Small
and Medium Enterprises comprise the bulk of enterprises in the world albeit
with varying degrees in different countries. SMEs have been reputed with
innovation and are known to be the driving force behind many economies around
the world (Xianmei, 2008). China which is one of the fastest growing economies
in the world is said to be driven by the growth in the SME sector where as high
as 50% of the GDP is attributed to SMEs (Liu, 2009). SMEs can be described as
the bedrock of any economy. In fact, most businesses start of as SMEs. SMEs can
be categorised broadly as microenterprises, small enterprises and medium
enterprises (Bureau of Statistics of China, 2003). These SMEs provide economies
with the benefit of ensuring resources and wealth distribution in the economies
is both effective and efficient. They also introduce a flexibility index in
such economies where the private sector is able to react to changing
environmental factors with relative ease.
The
strategies that businesses embrace are mostly a function of their internal
capabilities as well as the external environments in which they operate
(Chakravarthy, 1997). Major changes in the external environments of the
businesses call for a change of strategy among such businesses. The recently
ended global financial crisis which was triggered by the subprime mortgage
crisis in the USA in 2008 is known to have substantially affected market
conditions around the globe (Harvie, 2011). Demand for products is known to
have reduced tremendously in the face of reduced disposable incomes forcing the
average consumers to concentrate only on the main necessities. Shrinking demand
causes intensified rivalry between the firms operating in the market as the
existing firms are forced to scramble for a smaller market (Barney, 2000). This
necessitates the formation of appropriate strategies to ensure survival and
continued growth. This paper seeks to expound on the changes in strategy
embraced by SMEs in China in response to the subprime mortgage crisis that had
substantially changed the economic environments.
The
main strategic approaches taken by SMEs in other countries, especially in
Europe have included options such cost cutting, product differentiation, blue
ocean strategy, formation of alliances and refraining from making investments
(Yahong, 2011). The cost cutting approach is the most commonly embraced
approach and is often as a consequence of the widespread panic that accompanies
economic recessions. However, objective SMEs see such recessions as the much
needed opportunities to ensure a rapid growth through the occupation of market
shares of organisations that find it difficult to survive the hard economic
times (Renlong, 2001). Product differentiation involves the modification of
products to suit changing market needs. The accuracy with which these modified
products can satisfy the demand determines their rate of success. Economic hard
times inspire consumers seek for cheaper alternatives in order to match their
shrinking pockets. Modified products therefore have a better chance of success
in such times than in times of economic progress.
Organisations
can also opt to form strategic alliances to enable them combine economies of
scale and compete more effectively in the markets. Such alliances may be in
relation to distribution networks, combination of unique technologies, and the
sharing of other support functions (Naidoo, 2010). This helps ensure the
success of the businesses. Perhaps the least used approach is the pursuit of
the blue ocean strategy. This strategy involves the creation of demand among
the non traditional consumers. This strategy gives the firms a chance to
harness the benefits of monopoly status (for a while) in the newly charted
areas often resulting in higher levels of profitability than can be realised in
the traditional markets (Lengick-Hall, 1992). Organisations may also opt to
expand their operations into thriving economies in order to offset the effects
of a shrinking home economy. Even though economic crises affect global
economies, the intensity of such effects tends to be varied with the countries
most closely related to the source of the crisis bearing the worst brunt of it.
SMEs
tend to hold a number of advantages over their larger counterparts. These
advantages may relate to their small cost structures that allow them to operate
at lower costs enabling them to charge their products and services at lower
rates than other organisations (Yifu and Xifang, 2005). The small sizes also
provide them with the opportunity to foster closer interpersonal relationships
with their employees leading to higher levels of cohesion (Miller and Toulouse,
1986). This allows employees to embrace the organisation vision and contribute
towards its attainment to the best of their ability. Productivity levels
therefore tend to be much higher than the industry averages. Their sizes also
provide them with the ability to react to external stimulus with ease. The cost
of installing infrastructure necessary for new innovations and having the same
embraced by the employees tends to be much lower. This translates to higher
rates of flexibility enabling such SMEs to adapt ahead of their competitors.
Various
challenges are however encountered by these SMEs. Firstly, the access to funds
for capital investments tends to be highly restricted. The information asymmetry
existing between them and the providers of finances tends to drive up the cost
of finance hence discouraging entrepreneurs from pursuing such options (Fuxin
and Chumping, 2009). The small sizes of the SMEs coupled with smaller
distribution networks limit their ability to easily gather market information
making them incur substantial expenses when embarking on research. This is as
opposed to the larger corporations which can utilise their expansive
distribution networks to gather the kind of market information needed.
Moreover, SMEs tend to operate on a lower scale and do not therefore enjoy the
economies of scale.
