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Strategy development by SMEs for competitiveness: A review

Article  in  Benchmarking An International Journal · August 2008

DOI: 10.1108/14635770810903132

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SMEs for
Strategy development by SMEs competitiveness
for competitiveness: a review
Rajesh K. Singh and Suresh K. Garg
Mechanical Engineering Department, Delhi College of Engineering, 525
Delhi, India, and
S.G. Deshmukh
Mechanical Engineering Department, Indian Institute of Technology,
Delhi, India

Abstract
Purpose – SMEs are considered as engine for economic growth all over the world. After the
globalization of market, SMEs have got many opportunities to work in integration with large-scale
organizations. They cannot exploit these opportunities and sustain their competitiveness if they focus
only on certain aspects of their functioning and work in isolation. This paper tries to identify the major
areas of strategy development by SMEs for improving competitiveness of SMEs in globalised market.
Design/methodology/approach – About 134 research papers, mainly from referred international
journals are reviewed to identify thrust areas of research. On the basis of review, gaps are identified
and research agenda is proposed.
Findings – SMEs have not given due attention for developing their effective strategies in the past.
They are localized in functioning. On export fronts SMEs face many constraints due to lack of
resources and poor innovative capabilities. For sustaining their competitiveness, they have to
benchmark their assets, processes and performance with respect to the best in industry. There is also
need for developing a framework for quantifying the competitiveness by adopting a holistic approach.
Originality/value – This paper explores major areas for research on SMEs. It will be of great value
for researchers and professionals involved on SMEs management.
Keywords Globalization, Small to medium-sized enterprises, Competitive strategy
Paper type General review

1. Introduction
Small and medium enterprises are considered backbone of economic growth in all
countries. They contribute in providing job opportunities, act as supplier of goods and
services to large organizations. SMEs are defined by a number of factors and criteria,
such as location, size, age, structure, organization, number of employees, sales volume,
worth of assets, ownership through innovation and technology (Rahman, 2001).
In manufacturing sector, SMEs act as specialist suppliers of components, parts, and
sub-assemblies to larger companies because the items can be produced at a cheaper
price than the large companies could achieve in-house. Lack of product quality
supplied by them could adversely affect the competitive ability of the larger
organizations.
Majority of SMEs have simple systems and procedures, which allows flexibility, Benchmarking: An International
immediate feedback, short decision-making chain, better understanding and quicker Journal
Vol. 15 No. 5, 2008
pp. 525-547
q Emerald Group Publishing Limited
The authors would like to thank referees and chief editor of the journal for their valuable 1463-5771
suggestions and comments to improve the quality and contents of this paper. DOI 10.1108/14635770810903132
BIJ response to customer needs than larger organizations. In spite of these supporting
15,5 characteristics of SMEs, they are on tremendous pressure to sustain their
competitiveness in domestic as well as global markets. Owing to global competition,
technological advances and changing needs of consumers, competitive paradigms are
continuously changing. These changes are driving firms to compete, simultaneously
along different dimensions such as design and development of product,
526 manufacturing, distribution, communication and marketing.
According to Chiarvesio et al. (2004), a leading firm is characterized by dynamic
strategic behaviour in terms of innovation, relationship management with market and
suppliers, internationalization processes, ability to organize and manage business
networks, etc. According to Leachman et al. (2005), superior manufacturing
performance leads to competitiveness. It is synonymous with productivity and is
assumed to capture quality as well as efficiency feature (Porter, 1998). In most of the
studies, competitiveness of an organization is measured in terms of certain financial
parameters. Man et al. (2002) and Vargas and Rangel (2007) have observed that
business performance is positively related with development of internal capabilities
such as soft technology (methods and processes that support the firm) and hard
technology (externally acquired equipment, in house development of machinery and
innovation in raw materials) and a strategy of continuous improvement, innovation
and change.
For continuous improvement and change, SMEs have to benchmark themselves
with the best in industry. This study will try to synthesize different issues related with
the competitiveness through review of literature to identify the directions for future
research on strategy development by SMEs. Framework adopted for classifying this
literature is shown in Figure 1. According to this framework, market condition will be
major guiding force for deciding strategies and priorities. Based on these priorities,
organizations have to adopt different processes and management practices. Effective
implementation of theses processes will lead to performance improvement. Processes
and performance have to be reviewed with respect to benchmark standards
continuously in order to develop dynamic strategies.

2. Market condition for SMEs after globalisation

Improvements in competitors’ capabilities have shortened product life cycles, elevated
product complexity and expanded accessibility to new technical breakthroughs.

