Much of what has been written about strategy and strategic management is based upon the assumption that strategic choice is actually a viable option for most firms and that resource issues are non problematic. That assumption may hold for large firms but not for SME's. The vast majority of professional service firms in Asia are SME's and a large number of these are in fact micro enterprises consisting of one or two partners. A large law firm in China may have 10 partners whereas a large US law firm will have 100-200 partners and over a thousand lawyers. Whilst one may talk about geographic diversification and practice expansion so readily for a large PSF based on a premium image and heavily differentiated service, the options for SME's can be severely limited due to a number of factors:
- Lack of time to explore new opportunities
- Limited market information and research capability
- Lack of marketing and management expertise
- Money restraints
- Lack of accessibility to investment
- Lack of human resources
The list is not exhaustive but essentially highlights the key factors that affect a small PSF (SPSF) from being able to consider opportunities in the same way that larger firms can. These issues become even more pronounced when the SPSF is considering internationalization. Bearing in mind the resource limitations often faced by the SPSF, this chapter will provide knowledge to the owner/operators of these firms that can help them to overcome such barriers and compete effectively.
I Strategy for the SPSF
I have criticized a number of existing strategic management concepts in terms of their applicability to the PSF, this questioning can be extended to the SPSF and indeed the issues faced by such firms exacerbates the problems inherent in the concepts so readily applied to larger firms. For example, use of portfolio management tools (such as the BCG matrix or the GE matrix) are problematic for the PSF yet become even more so for the SPSF. Classifying a business based on such concepts as market share or growth have inherent limitations for smaller firms. The very nature of such firm means they tend to operate in only a few service markets and it is quite possible that the majority of their revenue could stem from markets that would be considered declining ones under portfolio prescriptions yet still highly profitable for the SPSF. If one wanted to take a poorly performing practice area (as prescribed by a portfolio approach) and divest of it, where would one get the money to invest in growing markets that were not yet profitable? Similar problems can be found in the use of Michael Porters three generic strategies. For example, if a niche strategy is successful and hence the niche market itself becomes attractive to other larger firms, what stops the larger firms acquiring the needed expertise in that market and hence competing directly with the SPSF? It is exactly these types of issues that face small firms and little direction is given to them in traditional writings in strategic management and marketing.
In their excellent book, Competing for Markets: Growth strategies for SME's, Khai Sheang Lee and colleagues identify a number of generic strategies that can be utilized by small firms in Asia and in particular, consider the reaction of larger incumbent firms. Although these strategies were not developed for the PSF, they can be readily applied in this context. The generic strategies described by the authors are:
- Niching – if the SPSF can offer a service to an ignored segment of the market that is differentiated and provides a competitive advantage, then it can use a niche strategy. For example, small architectural and design firms rely heavily on the knowledge and creativity of the founding partners and through work have gained prominent positions in niche markets even on a global scale.
- Substitution – a small firm can enter a currently served market by offering a substitutable, but differentiated, service, particularly if a niche strategy is not sustainable over the longer term. Basically, the firm is a second mover and benefits from the market development activities of larger firms. The firm should take care to differentiate its service from competitors either through the service itself or through marketing activities. For instance, a small law firm in China could take advantage of the growing real estate market developed by offering a similar service (with a lower price) but differentiating itself through a focus on local cultural knowledge. It would be self defeating for the larger firms to copy this approach as they focus on their international experience and scale of operation.
- Free riding strategy – in product marketing there are various forms of free riding but in professional services it is limited to an imitation strategy. A SPSF can benefit from second mover advantages by entering a market that is already developed and well served by larger firms. By offering a service that is the same as the incumbent firms the SPSF does not need to bare the costs of market development and the risks associated with being a first mover. For example, whilst M&A activity is slowing down in the west, the Asian market is growing at 20% lead by globalization and the influx of large firms developing the M&A market. A small firm can take a small piece of this market (or its associated service market) by riding on the coat tails of the development efforts by larger firms.