Despite
the challenges outlined above, SMEs continue to hold the potential to enhance
continued growth through the implementation of sound generic strategies. The
courage exuded by some SMEs in the face of economic downturns is a likely
reflection of a thorough knowledge of their capabilities and the confidence
that these capabilities can be harnessed to benefit the SMEs in the in the face
of economic adversity. This paper focuses on the SMEs in China and aims at
establishing the strategic options taken, and the likely effects of such
strategies.
The
research title for this research is: the subprime mortgage crisis and its
influence on the small and medium enterprises’ strategies in China. The
research therefore seeks to explain the relationship between the subprime
mortgage crisis and the SMEs in China. Accordingly, the research explains how
this crisis affects the environments in which the SMEs operate and how this
affects their prospects for performance and growth. The thrust of the paper is
the determination of the generic strategies embraced by Chinese SMEs to enhance
continual growth and sustainable performance and whether or not these
strategies have succeeded or are likely to succeed. The research topic has been
broken into questions which need to be comprehensively answered in order to
create an in-depth understanding of the research topic. The paper shall
therefore answer the following research questions:
- In what ways has the subprime mortgage crisis impacted the Chinese SME sector?
- What strategic options are available to the Chinese SMEs?
- What strategic measures have been taken by the SMEs in reaction to the crisis?
- How successful have these strategies been?
The
importance of SMEs to national economies is beyond question. SMEs drive
economies and play a critical role in wealth creation, wealth distribution and
the distribution of the factors of production (Chen, 2009). They also provide
economies with the flexibility that is necessary to spur economic growth and
development. The focus on SMEs and their strategies is therefore a subject of
immense interest to economists and policy makers in the various countries. Following
the recently ended global financial crisis, business organisations including
SMEs have embarked on a process of re-examination and the development of
strategies aimed at not only surviving the effects of such a crisis, but also
ensuring better preparedness in case of future financial upheavals (Chen, 2009).
Comprehensive studies on SMEs’ reaction to the crisis have mainly been done on
a global scale with the most readily available information being on the Western
European and American SMEs. This paper takes a focus on the Chinese SMEs in
order to bridge the information gap. With the growing influence of China in the
global arena, increased attention is being given to monitor the strategic steps
taken by the Chinese enterprises. The findings of this research are therefore
expected to add invaluable input to the body of knowledge which creates insight
into the Chinese business environments and the approach taken by the market
players in ensuring successful competition both within China and globally. The
likely beneficiaries of this information include investors in the industry who
may gain invaluable insights from the actions taken by other organisations in
dealing with the threats generated by the environment. Global investors may
also gain valuable insights on how Chinese firms compete globally. This paper
is also expected to form a basis for future research on the strategies embraced
by SMEs and the effect of such strategies with an emphasis on how effective
each of these strategies can become.
Strategic
management enables organisations to compete effectively in their environments.
The process of strategic management requires a thorough analysis of a firm’s
internal and external environments. Internal analysis enables the determination
of the strengths and weaknesses of such organisations while external analysis
enables the determination of the opportunities and threats that the
organisations would need to be aware of in order to enhance survival (Barney,
1997). The ability of organisations to match their strengths with the
opportunities availed by the environment or the ability of the organisations to
survive threats or convert their weaknesses and threats into weaknesses and
opportunities is the greatest determinants of their success (Barney, 1997).
Like any other organisation engaging in strategic management, SMEs must examine
their internal environments in order to identify their strengths and
weaknesses. The strengths may include flexibility, cohesiveness, innovative and
entrepreneurial culture, and the ability to maintain personal contact with
clients among others (Xuezhong and Xing, 2010). The weaknesses may be seen as
lack of adequate financing opportunities, poor distribution network, and lack
of economies of scale (Xuezhong and Xing, 2010). The threats posed by the
external environment which can also be creatively viewed as opportunities may
include the effects of global economic meltdowns as is the subject of this
research. This research aims at incorporating the concepts of effective
strategic management in interpreting the measures taken by the Chinese SMEs in
reaction to the subprime mortgage crisis.
The
study is organised into six chapters. Chapter one consists of the introduction
which provides a background to the study. It also outlines the research topics
and outlines the objectives of this research. In this chapter, the conceptual
frameworks guiding the study as well as rationale for conducting this study
have been outlined. Chapter two consists of the literature review. This section
expounds on the definition of SMEs and their influence in national economies.
