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Environmental Scanning and SMEs Strategy: A case study

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 22nd International Conference on Production Research

ENVIRONMENTAL SCANNING AND SMES STRATEGIES: A CASE STUDY

Abstract ID: OSPF10019

A.C.M. Pimentel, M.M. Spinola, R.O. Moraes

Departamento de Engenharia de Produção, Universidade de São Paulo, Av. Prof. Luciano Gualberto, São Paulo, SP,
Brasil

Abstract
Dynamic competitive environment demands a constant adaptation. To prioritize strategic actions, companies
must monitor key factors that affect their strategy. However, in SMEs (Small and Medium Enterprises) strategic
planning and environment scanning tend to be informal and centralized on the owner. In this situation, these
activities might be left aside or not produce information to support strategy formulation.Given the
circumstances, it is important to understand the relationship between strategic decisions and scanning
activities in SMEs. The relevance of this study lies on the fact that, in Brazil, over 90% of the companies are
SMEs, therefore they represent a significant force to the economy. The objective of this research is to identify,
from the characteristics of scanning process in SMEs, the relationship between competitive strategies and
scanning activities.It was used a unique case study, establishing the proposition that the adoption of a strategy
does not consider scanning activities. A framework was elaborated, based in the theory, and it was used as
research instrument. The interviews were conducted with the board. The collected information were analyzed
and confronted with the results found in theory. It was observed an informal and unstructured scanning, and a
lack of reliability in the information gathered, what could limit the influence of scanning in strategy. Up to this
moment, scanning activities did not influence the strategy in the studied company. This work helps to
understand the relationship between scanning activities and strategy in SMEs. The framework developed can
be used as reference to other studies. The limitations are the fact that the research only considers the
company´s vision about its own environment and the owner’s opinion and the impossibility of results
generalization. Future works can reproduce the research in similar companies, to confirm the obtained results.

Keywords:
SME, environmental scanning, Competitive Inteligence

1 INTRODUCTION relationship between competitive strategy and scanning

In a highly competitive environment, to know external
environment and adjust to it is very important. Because of
its dynamism, a constant scanning is necessary to conduct
correctly strategic actions of the companies. Scanning
includes defining information needs, searching and
collecting and using them deliberately to set organizational
strategy [1]. SMEs have some particularities, as financial
restrictions, simple structure, informality, centralization,
among others [2]. These particularities can affect scanning
process, since the owner, who is the main executive and
also perform many operational activities, has few time to
plan and scan [2]; [3].
Relationship among scanning activities and strategic
process were studied [4];[5]. However, correlation is still in
discussion, since factors as cognitive capacity and
personality can influence it. In SMEs, this also occurs,
maybe more strongly, given the great importance of the
owners role, leading the company to be a reflect of his
personality [2]. In smaller companies, planning tend to be
informal and reactive [3]; [6]. So, scanning activities and
strategic actions depend almost exclusively on the skills
and posture of this person towards the information
received.
Smaller companies attend over 90% of all companies in
Brazil and are a important force in the economy,
generating wealth and jobs [7]. A poor scanning, due
resources restrictions or lack of time, can lead to bad
actions and, in the limit, put the business in risk. Given the
context, a important question is how relationship between
strategic decisions and scanning activities develops in
Brazilian SMEs. The objective of this work is to identify,
from characteristics of scanning process in a SME, the
activities. As results, it was expected that smaller
companies had few knowledge on the external
environment, with an informal and unstructured scanning,
with use of personal sources, given the tendency of these
companies to informality. Other variables of environment
would receive little attention of the owner, and would be
obtained by chance.
2 THEORETICAL REVIEW
2.1. SMEs environment
To characterize a SME, there are many of criteria, such as
number of employees and annual incomes. A small
company can be defined as having between 20 and 99
employees, and a medium company has between 100 and
499 [7]; or as having between 10 to 49 employees, with a
annual income from US$ 400 thousand to US$ 3,5 millions
[8]; or even as having a annual income until US$ 2
millions, and a medium company until US$ 7,5 millions [9].
In this study, a company will be considered as medium if it
fits at least in one of these criteria.
Smaller companies have specificities and tend not to
follow academic models towards their administration and
operation [10], [2].In SMEs, adaptation and optimization
were more important than strategic thinking. There are
important features that differentiate a SME from a big
company, and it is necessary to use different approaches
to study these kind of company [11], [2], [10]. Since they
are so heterogeneous, it is difficult to propose theories, but
there are similar features among them, as exposed in table
1 [2].
 Table 1: SME characteristics
Heading 1
Organizational Centralization; simple and small structure; non-existence of intermediary
aspects hierarchical levels; direct contact with employees, easing informality and
flexibility; little control over external environment; owner prefers to use sensibility
rather than administrative techniques; low maturity; planning and control little
formalized; strategy little formalized and very intuitive; reactive management.
Decisional aspects Decision making lead by owner´s beliefs and based in a short-term logic and
experience; owner does not have time to perform strategic analysis;
centralization and personification of decisions; short decision circuits and often
taken without having all necessary information. Direct contact and simple
structure facilitates understanding about what happens within the company,
increasing responsiveness.
Individual aspects Predominance of an individual, who influences strategy, structure and
performance; company is affected by owner´s personal course; propriety
determines status and roles in the organization; owner has paternalist attitudes
towards employees. They have little technical knowledge, poor formal
knowledge, generally based in everyday practices, limited human resources and
technical skills.