Market condition Strategy Competitive

• Pressures development Priorities
• Constraints

Processes/
Management
Benchmarking Practices
of processes and
Figure 1.
performance
Framework for
competitiveness analysis Performance
Recently intense competition requires that firms excel simultaneously in several areas SMEs for
without trade-off, including innovativeness and responsiveness to their customers. competitiveness
Rise in global competition has compelled the firms to increase performance standards
in many dimensions such as quality, cost, productivity, product introduction time and
smooth flowing operations. Different pressures on SMEs are conformance to quality,
i.e. low-defect rates, product features or attributes, competitive price and performance
(Corbett and Campbell-Hunt, 2002). Capacity of a firm to maintain reliable and 527
continuously improving business and manufacturing processes to meet above
challenges appears to be a key condition for ensuring its competitiveness in the long
run (Lagace and Bourgault, 2003). Other major challenges for SMEs are up gradation of
technology (Kleindl, 2000), human resource development (Hudson et al., 2001), new
product development (Sonia and Francisca, 2005) and finally managing its supply
chain through collaboration and partnerships with customers, suppliers, distributors,
competitors, and other organizations such as consulting firms and research centers
(Soh and Roberts, 2005; Bennett and O’Kane, 2006).
In such a challenging environment, the capacity of a firm to maintain reliable and
continuously improving business and manufacturing processes appears to be a key
condition for ensuring its sustainability in the long run (Denis and Bourgault, 2003).
Vos (2005) has observed that managers of SMEs have poor skills in reflecting upon
their companies strategically. SMEs often are oriented towards serving local niches or
developing relatively narrow specializations (Urbonavicius, 2005). They may have
constraints due to the scarcity of resources, flat organizational structure, lack of
technical expertise, paucity of innovation, occurrence of knowledge loss, etc. The flat
structure of SMEs can often leave employees frustrated because they are often unable
to realize their short and mid-term career goals. That is why SMEs may find it difficult
to employ high-caliber staff and even harder to retain them (Ghobadian and Gallear,
1996). Major constraints on SMEs in meeting the challenges of competitiveness are:
. Inadequate technologies as well as other resources (Gunasekaran et al., 2001;
Hashim and Wafa, 2002).
.
Excessive cost of product development projects (Chorda et al., 2002).
.
Lack of effective selling techniques and market research (Hashim and Wafa,
2002).
. Unable to meet the demand for multiple technological competencies (Muscatello
et al., 2003; Narula, 2004).
.
Information gap between marketing and production functions as well as lack of
funds for implementing expensive software such as ERP system (Xiong et al.,
2006).

3. Strategy development
A firm’s competitive strategy specifies the potential products and markets, long-term
objectives, and policies for achieving the objectives. Organizations must continuously
review their manufacturing strategies to identify the aspects of market priority,
product structure, manufacturing configuration, and investment (Errin, 2004; Silveira,
2005). Improvement programs should match operational goals and objectives (Muda
and Hendry, 2003; Sum, 2004; Raymond and St-Pierre, 2005).
BIJ Main task of corporate strategy is not to describe the current state-of-art, but to
15,5 identify and explore core competencies that must be added. Otherwise the current
competencies can become obsolete and begin to function as core rigidities. Building
core competencies becomes essential for long-term competitive advantage because
advantages emanating from the product-price-performance-tradeoffs are almost
short-term (Kak and Sushil, 2002).
528 SMEs, which link operations to their business strategies, outperform the
competition. O’Regan et al. (2006a, b) have observed that high-growth firms place a
greater emphasis on external drivers such as strategic orientation, their operating
environment and the use of e-commerce compared with firms having static or declining
sales. As SMEs are faced with unfamiliar products and processes on a fairly regular
basis, they must develop programs for improving their skills and competencies
(Fuller-Love, 2006). They can get competitive advantage by developing internal and
external capabilities (Lai-Yu, 2001). According to Corbett and Campbell-Hunt (2002),
companies should focus their energy and resources on innovative product and its
niche. Singh et al. (2006) have observed that SMEs should be flexible in developing
their strategies. Chou and Hsu (2005) have suggested that by developing industry
portals, SMEs can aggregate flexibility and agility, despite their lack of resources.
For the SME to grow from local to world class status, entrepreneurial actions need
to be undertaken. This includes recognizing and exploiting market opportunities
through the use of advanced technology, such as advanced manufacturing systems
(AMS), creating new distribution channels, products, services and customer segments
(Sambamurthy et al., 2003). World class SMEs develop themselves through
diversification and extended networks (Cagliano et al., 2001). They can outperform
local and transition SMEs with regards to the development of networks and markets
(Raymond and Croteau, 2006).

4. Competitive priorities
Competitive priorities represent a holistic set of tasks, which should be performed by
the manufacturing function in order to support the business strategy (Kim and Arnold,
1996).Competitiveness of a company is mostly dependent on its ability to perform well
in dimensions such as cost, quality, delivery, dependability and speed, innovation and
flexibility to adapt itself to variations in demand (Carpinetti et al., 2000). While
alignment of the manufacturing function with strategic priorities is core to
competitiveness, the continuous improvement of the manufacturing function plays a
very important complimentary role in the quest of competitiveness in the long run.
Four widely accepted competitive priorities are cost, delivery, quality and
flexibility. Competitive priorities might be used as measures of competitiveness
(external) and competence (internal). According to Fleury and Fleury (2003),
organizations should optimize the quality/price ratio for operational excellence. Lau
(2002) have observed that quality and lower cost are the top ranking competitive
factors among US electronics and computer industries. Dangayach and Deshmukh
(2005) have observed that SMEs give highest priority to quality and the least priority
to flexibility. Lagace and Bourgault (2003) have advocated for linking of
manufacturing improvement programs and practices with the competitive priorities
of SMEs. Therefore, competitive priorities will have to be decided very carefully
because it will set the direction for adoption of different processes or management SMEs for
practices by the organization. competitiveness
5. Processes/management practices
Organizations need competence to organize and manage work processes in new and
efficient ways to compete in the market. These practices may be related with top
management commitment, development of alliances, organization culture, clean 529
production, innovation and knowledge management, research and development,
supplier development, quality management, technology management, information
technology (IT) applications, measurement of performance and competitiveness.
Contributions of researchers for development of different processes are discussed in
following sections.