These generic strategies take into account the resource limitations often faced by smaller firms and the fact that creating a competitive advantage is not always as easy as it seems when prescribed by consultants and other expert sources. They also take into account competitive reactions of the incumbent firms in terms of their ability to retaliate or accommodate. Again, it should be stressed that strategy is not a static concept and whilst a small firm may pursue one of the generic strategies discussed it will, over time, need to adapt to changing market conditions and adopt an alternative strategy altogether if necessary.
In reality, a particular strategy may not fit neatly in to the three generic strategies prescribed but that does not devalue them. Small firms tend to be more limited in their strategic choice than larger firms and by using the strategies described and their appropriate decision frameworks a smaller firm should be able to enhance their strategic decision making in line with what the firm can offer and the conditions of the competitive environment.
II Marketing Effectiveness and Success/Failure in the SPSF
It has been well documented that marketing in small firms is quite different from marketing in larger firms. The inherent resource constraints that small firms face means they rely heavily on networks of contacts and although they are aware of general marketing concepts they do not apply them in the same way that larger firms do. For example, planning tends to be a more formal process in larger firms yet more ad hoc in small firms. Whereas certain marketing experts may lament the lack of formal planning in smaller firms, much research supports a less structured approach in smaller firms. This is known as entrepreneurial marketing and in fact can be just as readily applied to large firms as well as smaller ones.
Not only do the marketing practices of small and large firms differ, they should, the limited resources of SME's means they cannot adopt scaled down practices of large firms or text book theory and expect to achieve satisfactory outcomes. The marketing competencies often associated with SME's are:
When considering the success or failure of SME's, there are essentially two categories to be considered: external and internal. External factors would consist of environmental factors such as the economy and competitors. Internal factors include things such as management, availability of resources and strong leadership. Much research has examined the main factors that affect SME performance in Asia and includes both service firms as well as manufacturing firms.
Research in Singapore by Theng and Boon (1996) examined the failure of SME's and the factors perceived to be the most important causes of such failure. The results found that external factors (finance and labour issues) were important, but that internal factors (short sightedness, lack of management expertise, low initiative and entrepreneurialism) were more important in determining the poor performance of a small firm. Lin (1998) also reached a similar conclusion in her study of SME's in Taiwan as management skills and concepts of the business founders were considered the most important factors when compared to employee skills and concern for production. This was also related to superior business performance.
Table 10.1 The Key Success Factors for SMEs in Asia
Key Success Factors A committed, strong and supportive management team Visionary, capable and strong leadership Adopting the correct strategy Ability to identify and focus on market Ability to identify and sustain capability Good customer and client relationship Good service and delivery system Availability of financial resources Good human resource management | Top 50 in Singapore* 1 2 3 4 5 6 8 9 12
| Singapore and Malaysia* 5 7 NA 2 11 1 3 4 6
| Australia and NZ* 3 2 NA 5 9 1 4 6 7 |
Note: The numbers are the rankings of the different countries
(Source: Ghosh et al., 2001)
Table 10.1 summarizes research done on the top 50 SMEs in Singapore as well in other parts of Asia. One can see from this table that it is internal factors which play the largest part in the success of smaller firms. Additionally, it is evident that many of these factors revolve around the broad concept of marketing in that firms must be able to identify the right strategy supported by a strong management and understanding of the firms capabilities.
III Conclusion
The SPSF faces a different environment to that of large firms and hence its decision making should be based on the resource limitations often facing such firms. Such firms should take an entrepreneurial approach to marketing and strategy and strive towards developing those competencies that create successful SME's. Moreover, when looking to external resources to enhance the firms marketing capability, the SPSF owner/partner should seek expertise and education that is rooted in the context specific situation they face. Scaled down text book theory offered by many institutes (such as trade associations and private firms) is not wholly applicable to the smaller firm and indeed may even be detrimental. As the small firm owner/partner, you must demand resources that are geared towards your situation.
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