2.2. Competitive strategies
A strategy must consider three factors: objective, scope
and advantage, which defines its purpose. The objective
defines also the time gap to achieve it; scope defines the
boundaries into which this strategy will be used. The
essence is to define what the company will do differently
from its competitors, therefore, its competitive advantage
[12].
Strategy concepts points to the importance of establishing
differentiation towards competitors, creating more value to
the customers, or the same value at lower cost, or even
doing both. The way in which activities are performed in
the company are the basic units of its competitive
advantage. In other words, strategic positioning means to
perform activities in a different way of the rivals [13].
Generic competitive strategies can be: leading by cost, by
differentiation or by focus, and it must consider which
activities the company performs and how they are done,
besides the industry context [14].
Another typology, and define three types of strategy, taking
as key-dimension the changes regarding products or
market. None of the strategies are superior to the others,
but each type has its risks, as showed in table 2 [15].

Table 2: Strategy typology Miles

Type Characteristics Risk Focus
Defenders Offer a stable set of products and Obsolescence Process efficiency,
compete by price, quality, service manufacture or delivery
and delivery rationalization

Prospectors Pioneers in developing products Over extension To select and to adjust

or services, changes product domain, observing trends in
lines frequently and compete by product and market
seeking new market
opportunities

Analyzers Intermediary – change products Balance product To establish relationship and

slower than prospectors and are disruption and internal roles in the company
less compromised wit stability moderate stability
than defenders.

In SMEs, the strategic process, when existent, is
incomplete, unstructured and irregular. Generally, It works
reactively, it is defensive and informal, since owners do not
strive to have a structured planning. Strategy development
occurs as the company needs, trying to increase its
survival chances. High resources restrictions make theses
companies very vulnerable to management errors and
financial hazards, what would influence the strategy
process [3].
Besides that, SME owners fell that strategic planning is too
complex and sophisticated. Existing overload on SME
owners, low professionalization and resource restrictions
would inhibit planning process. This context contributes to
the little interest in strategic planning of SMEs [3].
There is a positive correlation between company size and
sophistication level in planning process, thus, as a SME
grows, the company would need to do a formal and
structured planning [16]. However, most important strategic
decisions are taken outside formal planning, and this would
be stronger in smaller companies [17].
Other strategic planning schools, such as learning, are
more adequate to SMEs, since they have a more open
process, and people outside and inside the company can
contribute, allowing creativity. Owners could take