5.1 Leadership/top management support

The top management of the organization is directly responsible for determining an
appropriate organization culture, vision and quality policy. In order to enhance net
profit and revenue as well as to reduce cost of quality, managers must convey their
priorities and expectations to their employees. In SMEs, major problem is that owner of
the company usually does not delegate adequate power and responsibility to top
managers of the company. O’Regan et al. (2005) have observed that leading firms tend
to have higher levels of empowerment with greater involvement by top management in
key issues such as staff advancement and disciplinary matters. The success of small
firms is generally attributed to the managerial skills, training and education, and the
personal background of the company’s leader(s). Managers must develop a system that
motivates workers to think and act flexibly and productively to meet company goal.
Adoption of new manufacturing changes by SMEs may be hampered due to their
limited financial and human resources. However, the flexibility often associated with
SMEs may counterbalance this difficulty, provided that managers are capable of
defining a clear manufacturing strategy (Chapman and Hyland, 2000). Researchers
have found that the drive to invest in new improvement programs is influenced mainly
by senior management, regardless of firm size (Schroder and Sohal, 1999). Leadership
plays a significant role in framing organization strategy (Egbu et al., 2005),
benchmarking of performance (Deros et al., 2006) and in shaping the quality focus of
companies (Sila and Ebrahimpour, 2005). Firms whose managers have been able to
make shift in their business paradigms and are open to create change and to
incorporate new business practices have been able to match multinational competitors
(Vargas and Rangel, 2007).

5.2 Organization culture

The challenge before managers is to cultivate an organizational culture that supports
innovation. In high-performing firms, organization culture is more associated with
innovation (O’Regan et al., 2006a, b). Problems of small firms in developing a quality
culture are resistance to change, lack of experience in quality management, lack of
resources. Managing organizational culture effectively requires clarity in the minds of
managers about the type of culture and specific norms and values that will help the
organizations reach its strategic objectives. Support for taking risks, change and
tolerance for mistakes stimulates creativity. It has been found that those employees
BIJ with high-job satisfaction exhibited the highest creativity when commitment to
15,5 company was high and when support for creativity was available from the
organization and coworkers (Zhou and George, 2001).
Culture and cultural fit are more important in SMEs than other organizations
because an SME is likely to be entirely enveloped in a culture, rather than large
organizations, where several cultures may be present. It is easier to attain cultural
530 change in SMEs than in larger organizations. However, it is probably more difficult for
SMEs management to recognize the need for change (Ghobadian and Gallear, 1996).
McAdam and McClelland (2002) have observed a strong correlation between the
culture of continuous improvement and innovation in SMEs. Quality culture is a key
enabler in the development of innovation management. Flat structure of SMEs and
fewer departmental interfaces normally result in a more flexible work environment.

5.3 Total quality management

Total quality management (TQM) is a philosophy mainly dominated by large
companies (Yosuf and Aspinwall, 2000) but the fear of losing contracts prompts SMEs
to bring quality into their system. The increasing intensity of competition has made
continuous planning and quality improvement a prerequisite for the survival of not
only large firms but also for SMEs (Temtime, 2003). According to Yosuf and Aspinwall
(2000), TQM should not be implemented at the expense of losing flexibility which is
strength in small businesses. While implementing TQM, SMEs should focus on
training and education of employees. Leadership and information analysis play a
significant role in shaping the quality focus of companies (Sila and Ebrahimpour,
2005).The success of a TQM program increases when its implementation is extended to
the entire company.
TQM can foster continual improvement (CI) through integrated, consistent and
involving everyone and everything in SMEs. Effective implementation of TQM is a
valuable asset in a company’s resource portfolio, which can produce important
competitive capabilities and be a source of competitive advantage (Demirbag et al.,
2006). Prajogo (2007) have observed that that quality is predicted by differentiation
strategy. This strategy aims to build up competitive advantage by offering unique
products which are characterized by valuable features, such as quality, innovation, and
customer service. Firms can achieve improved productivity, greater customer
satisfaction, increased employee morale, improved management labour relations and
higher overall performance through TQM. According to Corbett and Campbell-Hunt
(2002), SMEs can gain competitive advantage through the quality of their products
because they can implement JIT system with low-defect rates or higher quality of
products. It will also help in reducing product cost through eliminating scrap and
rework (Fullerton and McWatters, 2001).