This aspect allows for the appreciation of the study. The study also outlines
the traditional challenges that have faced SMEs globally, especially in Europe
and the larger Asian region. This chapter also expounds on the strategic
options usually pursued by organisations and SMEs in reaction to changing
environmental factors. Chapter three outlines the methodology used in this
research. This section outlines the governing philosophy embraced in this
research. It also outlines the methods used in the research and the rationale
for the selection of such methods. This methodology provides the users of the
information with the balanced perspective providing the users with the
understanding of how the information was gathered and the integrity of the
resultant information. In this section, the limitations of the research and how
such limitations were overcome has also been outlined. Chapter four discusses
the results as obtained through primary research. Chapter five discusses these
results in light of the theoretical perspectives gathered through secondary
research. Finally the paper ends with a list of recommendations and concluding
remarks as outlined in Chapter six.
2.0 Literature review
2.0 Literature review
This
chapter highlights the characteristics of SMEs and the importance of the same
in national economies hence providing the rationale for the focus on the
changing strategies by SMEs as a result economic downturns. The chapter also
focuses in the general approach taken by SMEs around the world in reaction to
global financial crisis which was triggered by the subprime mortgage crisis in
the USA in 2008.
The
definition of SMEs has generated intense debate with various economies
categorising businesses using somewhat incomprehensive standards. While some
countries use the revenues as the yardstick for determining whether a business
is an SME, analysts hold that such a yardstick could be potentially misleading
given the ability of innovative small businesses to generate substantial
revenues and profits (WTO, 1998). The EU categorises SMEs on the basis of four
factors. These include the number of employees in the firms, the revenues
generated by the business, the asset base of the enterprises, and the level of
independence of such enterprises as determined by its capital structures (WTO,
1998). For instance, the EU describes a medium enterprise as one with a
workforce of between 49 and 250 employees. The firms should also have an annual
turnover of less than 40 million Euros and an asset base not exceeding 27
million Euros (WTO, 1998). The same categorisation describes small enterprises
as those with less than 50 employees, annual turnovers of about 7 million Euros
and an asset base of about 5 million Euros. The more widely accepted yardstick
is the use of the firm’s size as determined by the number of employees in it. The
workforce thresholds are however different from country to country. For
instance, the categorisation in the USA and most developed economy defines SMEs
as businesses with less than 500 employees. The categorisation in the European
Union places the threshold at 250 employees. This figure is significantly
higher than those used in developing countries. For instance, New Zealand’s
definition of SMEs places the workforce threshold as 20 employees (Yang, 2011).
Several scholars have however separated
the SMEs into three categories as determined by the number of employees. These
categories include microenterprises with 1-9 employees, small enterprises with
10-99 employees and medium enterprises with 100-499 employees (Yanhua, 2009).
Small
and Medium Enterprises play a major role in the economic growth and development
in most countries around the world. They are known to be among the most
significant contributors of employment to rural and urban populations with some
countries attributing the employment contribution of such enterprises to as
high as 80% of the total employment (Minghui, 2011). SMEs are known to be the
drivers of innovation in most economies leading to the creation of new
industries as well as the development of already existing industries. A good
example of a vibrant industry that has benefited immensely from the
establishment and growth of SMEs is the information technology sector which has
been driven by continuous innovations over time. Some of the socio-economic goals such as
poverty alleviation tend to be the largest beneficiaries of the establishment
and growth of SMEs (Jiang, 2006). This leads to higher living standards which
aid in economic development. Moreover, SMEs enable economies to ensure the
availability of essential goods at reasonable prices through the increase in
competition in the relevant industries. The contribution of the SMEs to job
creation could be underscored by the approach taken by governments whenever
there is need to stimulate the economy. Good examples of such actions is the
provision of venture capital for UK based start-up businesses which is believed
to be the major driving force of the UK economic growth in the last seven
decades (Li, 2001). In times of economic downturn, the major industry players
tend to be adversely affected and are often forced to reduce their labour force
in order to remain afloat. The newly unemployed workers are therefore forced to
look towards the SME sectors which are in many cases able to survive such
downturns. SMEs are useful tools for pulling economies out of recession. This
is due to the fact that most of them are highly entrepreneurial and tend to
engage in innovations that enable them adapt to the changing business
environments with relative ease. These innovations may either be through the
redesigning of products available to the markets or through the changing of
business processes to suit the changing environmental conditions (Winter, 1987).
Business processes may include enhanced after sale services, simplified
purchase procedures, and online shopping initiatives among others. Their small
sizes make it possible for them to change their processes and outlooks without
unnecessary strain.
SMEs
have in the past been known to be the drivers behind the transformation from
agriculture based economies to industrial economies in most developed countries
(Li, 2008). This was through the establishment of enterprises primarily based
to process the agricultural produce by engaging in various value addition
processes. The establishment of these businesses attracted further growth as
they created demand for industrial processors and other equipment hence
encouraging the proliferation of other ventures aimed at capturing the rising
demands. The end result was the creation of an industrial economy hinged on the
growing SMEs which would later convert into some of the leading corporations in
the world. The ease with which SMEs are established provides the economies with
a low risk methodology of ‘experimenting’ with resources by determining the
kind of reception the markets may have towards certain products (OECD, 1997).
