambert and Cooper, 2000).
Key strategies
With their relative strength through their market positions, large firms may exert more
influence on their supply chains. They are more flexible in forming strategic alliances
with suppliers and distributors. On the other hand, the scope of SME influence on
supply chains may be more restricted (Berry, 1998; Brouthers et al., 1998). SMEs focus
on building their unique competencies and strive for effective customer and supplier
management (Lee et al., 1999). Naturally, SMEs tend to focus on a specialized niche
market strategy.
SMEs need to decide where to compete (i.e. positioning in the supply chain) as well as
how to compete (i.e. strategic focus) (OGorman, 2001). To survive, SMEs need to
clarify their strategic focus and supply chain relationship position (Berry, 1998; Cooper
et al., 1986; Entrialgo et al., 2000; Fronmueller and Reed, 1996; Kemppainen and
Vepsalainen, 2003). Strategic focus refers broadly to how SMEs compete within supply
chains, in terms of either low cost operations or value added operations (e.g. new
product and service development) (Levy et al., 2001). Chain relationship position relates
to competitive positioning by particular SMEs. Relationship strength within the
supply chain may affect bargaining power with their customers (Kalafatis et al., 2000;
Olhager, 2003).
Survival and growth of SMEs may depend on how SMEs effectively allocate
resources through their strategic focus, and secure better negotiation terms through
improvement of their chain relationship position. In describing business practices in
the context of supply chains, these two dimensions highlight key characteristics of
SMEs. With their obvious size constraints, SMEs must carefully position themselves as
product or service component providers or producers. SMEs acting as suppliers are
more likely to offer product components, but if they are on the distribution side of
distributions, they are more likely to offer service components to their larger partners.
To continue as viable competitors, SMEs must be able to meet order qualifier
standards (i.e. quality and delivery). Frequently, order winning criteria are low costs
for mature manufacturing industries and innovative elements in product and service
offerings for knowledge-intensive industries.
JEIM Here, low cost refers to the extent of ability to produce goods and services at
19,3 competitive rates. Firms with a low cost focus tend to produce components for
mature products; consequently their market potential may not be growing. On the
other hand, firms with a value-added orientation show strengths in their capability to
design and deliver product or service components to meet changing customer
requirements, with more likelihood of market growth. Value-added refers to the
296 extent of value creation potential with the products and services offered to customers.
High value-add SMEs are able to create a larger value potential with their products and
services, but low value-add SMEs have relatively less capability to create value
potential (i.e. revenue enhancement for products and services they offer) (Kukalis,
1989).
SMEs that have high or low measures on the two defining characteristics of chain
relationship position and strategic focus result in four SME classifications. These are
shown in Figure 1.
If the strategic focus is low cost (i.e. productivity or operational efficiencies) and the
chain relationship position is low, then such a SME may be one of many small
competitors in the market. Such efficiency SMEs usually accept cost reduction
targets set by their customers and try to conform to their customer demands.
If their strategic focus is low cost and the chain relationship position is high, these
firms may be able to work toward better cost targets with their customers. With their
strong supply chain position they have fairly substantial negotiating power with their
customers. In this sense, we will refer to these companies as coordination SMEs.
If the strategic focus is value-added and the SMEs chain relationship position is
low, then such SMEs operate in a relatively collaborative market with competitive
strengths. Even if their negotiation position is not strong, their internal competencies in
relation to value creation capabilities allow them to stay in the business as viable
members. Therefore, we call these companies collaboration SMEs.
If the level of efficiency is high and the chain relationship position is high, then such
SMEs have a sustaining competitive position. Their negotiating position is strong and
Figure 1.
Value-added chain
relationship position
model
their internal competencies in relation to value creation capabilities allow them to stay Supply chain
in the business as dominant members. We call the companies innovation SMEs. management
practices
External and internal contexts of the four types of SMEs
In this section, we discuss business environments and management practices of the
four types of SMEs we identified. We first explain external contexts (market, position 297
in supply chain, external relationship patterns) and internal contexts (firm capabilities,
management process focus). Table II summarizes these essential supply chain
management characteristics for the four types of SMEs.
Competition characteristics
Competitive characteristics are the first pattern indicator of SMEs. Many component
suppliers in the US auto industry compete primarily on cost. Both efficiency and
coordination SMEs compete on cost or operational advantages. In information and
knowledge-intensive industries (e.g., IT and business consulting firms) the differences
between collaboration and innovation SMEs lie in their ability to compete, based either
on their current product or service advantages and their innovative capabilities.
Firm characteristics
The distinction among SMEs in this pattern is adequate or strong capabilities in
relation to their key strategic focus. Efficiency SMEs possess adequate cost
improvement capabilities to stay in business. Collaboration SMEs have adequate
product or service development capabilities. Coordination SMEs have strong
productivity enhancement capabilities and stand out among their competitors.
Innovation SMEs have strong product development capabilities that may result in
marketing multiple sets of new products and improving their market positions.
For the purpose of this paper, we do not consider examples like Dell, which grew into a
very large corporation in a relatively short time period. Our focus is more on the
majority of SMEs that, in spite of their noticeable growth over the years, have not
become large firms. The model we developed is based partially on the growth theory of
SMEs (Venkatraman, 1991), strategic and operational choices of SMEs (Berry, 1998),
dynamic changes of SMEs (Levy et al., 2001) and other positioning literature (Kalafatis
et al., 2000; Olhager, 2003). Our model focuses on the organizational transitions that Supply chain
SMEs may undergo, and is demonstrated in Figure 2. management
Efficiency to collaboration path practices
The central aspect of this transition is a change in strategic focus from low cost to
value-added. Such a transition requires major reorientation of the companys
functional strengths. The focus of a low cost SME is primarily on operational 299
efficiencies, based usually on the operations function. On the other hand, functional
strengths of value-added typically show in R&D and marketing. This transition
requires switching from operational efficiencies (cost reduction through waste
reduction) to customer-sensitive value creation capabilities. Here, the transformed
emphasis is on external market realities, beyond internal cross-functional integration
and work process transformation. In the short run, these changes may not necessarily
improve the firms position in the supply chain through increased market share.
Rather, the transition allows firms to be much more flexible in inter-organizational
relationship building practices.
Figure 2.
Growth paths
JEIM and better technological networks (De Toni and Nassimbeni, 1996; Kalafatis et al.,
19,3 2000; Levy et al., 2001).
Conclusion
The theoretical contribution of this paper to the nature of SMEs and their supply chain
relationships is threefold:
(1) we have examined the differences between large enterprises and SMEs in terms Supply chain
of key management practices; management
(2) we have identified key characteristics of four types of SMEs in terms of their practices
supply chain relationship position and strategic focus; and
(3) we have shown the transition paths that SMEs may follow.
The models presented in this paper give an informed insight and understanding of the 301
dynamic changes that can transform SMEs within their supply chain relationships.
Managerial implications of the study include:
(1) SME executives may diagnose their current business position and strategically
plan intended changes by enhancing their operational capabilities and chain
relationship positions, in view of changing market realities; and
(2) most importantly, they may strive to take practical steps to evolve from
efficiency SMEs all the way to innovation SMEs.
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Corresponding author
Paul Hong can be contacted at: Paul.Hong@Utoledo.Edu