5.4 Development of alliances

Since scope for improvement within the organization is decreasing; organizations have
to think for newer alternatives of integrating the business activities beyond the
organizations boundary. Cagliano et al. (2006) have advocated for integration of
information flows and integration of physical flows. Even the most vulnerable newly
established SMEs have potential of joining international value chains and even
developing their own marketing strategies (Chen and Huang, 2004). By aligning and
coordinating the business processes and activities, overall performance and effectiveness SMEs for
of value chain can be improved (Sarmah et al., 2006). Alliances provide sharing of competitiveness
product, manufacturing technology, marketing and R&D know how and resources.
It also reduces the uncertainty and vulnerability associated with the design and
introduction of new products (Magnan et al., 1999). In addition, through alliances and
collaborations, new product design and development and manufacturing capabilities
are internalized (Banerjee, 2000). It also helps in tracking of customer expectations and 531
reduction of product and process development cycle times (Perry and Sohal, 2001).
Learning how to build stronger relationships with customers is often recommended
as a way of ensuring the survival of firms in the face of turbulent and highly
competitive market conditions. Organizations should have thorough analysis about
their own strengths and weaknesses before thinking of getting into partnering
relations (Varis et al., 2004). Firm’s competitiveness may be determined more by its
external network than its own size. Alliances provide higher added value to customers
and develop better working relationships (Loh and Koh, 2004). Noori and Lee (2006)
have advocated for dispersed network manufacturing (DNM) by SMEs to compete on
global scale. This will focus on creating network of plants that are electronically linked
so that the participating members, spread geographically, focus on their specialized
tasks yet also share their manufacturing and production resources to create a loosely
structured and flexible enterprise. DNM will require SMEs to have the ability to
rapidly develop and enhance their internal production capabilities.

5.5 Vendor development

A large number of SMEs operate with poor forecasting and planning systems and
operate with long cycle times. They also have problems with unreliable inventory
control systems, with no stock tracing and poor cost control. This can lead to excess
obsolete stock and eroding customer service levels (Gunasekaren et al., 2000). SMEs in
manufacturing industry need to improve their production and material management
systems (Ulusoy, 2003). For this development of vendors is essential. Vendor
development helps in improving the performance of not only buyers but of vendors
also (Humphreys et al., 2004). By vendor development, buying firm helps their vendors
for increasing their capabilities to improve their performance. It was found that higher
rated vendors emphasize process management and employee satisfaction to a greater
degree than the lower rated vendors (Park et al., 2001).
Trent and Monczka (1999) stressed that maintaining a small number of vendors,
improves product quality and productivity of buyers by encouraging enhanced vendor
commitment to product design and quality. Mutually supportive long-term supplier
relationship is the best way to achieve quality improvement. Direct product costs and
customer’s acquisition and operational costs can be also lowered when buyers and
suppliers work together closely (Canon and Homburg, 2001).

5.6 Supply chain management

Earlier most of the manufacturing organizations have accomplished massive
productivity gains through the implementation of lean production by eliminating
“waste” from different internal operations. Now a significant productivity
improvement for most of the manufacturing organizations is very limited. However,
there is a huge improvement potential to reduce the inefficiencies caused by the poor
BIJ performance of the suppliers, unpredictable customer demands and uncertain business
15,5 environment. This can be done by integration of internal processes of the organization
with the suppliers and customers known as supply chain management (SCM). SMEs
have significant impacts on supply chain performance, where they may serve the roles
of suppliers, distributors, producers and customers (Hong and Jeong, 2006). Owing to
this, firm level competition is popular only in developing economies and is being
532 replaced by competition between supply chains (Koh et al., 2006).
SCM practices will not only reduce inventory level, but will also free up warehouse
space and untighten cash flow (Mistry, 2006). This is particularly important for SMEs
which are in constant need for cash to run the business. Building long-term partnership
relations with suppliers and customers also helps to improve the flexibility of the supply
chain by creating a mutual understanding among the members (Chang et al., 2005). SCM
practices directly influence operational performance of SMEs (Koh et al., 2007).

5.7 Clean production and total productive maintenance (TPM)

Clean production and safety measures for environment have become essential criteria
for organizations to compete in the market. Worthington and Patton (2005) have
observed that companies that voluntarily embrace environmental friendly practices
can simultaneously improve their business performance. Rao and Holt (2005) have
advocated for green supply chains to improve competitiveness of organization.
Competitive advantage can arise from integrating environmentalism with
organizational strategy. SMEs see the environment as an important business issue
but are often unaware of environmental legislation affecting their business (Petts et al.,
1999). One way to enhance understanding among SMEs is to consider environmental
responsibility as part of the quality attributes which customers may expect from
suppliers.
Laugen et al. (2005) have observed that increasing equipment productivity and
environmental compatibility are the best manufacturing practices for improving
performance of organization in present scenario. For improving equipment
productivity and environmental compatibility, TPM can be an important strategy.
Machine productivity can be improved by using properly trained personnel and by
using appropriate IT controlled processes, thereby providing better proactive servicing
(Eti et al., 2006). It is observed that business performance of TPM firms is significantly
superior to the non-TPM firms (Brah and Chong, 2004; Chan et al., 2005).