Moreover, resources that may be substantial for an SME but not for the setting
up of larger corporations are fully utilized. This helps reduce wastages in the
economy and pushes the economy towards the point of optimal production. They
also provide an appropriate linkage between large corporations creating a
certain level of flexibility in the economies. As at 1997, the SME sector
catered for over 25% of production and 35% of all exports in Asia (Economist
Intelligence Unit, 2010). These enterprises are also estimated to contribute at
least 40% to China’s GDP where their influence on the product range available
in the markets is self evident (Economist Intelligence Unit, 2010). Other Asian
countries like Japan and Korea also acknowledge the importance of the SME
sector and have been keen to generate policies that encourage the establishment
and growth of the same. The Pakistani economy also owes its growth to the SME
sector with their contribution to Pakistan’s GDP in 2008 being an impressive
40% with an 80% contribution to employment in the non-agricultural sectors
(Economist Intelligence Unit, 2010). As a matter of fact, over 90% of the
enterprises in Pakistan can be categorised as SMEs. The SME contribution in the
USA stands at OVER 50% of the GDP in the non-farm sectors and a new job
generation rate of up to 80% in 2004. In New Zealand, SMEs account for over 90%
of the business enterprises. In the Philippines, SME contribution to employment
stands at 50%. This figure rises marginally in the EU which stands at 66.3%,
81% in Japan, and 86.7% in Greece (Fuxin and Chumping, 2009). The importance of the SMEs in national
economies has often led to the generation of political debate with most leaders
concurring that the encouragement of the sector may be the best approach to
counter the growing global levels of unemployment. In the USA, it is estimated
that businesses with fewer than 500 employees are the main source of employment
catering for over half of the total workforce.
The
main advantage that SMEs have over the larger corporations is bear a higher
degree of flexibility that enables them adapt to changing business environments
with relative ease (Liu, 2009). As a matter of fact, it has been proven that
SMEs have traditionally tended to increase its market shares whenever negative
events in the economies substantially altered the market variables. SMEs tend
to be more labour intensive meaning that their capacity to generate new jobs
remains unrivalled. The job creation processes come at a much lower cost than
the ones borne by the larger corporations (Economist Intelligence Unit, 2010).
SMEs also tend to have a cost advantage over the larger corporations. This
translates to their ability to offer products and services at prices lower than
the larger and more experienced firms. This provides the lower carder of
consumers with the benefit of services which they would have otherwise been
unable to afford. The small businesses also benefit from the direct supervision
of the entrepreneurs who tend to be available to oversee the firms’ operations
(Economist Intelligence Unit, 2010). This focused attention tends to result in
higher levels of productivity among employees. Small and medium enterprises
also enable economies to function efficiently.
By encroaching into the market shares previously held by the larger
corporations, they help discourage monopolistic and oligopolistic tendencies in
the market (Savlovschi and Robu, 2011). They therefore help in ensuring fair
allocation of factors of production and distribution of resultant products in
the economies.
SMEs
are however faced with a myriad of challenges that may inhibit their growth and
smooth functioning. Key among these is the apparent lack of economies of scale.
Their small sizes make it difficult for most small businesses to produce in
bulk thereby reducing their ability to satisfy market demands (Economist
Intelligence Unit, 2010). Secondly, given that most SMEs are small organisations
operating in specific localities and with no substantive distribution network
limits the ability of such organisations to gather the necessary information on
changing market tastes (Renlong, 2001). This makes the researching processes of
such organisations to be very costly on the part of the SMEs. The SMEs also
suffer from lack of sufficient funding. This especially affects the start up
ventures that have no previous credit record with the financial institutions.
The workings of the concept of information asymmetry and the conflicts
highlighted in the agency theory makes financial institutions to hike the cost
of credit available to such firms (Gao, 2008). This exaggeration of the cost of
credit results in a scenario where entrepreneurs prefer not to obtain venture
and expansion capital from the financial sector. This phenomenon limits the
establishment and growth of SMEs.
The
appreciation of the importance of SMEs to national economies can be
demonstrated by the various policies taken to ensure the availability of start
up capital and the provision of incentives that are aimed at helping such
enterprises fight the effects of globalisation and compete effectively
(Kongolo, 2010). The UK has established various funds charged with the
responsibility to ensure availability of funds for SMEs for start up and
expansion capital. These authorities are also charged with the responsibility
to identify training needs and provide such trainings in a bid to convert the
highly informal small businesses into formats that can effectively attract
investment by market players (Kongolo, 2010). This is coupled with the
provision for tax incentives and subsidies in selected industries. In the USA,
government funds are allocated for such financing. For instance, the SME sector
received a massive budget allocation of in the year 2008 to encourage the
establishment and expansion of SMEs in a bid to jumpstart the stagnating
economy.