advantage from learning since they have difficulties to
understand a complex ad dynamic environment [3].
2.3. Scanning competitive environment
Companies must adapt to the environment to survive.
Scanning is a first step in this process of adaptation,
because competitors with different information show
differences in skills to formulate responses, and survival
depends on understanding external influences [4], [18],
[19]. Scanning to competitive intelligence can be defined
as the main tool to obtain important information.
Competitive advantage would come from organizational
ability to scan proactively and have more efficient
responses [5]. Scanning is the search and collect of
information about events, tendencies and changes beyond
organizational boundaries to guide strategic management
[20].
Definitions
Organizational decisions and actions come from
information processing arising from external environment.
Changes, events and tendencies create signs and
messages, and organizations use these clues to adapt to
new conditions. Besides that, external environment
influences internal structure: if it is more stable, structure
would be more rigid, if it is more dynamic, companies
would be more flexible [21]. So, environmental scanning is
the internal communication of external information that
might influence in decision making, and involves identifying
these factors, collecting information, that are passed to
managers to guide future actions [18]
Executives use these information to maintain or change
structures. So, scanning´s purpose can be environment
surveillance rather then problem solving. Scanning does
not enable the company to adapt to the market, instead
helps to construct perceptions and strategic answers by
executives from obtained information [21]; [5].
There are different approaches of scanning [4], [21], [5],
[18]. It is hard to establish scanning measures, since
executives scan in a fragmental, informal and random way.
Measured variables were frequency (what were the
frequency in which executive knew about tendencies and
events), interest (extension in which executives detained in
a subject) and hours (what percentage of scanning time
was directed to each department) ([4], [19]) Other factors
measured could be frequency and scope (which sectors
are scanned). Also, to perform a formal scanning, some
steps can be followed. First it is necessary to identify
scanning needs. Next, to collect information and analyze
them. Finally, the results must be communicated and a
decision must be made based on the information (informed
decision) [18], [1]
It is possible to define "monitoring modes" [1]. In
"undirected vision", the individual is exposed to information
without a specific goal, trying to detect early signs of
changes in the environment. In "Guests vision", the
individual sees information about selected topics in an
attempt to assess the impact on the company. In "informal
search" the individual seeks information actively, but not so
structured. Finally, in the "formal search" there is a formal
and deliberate planning for specific information.
The role of the managers and strategy
The role of entrepreneurs is important in searching and
processing information, and it is even more critical for
smaller companies, since they are more dependent on
individuals as information providers. Difference in the
patterns of information seeking is influenced by a set of
psychological factors and factors related to personality,
which will be addressed later on [6]. Managers have the
22nd International Conference on Production Research
role of interpreting the external uncertainties and decide on
how the internal structure should work for better fit [21]. In
SMEs, there are difficulties in understanding the external
environment, and therefore qualitative aspects related to
the understanding and interpretation, and the cognitive
capacity of the leader become very important [3]. In
addition, variables such as strategic strengths and
weaknesses would be subjective representations made by
the directors, and this depends on their characteristics.
There are three factors orientated to entrepreneurship that
affect competitive scanning. First, "need for achievement"
refers to the desire of the manager to be successful. These
people would have a moderate propensity to take risks,
and prefer to take responsibility for their own decisions.
The second factor, "locus of control" refers to managerial
perception of how their personal control affect the results.
This factor has two dimensions: internal, where the
manager believes that their actions and behaviors interfere
with the search result and thus control over the
environment, and external, where he believes the
situations are unpredictable and results derive from luck or
chance, what leads to a passive attitude. The last factor,
"innovation" refers to the tendency of the leader in
supporting and engaging in new and creative ideas and
experimentation, exploring new and unique ways to solve
problems within the organization [5].
Furthermore, market-oriented firms were more proactive in
scanning because their culture favors support for this
activity. Proactive scanning is driven more strongly by
innovative managers, with a strong desire to succeed.
Therefore, scanning efforts could be maximized in
companies that value competitive intelligence over
competitors and consumers. Knowledge of consumers and
competitors' actions allowed a better evaluation of the
strengths and weaknesses of the company, and therefore
a better representation of their competitive advantage. The
competitive scanning should be done to understand the
impact of market forces [5].
There is a common body of knowledge in industry, and
executives tend to see common sources of information.
Entrepreneurs only scan beyond these limits if their
strategy asks for a particular type of information or if the
information was very abundant [4], [20]. In SMEs the
preparation of formal strategic alternative scenarios is not
developed - the executive collects information in the day-
to-day to develop a strategy. Search for information would
tend to drive up to what is familiar, convenient and less
costly [11].
The choice and use of sources of information also depends
on cognitive ability and values and beliefs of the executive.
Organizations can be seen as rational systems for decision
making, but there is a limitation that is the individual's
cognitive capacity [21]. Information would serve to reduce
the uncertainty of the process. There is distinction in the
choice of sources of information according to personal
characteristics [6]. There is a increased importance of non-
personal sources in leaders with internal locus of control
and high self-esteem. Leaders with a propensity to take
risks tend to seek personal sources, while leaders with
personality stiffer seek professional sources.
Given the diverse influences on scanning activity and
strategy, some subjective, the relationship between these
two aspects is object of study, without a definitive
conclusion. Companies that tend to adopt the strategy of
"defenders" would have a more limited scanning, and
companies that tend to be "prospectors" are more
aggressive and wide in this activity [15]. Other studies [4],
showed inconsistency because defenders are not
necessarily passive, but tend to more aggressively
competing for efficiency. Likewise, prospector, though
innovative, are primitive in the approach of production or
operation. The link between strategy and scanning was not
strong. Instead, prospectors and defenders had the same
information, but used it differently, and these choices are
linked to their distinctive competencies and managerial
values. The scanning itself would not be used to reinforce
their strategies and would be restricted to a functional role.
Executives scan according to the perceived need for
information, and this can be considered a function of the
organization's strategy. Executives scan to enhance their
competitive strategies. This behavior can perpetuate
strategies, limiting its responsiveness to environmental
signals [22]. However, other researchs ([4]) reached
different results, where executives rarely discussed ways
of monitoring in terms of contribution to strategy, but in
terms of functional and personal interest.
Scanning in SMEs
In the SME environment scanning occurs in a situational
and reactive way, and the leaders have little control or
influence over the external environment and little
awareness about the need for pro-active scanning [10].
Customers aspects were most monitored by SMEs,
followed to information about suppliers, industry
regulations and general economic conditions [23].
Even so, the factors that received more attention still
lacked information, which to the authors can be explained
by an inefficient and unstructured scanning, because even
with high frequency search, was not suitable. It was also
found infrequently scanning of competitors, and the factor
"price by the competitor" as the one highlighted. Other
sectors few scanned were linked to demographic, socio-
cultural and "practices of banks and lenders."
The authors also analyzed the influence of the size
(number of employees and annual revenue) and the age of
the company in scanning activities. In general, since
environmental influence increased, aspect of bank
practices received the more attention. As for age, the
authors found that younger firms seemed more concerned
with competition. Scanning competitive environment
proves to be an important part in the process of strategic
planning, since the information obtained, if used properly,
can lead to good decisions on the establishment or
continuation of a competitive advantage. Many factors
influence this activity, and in SMEs it tends to be
centralized in the leader / owner, who for lack of time or
resources, can neglect it. The relationship between
scanning and strategy is still controversial in the literature.
3. METHODOLOGY
The methodology used was a single case study, where the
object of study was a medium size industry in the state of
to the framework below. The interview followed, to the
extent possible, this sequence of items
São Paulo. The company has a diverse product line,
serving industries such as: stationery (predominant),
"Home Centers", furniture and toys. Its sale is concentrated
in the domestic market, serving all states of Brazil. It is a
family business, with 20 years of existence; In the last 5
years, it underwent on a process of rapid growth in its
manufacturing plant as well as in sales. After a period of
turmoil and disorganization, the company began to
restructure its internal environment, at first, establishing
rules and operating procedures.
With this consolidated for about 3 years now, its concerns
are about the strategic process and gathering information
from the external environment. Despite the lean
management structure and few hierarchical levels, it has
formed, since 2009, formalized directory board and
important issues are always discussed and decided
together by these people, who have family ties. No
member of the group is considered the company's
president. The most important decisions involving
investments, strategic actions one new changes in
previous decisions are made jointly by the group. In case
of discrepancies, the general consensus of the majority
prevails. Over time, there has been a maturation in relation
to the frequency and format of meetings and decisions.
Each member of this group is responsible for an area of
the company: sales and commercial; production and
product design; purchase; and "back-office" (IT,
accounting, tax, human resources and finance). Given
these characteristics of the object of study, observation
and understanding of the scanning processes and strategy
planning can be clearer, as the company has gone through
several cycles of learning.
The company's generic strategy is differentiation in
products and service. However, its products are
considered of low turnover and commodities - price factor
often ends up being predominant in trade negotiations.
Using the five forces model of Porter, it can be noted that
the industry has tougher competition and low financial
return. Compared to competitors, there is a great rivalry
and "price war" strategy is a constant. About new entrants,
there is an imminent threat, coming from imported products
brought by new distributors, which eventually compete with
industry. There is little bargaining power with suppliers,
which are composed mostly of multinational or large
businesses. Regarding buyers, the bargaining power of
them is great, due to the characteristics of the product itself
and increased competition. About substitutes, there is a
possibility of moderate occurrence.
To form the interview script , it were used several of the
studies discussed in the theoretical foundation, according
to figure 1:

Figure 1: Proposed Framework
To help in the investigation of the research question, it
were formulated two propositions. SMEs have little visibility
of its external environment. Increased competition is a
major concern for these companies as well as financial
performance variables. Thus, loss of market share and
revenues are sensitive issues [10]. Factors related to
market are the most monitored [23]. Given the constraints
of resources and human capital to smaller companies, and
their reactivity characteristics in the strategy ([2]; [3], [10]),
the first proposition of the study is:
22nd International Conference on Production Research
P1. In an SME environmental monitoring will be limited to
matters related to clients with personal sources.
Considering the points raised in the first proposition, and
yet the fact that strategic processes are poorly structured
and formalized in SMEs, and that there is dynamism and
speed in decision making of SMEs due to centralization
and hierarchical structure centered in leader ([11]; [2]), and
the fact that in these companies scanning is situational and
reactive [10], the second proposition of the study is:
P2. In an SME, only information about competitors,
characterizing a threat to the company, will cause a
change in strategic actions in order to minimize the
financial impact of this new situation.
4. RESULTS
The interviews were conducted during a week with
members of the directory board. Then, the information
obtained were summarized in Table 3, following items
proposed in the framework, to facilitate understanding and
analysis.
The results obtained in the case study are consistent with
the theoretical aspects, regarding the particularities of
SMEs in shaping strategy and environmental scanning. It
was also observed that there is a strong motivation of the
members of the company to make it successful, which is
the main driver of decisions. Although there is a small
structure in scanning, the company often feels "lost" and
unsure about whether or not to take actions based on the
information obtained, since it considers these personal
sources not totally reliable. Even information coming
directly from external customers and staff are seen as
biased, particularly with regard to price and activity of
competitors
 Table 3: Results
Heading 1
1. Company Stationery industry (more relevant), followed by home-center (furniture) and toys. Medium-
characteristics sized, 110 employees, annual revenues over $ 10 million. Generic strategy: differentiation.
Strategy: analyzers. Products of low turnover, price predominant factor. Products are office
furniture and utilities, in wood and aluminum. 5 five forces: the intensification of competition,
low financial return. Competitors: great rivalry, "price war." New arrivals: imminent threat.
Little bargaining power with suppliers and buyers. Substitutes: moderate chance.
Most important decisions taken by a group of people. But these people perform operational
activities. The formation of this group was in 2009, and the company believes that there
have been several cycles of learning how to make better decisions, despite finding that has
not yet reached an ideal situation.