5.8 Innovation and knowledge management

To keep in pace with international competition, firms of all size are challenged to
improve and innovate their products and processes constantly (Ernesto et al., 2005).
The foundation of organizational competitiveness has shifted from physical and
tangible resources to knowledge (Wong and Aspinwall, 2005). SMEs can improve their
responsiveness by developing capabilities in external knowledge acquisition (Liao et al.,
2003). Learning-by-doing is the most effective mode of knowledge acquisition
(Oyeyinka and Lal, 2006). Knowledge-based resources are positively linked to
performance of SMEs (Wiklund and Shepard, 2003; Liu et al., 2004).
Innovation, firm’s knowledge accumulation and the development of internal
technical capabilities help SMEs in achieving better competitive position in
international and national market (Vargas and Rangel, 2007). Nunes et al. (2006)
have observed that by adequately capturing, storing, sharing and disseminating SMEs for
knowledge, SMEs could achieve greater innovation and productivity. When compared competitiveness
with large-sized firms, the innovative process in small units is more informal and less
structured, the base of managerial competencies is limited, availability of financial
resources is lower and the attraction towards skilled labour is weaker (Toni and
Nassimbeni, 2003; Scozzi et al., 2005). Levy et al. (2003) have observed that SMEs are
knowledge creators but are poor at knowledge retention. 533
The ability of a firm to respond to identified changes in market or customer
behaviour is an important feature exhibited by successful firms (Chaston et al., 2001).
For innovative products and processes, management of employees’ knowledge and
skills is essential. Lei et al. (1999) have expressed the view that in tomorrow’s business
world, success will be critically influenced by the degree to which firms utilize new
knowledge to support innovation. Innovation implementation requires ongoing effort,
commitment and understanding beyond that of continuous improvement (Humphreys
et al., 2005). Effective innovation must involve all areas of an SME with the potential to
affect every discipline and process (McAdam, 2000).

5.9 Research and development

To meet rapidly changing product features and customer needs, SMEs should build a
dynamic capability to develop new to market products (Eisenhardt and Martin, 2000).
According to Mosey (2005), SMEs can compete with their larger rivals by developing
new-to-market products. Investment in product research and development will also
help in improving quality and in reducing cost. According to Chorda et al. (2002), cost
of product development and uncertainty of the market were found to be the major
determinants that confront the product development.
Most of the SMEs research focuses on factors that contribute to their survival such
as financing, rather than a greater understanding of the growth process and
the achievement of sustainable competitive advantage. However, according to
Karlsson and Olsson (1998), small firms not only spend more on fundamental research
but also account for a high proportion of innovations in products and services. For
higher growth small firms should focus on research and innovation in the longer term.
However, many SMEs have some difficulty in converting research and development
into effective innovation, that leads to positive return/high growth (O’Regan et al.,
2006a, b).

5.10 Technology management

Majority of SMEs rely on outdated technology, labour intensive and traditional
management practices. This in many cases led to inefficient, lack of information and
inadequate in-house expertise (Hashim and Wafa, 2002). Increased uncertainty in the
SMEs’ environment has lead to increased levels of critical success factors for advanced
manufacturing technologies applications (Raymond, 2005). According to Mosey (2005),
SMEs can compete with their larger rivals by developing new to market products
using novel and often simpler technologies.
According to Chanaron and Jolly (1999), global competitive strategies are
increasingly becoming technology driven in the context of extremely dynamic and
turbulent environments. There should be linking between the capabilities of the
technologies and the firm’s business and manufacturing priorities (Gupta, 1996).
BIJ More importantly, if a competitor’s technology is accepted as the industry standard,
15,5 it can threaten the existence of the firm (Narula, 2004).
Technology operates on competitiveness in two ways. First by altering the price
structure through the development of more efficient and flexible processes and second
by enabling the creation of better products of greater quality, better design, after sales
service and short delivery periods (Vinas et al., 2001). New technologies available for
534 SMEs provide them with the possibility of accessing international markets and
facilitate the process of introducing products to these markets (Aspelund and Moen,
2004). Gunasekaran et al. (2001) have observed that computer integrated
manufacturing helps SMEs to reduce lead time, increase flexibility, reliability and to
improve customer service.

5.11 Information technology applications

Information and communication technologies are indispensable to the operation of the
core routines of organizations (Hicks et al., 2006). SMEs generally have an ad hoc
approach to IT management, and therefore seldom have a defined IT budget or an
explicit IT plan or strategy (Sadowski et al., 2002; Barry and Milner, 2002). Investments
in technology are often driven by the owner, rather than by any formal cost-benefit or
strategic analysis. For making investment in information and communication
technologies, SMEs should seek accredited advisors to ensure success (Morgan et al.,
2006). Business executives of SMEs must regard IT as a strategic resource (Beheshti,
2004; Floyd and McManus, 2005). SMEs can get Competitive advantage by having
integrated information systems (Koh and Simpson, 2005; Blackwell et al., 2006).
AMS based on IT applications such as CAD/CAM, EDI, and MRPII help in strategic
development and growth of SMEs (Gunasekaran and Ngai, 2004). e-Business
applications such as EDI enhance SMEs SCM and collaboration capabilities within
networks (Brown and Lockett, 2004). IT has both indirect and a direct effect on
performance (Rivard et al., 2006). According to Corbett and Campbell-Hunt (2002), IT
has become an important part of the manufacturing strategy for SMEs. Manufacturing
performance of SMEs can be improved as a consequence of the use of the most
appropriate IT tools without any major changes in business practices, manufacturing
operations or the production facilities (Lal, 2004; Hodgkinson and McPhee, 2002).