Generic
strategies in businesses are aimed at ensuring the continual survival and good
performance of businesses in the economy (Barney, 1997). These strategies are
often in reaction to organisational mission and vision as well as the influence
of external factors. Such external factors may include political and legal
requirements, economic conditions, social conditions which refer to the tastes
and preferences of the consumers, and the technological factors that refer to
the level of technological sophistication in the environments that the
businesses operate it (Ma, 2000). Other factors that influence the type of
strategies adoptable by businesses are the factors in the industries in which
the businesses operate. Such factors include the level of industry rivalry,
buyer power, supplier power, threat of entry and threat of substitutes (Naidoo,
2010). They are a great determinant on whether an organisation chooses to
compete using the low prices strategies, product differentiation, or even the
strengthening of their brand image.
One
of the main factors that determine the choice of strategy taken by
organisations is the economic factor. This mainly refers to the level of demand
in the economy and therefore the potential of the organisations to turn up
volumes (Naidoo, 2010). Periods of economic recessions are therefore a major
source of concern to the businesses which have to cope with the challenge of
reduced disposable incomes among their target consumers (Naidoo, 2010). Economic
recessions are periods of inhibited economic activity. These periods tend to
cyclical and are bound to occur in economies from time to time. However, where
such recessions become prolonged, they have the capacity to fundamentally
affect the operations of businesses with many businesses forced to close down
their operations. In the increasingly globalised world, economic downturns in
one country are expected to reflect on trade and production in other countries
due to the fact that changes in demand levels affect all international market
players (Yue, 2011). The three most serious global recessions have been
identified as the long depression of the 1890s, the great depression of the
1930s and the global economic crisis of the late 2000s (Economist Intelligence
Unit, 2010). Of the three global recessions, the global economic crisis is seen
as the one that lasted for the shortest time, less than three years, even
though its impact and the intensity of economic deterioration matched if not
exceeded the other depressions.
This
crisis was triggered in the USA housing industry after the collapse of the
housing bubble that had been growing in the previous years. The unregulated
practices by financial intermediaries in the USA had made it possible for
individuals and institutions to access mortgage financing with relative ease
where even those that would not ordinarily qualify for financing tended to
access such facilities (Economist Intelligence Unit, 2010). The end result was
soaring prices of houses whose effect was increasing rates of default among the
borrowers triggering major liquidity issues in the financial services sector.
This crisis would later spread to the American stock markets characterised by
major drops in the share prices of the stocks associated with the real estate.
The resultant panic led to the crisis which was characterised by reduced
demands and reduced investments as most investors held to their funds in fear
of losing their investments. A survey among the SMEs in the UK revealed that at
the onset of the financial crisis, most businesses expected to experience low
sales coupled with late completion of payment by their clients (Economist
Intelligence Unit, 2010). The feeling was however not similar to their
commitment to pay their suppliers with most SMEs holding the opinion that they
would still be obligated to make timely payments to their suppliers despite
their anticipated predicament. However, most enterprises remained optimistic
that they could continue to record growth in their books despite the recession.
Accordingly, less than 20% of the surveyed SMEs were of the opinion that they
would need to lay off their staff and declare redundancies (Economist
Intelligence Unit, 2010). In fact, over 60% of the polled firms remained
optimistic that they would be able to create new jobs during the recessions.
Periods
of economic downturns pose a major challenge to business executives and
entrepreneurs aiming to survive such periods. One of the most commonly adopted
approaches by businesses includes the move to enhance cost cutting measures.
Cost cutting refers to the shedding of unnecessary expenses which the
organisations can do without (Hai, 2010). Such costs often include the
reduction of staff costs through the laying off of redundant staff, or the
changing of the salary structures of such employees in order to reduce the
fixed costs that the organisations have to contend with. Many SMEs have also
been known to reduce their marketing budgets, or even keep their marketing
campaigns on hold (Economist Intelligence Unit, 2010). Such decisions are often
informed by the fact that in such hard economic times, marketing efforts may
not be as rewarding and therefore amount to loss of organisation’s funds.
However, economic recessions may come as a source of competitive advantage to
SMEs who then get a chance to grab markets that were previously held by the
larger corporations. By utilising their low cost structures, SMEs are able to
price their products at lower amounts than their more established counterparts.