2. Existence of Informal and unstructured information arrives by chance. Company does not know how to
scanning of structure this process, and considers that the cost-benefit is not worth it. However, it admits
competitve that more information could be positive in some situations. Company feels that it should seek
environment other sources of information, particularly about the activity of competitors. There are no
institutes or agencies that make measurements on stationery industry, in the company´s
subsector. Scanning has no direct influence on strategic actions, and serves more as a
thermometer. The influence occurs when information from the external environment
combined with observations in the internal environment suggest a major threat to financial
performance (as a sharp drop in revenues or profitability, loss of major customer, a
significant increase in costs, among others).

3. Information The main requirements refer to customers needs, trends, tastes and habits (to direct
needs launching new products), activities of competitors (prices, sales policies, development of
new products) and new technologies to manufacturing (to decrease costs). To a lesser
degree of importance, the company seeks regulatory information, suppliers and
macroeconomic situation. Internal information are also important

4. Source Customers and competitors: main sources are their own customers, sales staff, as well as
identification and contacts with some companies in the same industry. The sources are personal (contacts).
importance The same is observed in relation to suppliers and new technologies, using still active
research on the internet and in fairs / exhibitions. On new product development, the main
sources are international trade fairs, client websites, competitors, and consultants.
Regulation is monitored through a third party (accountant and consultants), and a site
specializing in law. The main source of the macroeconomic situation is the national press,
and internal factors are monitored by reports from ERP.