6. Measurements of performance and competitiveness

For sustainable growth in highly competitive global market, performance
measurement has become an essential component of strategy development by
SMEs. Effective performance measurement system plays an important role in
supporting managerial development in the organizations (Garengo et al., 2005).
Performance measurement is defined as the process of quantifying the efficiency and
effectiveness of manufacturing system. Performance of an enterprise is often measured
as a ratio of output to input. The outputs constitute the products of the enterprise and
the inputs are the resources used by the enterprise (Choudhary, 2001). It is highly
essential that all the factors, both tangible and intangible, should be included in
analysing organizations performance.
Traditionally, organizational performance has been measured by using only
financial indicators such as profit, market share, sales, and growth rate. Financial
indicators measure only past performance. Garg et al. (2003) suggest that as most small
firms are privately held, it is unlikely that their CEOs will be willing to provide detailed SMEs for
accounting data on the firms performance. Therefore, they suggest the use of competitiveness
“subjective and self-reporting measures of performance.” Performance of an
organization relative to its industry standards is termed as its competitiveness.
Vastag and Montabon (2001) have measured competitive advantage by using five
point Likert scales, which compared the firm’s unit cost of manufacturing, delivery
speed, etc. with its competitors. This comparison with best in industry is also referred 535
as benchmarking. The core of the current interpretation of benchmarking is (Denkena
et al., 2006):
.
Measurement of the own and the benchmarking partners’ performance level.
.
Comparison of performance levels, processes, practices, etc.
.
Learning from the benchmarking partners to introduce improvements.
.
Improvement, which is the ultimate objective of any benchmarking study.

Benchmarking contributes to the CI in performance factors. Deros et al. (2006) have

developed a benchmarking implementation framework for automotive
manufacturing SMEs but it has been validated with only six pilot case studies,
not tested empirically. They have divided key performance measures in two
categories, i.e. hard measures and soft measures. Hard or tangible measures include
work-in-progress levels, lead-time, delivery-time, rejection (percent), rework (percent),
product quality, product reliability, process cycle time, employees skill level, etc. The
soft measures may include management commitment towards quality improvement,
improvement in customer’s satisfaction for both internal and external customers,
existence and practice of team working, employee’s involvement, rewards and
suggestion schemes, etc.
Ribeiro and Cabral (2006) have developed a benchmarking methodology for metal
casting industry. Performance assessment model given by them involves broad areas
of manufacturing, customer focus and business results. St-Pierre and Delisle (2006)
have developed an expert diagnosis system for the benchmarking of SMEs
performance. On the basis of data taken from 100 SMEs, they have observed that
benchmarking improve their operational and financial performance. Denkena et al.
(2006) have given knowledge-based benchmarking of production performance for
SMEs using an existing European database called Benchmark Tool to improve the
Production Performance. It has integrated quantitative and qualitative information
about the company.
Many excellence models and performance measurement frameworks, like the
Kanji’s business scorecard (Kanji and Sá, 2002), the performance prism (Neely et al.,
2002), balanced scorecard (Kaplan and Norton, 1992) and assets, processes and
performance model (Momaya, 2000) have proposed ways for analysing performance
but gaps have been observed between strategy and performance measures
(Frigo, 2002). Hudson et al. (2001) have also recommended for taking steps to
redesign the current performance measurement systems.

7. Benchmarking of processes and performance

For having continuous improvements on different processes and performance, SMEs
have to set some benchmark standards as their target. Benchmarking will have
BIJ positive impact on competitiveness (Cassell et al., 2001; Carpinetti and Melo, 2002).
15,5 Identification and transfer of best practices is considered a difficult task for SMEs due
to severe resource constraints and limited knowledge of benchmarking methodologies.
They often have difficulty in identifying their reference group. The selection of most
appropriate reference group plays a key role in benchmarking since it greatly
influences the performance indicators that will be used by enterprises throughout the
536 exercise (Sousa et al., 2006).
Benchmarking starts with a deep understanding of the internal processes. Then,
competitors, dissimilar organizations or different units of the same organization are
comparatively analysed. Practices and performance change frequently. Therefore,
organizations should adopt benchmarking as an on-going process. Benchmarking
involves lot of processes and activities, which are complex. Basic steps of
benchmarking are planning, information gathering, analysis of the gaps between the
enterprise and its partner and adoption or implementation of changes (Ribeiro and
Cabral, 2006).