The consumers whose disposable incomes tend to reduce significantly become price
sensitive and tend to consume lowly priced goods in order make room for other
needs (Naidoo, 2010). Such reduced incomes may also necessitate the production
of smaller units of products in order to enable consumers who may not be able
to afford the standard sized products to afford them. This approach to strategy
normally comes at a cost which tends to be lower in the case of SMEs enabling
them to adapt with relative ease. Moreover, the level of interpersonal
relations and organisational cohesion experienced in many SMEs becomes a source
of advantage in such perilous times. While the changes in the payment
structures and reduction of such salaries lead to increased sense of insecurity
and poor morale among employees in the larger corporations, SMEs’ managers
exploit their existing relationships with such employees to make any cost
cutting measures adopted more acceptable (Naidoo, 2010). The end result is that
SMEs continue to be highly productive where other corporations grapple with the
effects of low motivation levels among their employees. Small businesses are
often committed to retain their staff members despite economic times. This
loyalty to their employees in turn inspire great confidence and increased
commitment among the employees who quickly internalise the vision and mission
of the businesses and go out of their way to ensure that the organisational
goals are realised (Naidoo, 2010).
Another strategic measure taken by
organisations in order to compete under hard economic times is product
differentiation and new product development (Economist Intelligence Unit, 2010).
This refers to the innovation of new products that can meet the needs in the
market in a manner that suits the consumers better than they are suited by the
products already existing in the markets. SMEs have always been lauded as
drivers of innovation in most economies and are therefore expected to lead from
the front as far as innovation is concerned (Hallberg, 2000). Such newly
created products would often be expected to meet the consumer needs at lower
prices in order to match their shrinking disposable incomes. Differentiation
may also be achieved by the modification of business processes to suit changing
customer needs. The ability of SMEs to develop and adapt new technologies places
them at an advantageous position relative to their larger counterparts (Mo,
2009). The use of new technologies require that all members of the
organisations be well trained and enabling infrastructure be installed at all
points necessary for the effective implementation of such programs. This has
cost implications in terms of financial resources and the amount of time
required for the members of the organisations to fully embrace such
technologies and their effects. Smaller organisations have smaller need for
enabling infrastructure and are able to effectively monitor the pace with which
their staff members are able to adopt such innovations. In many cases, SME
innovations take off long before the large corporations are able to roll out
with their new technologies enhancing survival chances of SMEs in the
economies. The Innovations and modification of products can also enhance demand
creation in entirely new sectors. This is referred to as the blue ocean
strategy (Xuezhen and Yongshen, 2007). This is where an organisation chooses to
pursue an entirely new market instead of competing in the traditional markets.
Such markets tend to be on a slowing pace given the shrinking demands which
often result in increased level of rivalry among the organisations operating in
such markets. Where such a strategy is adopted, the pioneering firms are able
to realise high returns due to the lack of competition in such new market
segments.
The
firms may also opt to pursue brand enhancement strategies in order to remain
competitive. The strategy is based on the premise that even though disposable
incomes are reduced, most consumers would prefer to purchase quality products
that would make it unnecessary for the clients to spend money in replacing the
items after a short while (Naido, 2010). Projecting the image of an
uncompromising provider of high quality products therefore becomes a source of
increased sales even during recessions. Brand enhancement also breeds loyalty
among clients. In times of reduced economic activities, organisations with a
highly loyal client base tend to survive with more ease than the organisations
without them. This forms the basis for the formation of client retention
programs such as the use of loyalty cards that allow clients to obtain certain
benefits upon the attainment of a given threshold in terms of the level of
activity (Naidoo, 2010). For instance, upcoming retailers in the UK allocate
certain points that accumulate with subsequent transactions where the clients
are in a position to obtain certain benefits or buy certain products upon the
forfeiture of such points. Client loyalty programs make businesses distinguish
themselves as the destination of choice to all participating clients.
Economic
hardships also inspire extra caution in making investment decisions among
businesses which are often keen to ensure that their investments are not
compromised. These periods see many businesses shelf their expansion plans
which are then suspended until such times as the executives determine as
appropriate (Hines, 2008). Expansion can however be realised without
unnecessary expenditure in terms of capital inputs. Times of economic hardships
are also a good time to consider the formation of strategic alliances.
Strategic alliances in such times often involve the sharing of distribution
channels where the partnering organisations take advantage of each other’s
distribution networks (Naidoo, 2010). This provides a two fold benefit: it
enables the cost cutting in terms of distribution logistics, and enables the firms
to compete more effectively in the market. Strategic alliances can also be
created to enhance the sharing of technologies. Where a certain technology is
already patented and is identified as crucial in a new product development
project, it may be wise to consider making arrangements with the patent holders
in order to utilise such technologies (Naidoo, 2010). Innovation is one of the
most effective tools for ensuring the stability of businesses and where
alliances allow for such innovations to be effective, organisations must
consider forming them.