5. Frequency and Unable to determine. Consider that this happens all the time due to dynamic environment.
time spend in Actively seek information as the need arises. The passive scanning occurs at all times.
scanning Scanning of customers and competitors as well as internal factors (cost, sales and
profitability) is more frequent and a little more structured.

6. Scanning The company considers the environment "moderately analyzable" - believes some aspects
classification are analyzable, but others not. Feels insecure about many information that it receives, which
leads to indecisions about when act. They consider that some used information sources are
unreliable, and they usually wait a little to see if there confirmation (or query other sources to
confirm). The area considered more "not analyzable" are information about habits of
consumers, that directly impact in decisions about releases of new products.
Since the company has a posture relatively active, despite a not structured process, it can
be classified in quadrant "Searching informal (enacting)" and "vision undirected", of [1].

customers. It has plans to do quantitative research directly

The company believes that the external environment is
very dynamic and that a formal scanning would be very
costly, despite not being happy with the way it performs
this activity today. This reinforces the idea that resource
constraints may influence the monitoring activity. The
industry in which it operates has no formal associations
(egg, in the automotive industry) and the company does
not know where to seek external information, other then
personal sources. As the leaders have operational
activities, they can not devote themselves entirely to
scanning and strategy, even being necessary. A issue of
great concern is how to decrease the impact of the "price
war" imposed by competitors, but the company does not
know how to find a important aspect to add value for
with customers, but dit not yet implement this idea. The
company does not consider that its strategy fails, but
admits that in some cases it lose business. However, there
are niches of customers who value other things than price,
and in those cases, the company takes advantage over
their competition, mainly with delivery time.
As suppliers are large companies and have a long
relationship with the company studied, there is no intensive
scanning in this area. Emergence of new technologies,
especially machinery, which reduces costs and increases
productivity is the subject of active research. Developing
new products is an area that suffers from the lack of a
more formal scanning, and company has various
experiences of unsuccessful launches, which caused loss

of money, because the product did not have a turnover
considered good.
The influence of the scanning in strategy was observed
only when the actions of competitors caused a major
impact on revenue (sales drop, for example) or the
company's financial performance (egg, departure from the
company's "price war", despite the loss of customers). Still,
there was not a strategic shift, but adoption of more
specific actions and in some regions or customers, where
the impact was very intense. Unreliability and insecurity
about the sources may explain the low influence of
scanning in strategic actions. An interesting point was that
these decisions cause conflicts in the board, since due to
formation and different personalities, information is
interpreted differently, when not opposed. The opposite -
the strategy influence the scanning - was not observed in
the company.
Presented propositions in the methodology were partially
observed. The first, "In an SME environmental scanning
will be limited to matters related to clients with personal
sources" was not confirmed, because despite the great
weight of these factors, other aspects are monitored, with
less intensity. The second proposition, "In an SME, only
information about competitors, characterizing a threat to
the company, will cause a change in strategic actions in
order to minimize the financial impact of this new situation"
was confirmed in the company's actions so far, despite it
claims that a major technological innovation or change in
habits of consumers / market could trigger a change in
strategy. However, this should occur reactively, since there
is no active scanning and information is obtained
randomly, which leads to a tendency to respond after the
occurrence of the change in the external environment.
5. CONCLUSIONS
Scanning competitive environment within the dynamic
changes is an important tool to support strategic actions.
SMEs, due to its particularities, face many difficulties to
carry out this activity in a structured way. Strategies
formation in these companies is also informal and tends to
be reactive. Studies seeking relationship between these
two processes are still controversial. In the case studied,
there was partial influence of scanning in strategy,
especially when the impact of environmental changes
implied loss of customers, loss of revenue or profitability
decrease. There is the possibility of other external factors
also influence strategy. However, the strategy did not
influence scanning activities.
This study aimed to contribute to the understanding of the
relationship between environmental scanning and
competitive strategy, in smaller companies, as they have a
strong presence in Brazil, creating jobs and stimulating the
economy. The proposed framework can serve as
instrument to other studies, because it is generic and
based on the literature. Because it is a case study, the
results can not be generalized. The fact that the
information came from the company´s board generates
bias, because they will reflect the point of view of a
company, and not the reality of the industry as a whole. If
the research was repeated on a competitor, it is likely that
the results presented any difference. Future work may play
a similar research in other companies, or even
competitors, to confirm the results.
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22nd International Conference on Production Research
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