8. Summary and gaps identified from the literature

This paper has tried to review the literature on different areas of strategy development
by SMEs for competitiveness. Major areas considered in the framework for this study
are concerned with market condition, strategy development, competitive priorities,
processes, performance and benchmarking.
In this regard 133 research papers are reviewed. The references corresponding to
each particular area and major findings have been summarized in Table I.
Most of the studies by researchers have focused on a specific issue such as quality
management, technology management, competitive priorities, leadership issues,
constraints and challenges for them. On the basis of this extensive literature review,
the following gaps are identified:
.
There has been lack of empirical research on strategy development by SMEs for
competitiveness. Even in developed countries, most of the studies related to
competitiveness have been devoted to large-scale enterprises (LSEs). These
studies have also not tried to compare SMEs with LSEs as well as different
manufacturing sectors in terms of operation management issues. Most of the
researchers have not tried to analyse the pressures and constraints of SMEs
under globalized and liberalized economy.
.
Holistic approach has not been adopted to analyse the competitiveness.
Researchers analysed certain aspects of competitiveness in isolation. Most of the
studies have considered the relationship of a particular strategic issue with
certain financial parameters only, not with overall performance or
competitiveness. Different dimensions of competitiveness have not been
explored in available studies. Available studies lack in identifying major
drivers of competitiveness in global economy. No adequate framework was
found to quantify the competitiveness of SMEs.
.
For continuous improvement of various processes and performance measures,
organizations need to benchmark themselves with available standards. Simple
and systematic empirically tested frameworks for benchmarking of SMEs
processes and performance are lacking. Most of the frameworks have not
S no. Areas of strategy development
1 Concept of strategy development
Explore core competencies
Continuous improvement in processes
Link operations to business strategies
2 Competitive priorities
Holistic set of tasks to support the strategy
Measures of competitiveness
Linking of manufacturing programs with
competitive priorities
3 Leadership/top management support
Success is attributed to management skills
Motivate workers to think and act flexibly
Define objectives and strategies
4 Organization culture
Support innovation/creativity/excellence
Focus individual needs /motivation of each
employee
Promote flexibility and personal autonomy
5 Total quality management
Continuous planning and quality
improvement a prerequisite for survival
Helps in implementing JIT systems
6 Development of alliances
Sharing of product/technology/R&D
Capabilities are internalized
Reduction of product development time
7 Vendor development
Helpful to buyers as well as vendors
Rationalization of vendors for productivity
and quality improvement
8 Supply chain management
Competition is between supply chains
More scope for performance improvement
through SCM
9 Clean production/TPM
Clean production essential to compete
TPM is beneficial for machines as well as
employees
10 Innovation/knowledge management
To keep in pace with international
competition
Incorporate both incremental and radical
changes
Incorporate new knowledge to support
innovation
References
SMEs for
competitiveness
Cagliano et al. (2001), Lai-Yu (2001), Corbett and
Campbell-Hunt (2002), Kak and Sushil (2002),
Muda and Hendry (2003), Sambamurthy et al.
(2003), Sum (2004), Errin (2004), Raymond and
St-Pierre (2005) Silveira (2005), Chou and Hsu
(2005), O’Regan et al. (2006a, b), Fuller-Love
537
(2006), Raymond and Croteau (2006) and Singh
et al. (2006)
Kim and Arnold (1996), Carpinetti et al. (2000),
Lau (2002), Fleury and Fleury (2003), Lagace and
Bourgault (2003) and Dangayach and Deshmukh
(2005)
Schroder and Sohal (1999), Chapman and Hyland
(2000), Egbu et al. (2005), O’Regan et al. (2005)
and Sila and Ebrahimpour (2005), Deros et al.
(2006) and Vargas and Rangel (2007)
Ghobadian and Gallear (1996), Zhou and George
(2001), McAdam and McClelland (2002) and
O’Regan et al. (2006a, b)
Yosuf and Aspinwall (2000), Fullerton and
McWatters (2001), Corbett and Campbell-Hunt
(2002), Temtime (2003), Sila and Ebrahimpour
(2005), Demirbag et al. (2006) and Prajogo (2007)
Magnan et al. (1999), Banerjee (2000), Perry and
Sohal (2001), Loh and Koh (2004), Varis et al.
(2004), Chen and Huang (2004), Sarmah et al.
(2006),Cagliano et al. (2006) and Noori and Lee
(2006)
Trent and Monczka (1999), Gunasekaren et al.
(2000), Park et al. (2001), Canon and Homburg
(2001), Ulusoy (2003) and Humphreys et al.
(2004)
Chang et al. (2005), Hong and Jeong (2006), Koh
et al. (2006), Mistry (2006) and Koh et al. (2007)
Petts et al. (1999), Brah and Chong (2004),
Worthington and Patton (2005), Laugen et al.
(2005), Chan et al. (2005), Rao and Holt (2005) and
Eti et al. (2006)
Lei et al. (1999), McAdam (2000), Chaston et al.
(2001), Liao et al. (2003), Wiklund and Shepard
(2003), Levy et al. (2003), Toni and Nassimbeni
(2003) Oyeyinka and Lal (2006), Liu et al. (2004),
Scozzi et al. (2005), Humphreys et al. (2005), Table I.
Ernesto et al. (2005), Wong and Aspinwall (2005), Classification of reviewed
Nunes et al. (2006) and Vargas and Rangel (2007) papers on strategy
(continued) development by SMEs
BIJ
S no. Areas of strategy development References
15,5
11 Research and development Karlsson and Olsson (1998), Eisenhardt and
To meet rapidly changing product features Martin (2000), Chorda et al. (2002) and Mosey
and customer needs (2005) and O’Regan et al. (2006a, b)
SMEs research focuses on short term
538 objectives
12 Technology management Gupta (1996), Chanaron and Jolly (1999),
Better technological decisions improve Gunasekaran et al. (2001), Vinas et al. (2001),
productivity Hashim and Wafa (2002), Aspelund and Moen
Linking of technological capabilities and (2004), Narula (2004), Mosey (2005) and
manufacturing priorities Raymond (2005)
Enable high quality products at low cost
with timely delivery
13 IT applications Corbett and Campbell-Hunt (2002), Sadowski
Has direct and indirect effect on performance et al. (2002), Barry and Milner (2002),
Enable better performance in international Hodgkinson and McPhee (2002), Beheshti (2004),
market Brown and Lockett (2004), Lal (2004),
SMEs reluctant to make investment in IT Gunasekaran and Ngai (2004), Koh and Simpson
(2005), Floyd and McManus (2005), Rivard et al.
(2006), Morgan et al. (2006), Hicks et al. (2006)
and Blackwell et al. (2006)
14 Performance and competitiveness Kaplan and Norton (1992), Momaya (2000),
Process of quantifying the efficiency and Hudson et al. (2001), Frigo (2002), Vastag and
effectiveness of manufacturing system Montabon (2001), Kanji and Sá (2002), Neely et al.
Subjective and self reporting measures for (2002), Choudhary (2001), Garg et al. (2003),
SMEs Garengo et al. (2005), Denkena et al. (2006), Deros
et al. (2006), Ribeiro and Cabral (2006) and
St-Pierre and Delisle (2006)
15 Benchmarking of processes and performance Cassell et al. (2001), Carpinetti and Melo (2002),
Identification and transfer of best practices Sousa et al. (2006) and Ribeiro and Cabral (2006)
Table I. Contributes to improvement in performance