This
section has highlighted on how organisations can be identified as SMEs. It has
also explained the challenges faced by such organisations and how important
these organisations are important to the national economies. The section has
also highlighted the common strategic approaches that businesses, including
SMEs, take in order to survive periods of economic downturn. Having ably
highlighted such aspects, the following sections examine the workings of the
Chinese SMEs and how these SMEs have been reacting in response to the subprime
mortgage crisis.
This
chapter outlines the process by which the enquiries were done and the mode of
collection of information. It also provides a background of the guiding
philosophies that were used in the research. The provision of guiding
philosophies allows for the appreciation of the perspectives considered in the
research and therefore provides the users of the information that the findings
and conclusions are were done objectively and with a high measure of integrity.
Research methodology not only governs the research process, but it also
contributes to the level or organisation exhibited in the research enabling
efficient and effective time management and use of resources. The philosophies
and methods adopted for this research are as outlined in the subsections below.
Research
philosophies highlight the various beliefs, assumptions and dominating
perceptions that come into play whenever research is being conducted (Chia,
2002). These philosophies enable the identification of any researcher biases
that may inhibit the conduct of an objective enquiry. The knowledge of such
philosophies also enables the researcher to understand the biases that may be
exhibited by the respondents and other sources of information allowing the
researcher to factor out such elements in the interest of drawing balanced
conclusions (Chia, 2002). The choice of the philosophies to embrace in the
conduct of the research is determined by the nature of enquiry based on the
type of information being sought. Use of appropriate philosophies enables the
conduct of effective enquiries that result in the collection of reliable
information. Such matching is referred to as coherence. This understanding
calls for the explanation of the concepts of ontology and epistemology.
Ontology refers to the paradigm that allows for the evaluation of the biases
held by researchers as influenced by their views on reality (Chia, 2002). This
aspect aims at helping the researcher distinguish between the reality as
observed during research and the influence of their personal biases of the same
realities. In other words, it seeks to
minimise the prevalence of subjective interpretations and instead promotes
objectivity in the same. Proper focus on ontology enables the inhibition of the
influence of the researcher biases on the objectivity of the research findings
and recommendations (James and Vinnicombe, 2002). The consideration of this
philosophical aspect is useful in ensuring that the research design is done in
a manner that minimises the chances of such biases.
Epistemology
emphasizes the importance of using the right procedures in collecting the
information required to answer the research questions (James and Vinnicombe,
2002). Epistemology guides the
researcher in their quest to generate attainable research objectives. The
definition of the information needs focuses the attention of the researcher on
the knowledge of what is attainable with the available resources and within the
available time for the research. It also helps ample focus on the authenticity
of the information sources picked with an emphasis to determining the
usefulness of such knowledge to the research in question. This perspective also
allows for the inhibition of researcher biases in designing the research
process. The research design produces more effective results when it is based
on the nature of information sought rather than the subjective preferences of
the researcher.
Research
philosophies can be categorised in three main paradigms. This classification
depends on the nature of information to be gathered as well as aims of the
research. The main research philosophies include the constructionist or the
interpretivist paradigm, the positivist paradigm, and the realist paradigm
(Chia, 2002). The positivist views mainly deal with observable realities. This
paradigm emphasises enquiries made to prove or disprove an existing hypothesis
which is then proved as correct or incorrect based on the gathered information
(Eaterby-Smith, Thorpe and Jackson, 2008). This paradigm also holds true the
existence of an objective social world. The most common approach to prove these
realities is through the use of statistical analyses and other quantitative
methods of analysing the relationship between various variables. The data
collection methods advocated for in this paradigm are questionnaires, written
surveys, and the use of secondary data. Constructionist or the interpretivist
approach differs from the positivist approach in that it takes cognisance of
subjective opinions as influenced by the experiences of the persons in
question. It reckons that understanding is mainly based on the people’s
interpretation of the events that go on around them (Eaterby-Smith, Thorpe and
Jackson, 2008). The adoption of this view underscores the importance of
continued research. This is because people’s perceptions of events change from
time to time and continuous enquiry is the only way to establish the prevailing
perceptions at a particular time. The view therefore advocates for little
reliance on past research due to the fact that the perceptions captured at the
time of such recording is likely to have shifted necessitating the capturing of
the current perceptions. The recognition of past experiences on the perceptions
also provides the researcher with the rationale to look into the experiences of
such persons when carrying out the enquiries (Eaterby-Smith, Thorpe and
Jackson, 2008). For instance, a person whose experiences have been positive is
likely to exaggerate the goodness of a phenomenon while that whose experiences
have been negative are likely to undermine the benefits of the same phenomenon.
The realist paradigm on the other hand acknowledges both the objective
realities in the world as well the subjective perceptions of the people in
interpreting such realities. This paradigm, while acknowledging the
significance of social conditioning on peoples’ understanding, reckons that
there exist certain objective truths that remain the same irrespective of the
personal perceptions about them.