followed holistic approach rather they have focused on a specific functional area.
Researchers have suggested improvement practices as part of benchmarking but
not prioritized them. Prioritization of improvement activities will help SMEs in
successful implementation of benchmarking exercise.
.
Major emerging areas of research for strategy development by SMEs are
extended network/synchronous supply chain and utilization of combined
resources, distributed network manufacturing, to integrate SMEs in
developing economies with developed economies, innovation and knowledge
management, extent of TQM implementation and its effect on performance of
SMEs, effective implementation of government policies to improve SMEs
capabilities and competencies, decision support system for making
investments in IT and AMTs.
.
Most of the performance model do not have predictive power for future
performance of SMEs and do not specify causes and corrective actions. Gaps are
observed between existing performance models and management practices
adopted by organizations.
9. Concluding remarks SMEs for
It has been observed that all over the world, SMEs are considered as major source for competitiveness
economic growth. SMEs have not given due attention for developing their effective
strategies in the past. The reviewed literature reveals that most of the strategies have
been formulated for short-term goals as most of them are localized in their functioning.
On the export front, they are facing many constraints due to their limited resources and
lack of innovation in capability development. Major problems are related with 539
knowledge loss, product design and development capability, training infrastructure
and networking. SMEs are also not following any comprehensive framework for
developing their strategies and quantifying their competitiveness. Present paper has
tried to identify different areas of strategy development by them. On the basis of gaps
identified, further study need to be carried out to develop a holistic approach,
i.e. considering all aspects of organization functioning for strategy development. This
framework should also enable them in benchmarking of their processes and
performance for continuous improvement.

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About the authors

Rajesh K. Singh is a Senior Lecturer in Mechanical Engineering at Delhi College of Engineering,
Delhi, India. His areas of interest include competitiveness, small business management and
quality management. He has published papers in journals such as Singapore Management
Review, International Journals of Productivity and Performance Management, Competitiveness
Review, Global Journal of Flexible Systems and Management, International Journals of
Productivity and Quality Management, International Journal of Services and Operations
Management, South Asian Journal of Management, Productivity, IIMB Management Review and
Productivity Promotion. Rajesh K. Singh is the corresponding author and can be contacted at:
rksdce@yahoo.com
Suresh K. Garg is a Professor in Mechanical Engineering at Delhi College of Engineering,
Delhi, India His areas of interest include competitive strategies, JIT manufacturing systems,
quality management and SCM. He has published 60 papers in international and national
journals/conferences such as International journal of Manufacturing Technology and SMEs for
Management, International Journal of Production Economics, Competitiveness Review,
International Journals of Productivity and Quality Management, International Journal of competitiveness
Services and Operations Management, IIMB Management Review, Global Journal of Flexible
Systems and Management and Productivity.
S.G. Deshmukh is a Professor in Mechanical Engineering at Indian Institute of Technology,
Delhi India. His major research interests include manufacturing management, SCM and quality
management. He has a long list of papers published in reputed international and national 547
journals such as International Journal of Operations and Production Management, International
Journal of Production Research, Competitiveness Review, International Journal of Manufacturing
Technology and Management, Production Planning & Control, International Journal of
Production Economics, International Journals of Productivity and Quality Management,
International Journal of Services and Operations Management, IIMB Management Review, etc.

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