This
research shall embrace the realist paradigm. This is due to the fact that it
will need to capture the objective facts as demonstrated by figures on the
contribution of SMEs in China and other aspects. The realist view will also
enable the researcher to factor out the personal biases of the respondents
where their responses are seen as a reflection of their subjective opinions.
The
use of appropriate research strategies enables the researcher to conduct timely
enquiries, collect the desired information, and arrive at the desired
conclusions that meet the integrity and reliability thresholds (Kvale, 1996). The
research strategy determines nature of enquiries, data collection methods, the
choice of the appropriate population and sample to produce the required
information, and the choice of interpretation and analysis tools necessary for
ensuring the realisation of the research objectives. Without the use of the
right strategy, the integrity of the findings cannot be guaranteed. These
strategies are highly dependent on the type of information sought, the
resources available to the researcher, the amount of time available for the
enquiry as well as the physical distance between the researcher and the
intended population and sample (Kvale, 1996). It also includes the
determination of the secondary sources whose information meets the desired
levels of integrity.
Considering
the nature of information sought in this research, the research engaged the use
of both the primary and secondary data collection methods. This is due to the
fact that experiences in the business world are constantly changing and it is
crucial to current developments in the business world. While the secondary data
is expected to provide the theoretical frameworks and insights based on the
experiences of SMEs outside China, the primary research will specifically
outline the experiences of the Chinese SMEs. Secondary data was obtained from
online analyses, industry publication, government agency newsletters and other
resources determined to be reliable. Primary data was collected using
questionnaires and surveys which were mainly addressed to entrepreneurs and
executives in the medium enterprises in China as well as management level
employees that are privy to the strategic issues affecting their organisations.
Government agencies charged with monitoring the progress of industries (ministry
of trade and bureau of statistics) were also factored in. The nature of enquiry
was mainly qualitative due to the fact that it mainly sought to establish the
experiences of the SMEs even though quantitative information was found
extremely useful in determining the performance indexes of the SMEs in China. The
presentation and analysis of the results were equally done qualitatively and
quantitatively in order to provide balanced information.
Secondary
data was collected from the various industry publications as well as reports
from relevant government agencies. Secondary data is useful in any research due
to its ability to provide the theoretical background necessary for
understanding and accurate interpretation of the acquired information.
Secondary data is always in permanent form and can therefore be analysed
leisurely with no danger of losing information (Eriksson and Kovalainen, 2008).
Besides, several publications are done with immense input as far as research is
concerned. They therefore provide a more detailed outlay and therefore become a
reliable source of information for research. Secondary data sources also
present a number of challenges. Most of this information is gathered with other
objectives in mind. The information can therefore be only applied selectively
in order to ensure the information gathered is relevant to the research.
Moreover, given that the secondary data serves different purposes, it may be
impossible to obtain the kind of information needed for an ongoing research.
This provides the rationale for the use of primary research.
Primary
data was collected through the use of questionnaires and written surveys. The
choice of these collection methods was based on the fact that by the very fact
that they are written, they would give the respondents an ample opportunity to
respond without undue pressure from the researcher. The data collected was also
in printed form eliminating the chances of loss of information as may be common
in other non written collection methods (Kumar, 2005). The design adopted for
the questionnaires was aimed at ensuring clarity of questions to enable
respondents answer accurately. The questionnaires were taken through certain
tests to ensure the accuracy and simplicity of the questions. The threat of
misinterpretation of questions is real in the case of questionnaires due to the
fact the researcher may not be available to offer the necessary clarifications.
This makes it very important to ensure that the design and the nature of
questions are simple enough to be understood by the average respondent. The
questionnaires were distributed in two versions: the English and the Chinese
version. This enabled respondents to respond with ease without imposing
unnecessary strain on those who may not be good English speakers. The
researcher therefore enlisted the services of an interpreter to ensure that the
questionnaires and subsequent responses are clearly understood. The use of an
interpreter was also useful in analysing the meaning of responses offered given
the implicit nature of communication prevalent among the Chinese.
These
questionnaires were administered through the email. The researcher sought the
information about the targeted SMEs and established contact with prospective
respondents through the email. The targeted respondents were petitioned for
consent and informed of their rights and obligations before the data collection
began. Emails were seen as cost effective even though the absence of personal
contact proved to be quite a challenge.
Population
in research refers to the elements in consideration in a study. It takes into
consideration the elements on whom the research objectives have the greatest
effect. It involves a broad base of subjects. The population in this research
is the SME population in China. The research also covered selected government
agencies in China. The choice of SMEs in China is based on the presumption that
it is the Chinese SMEs that are best equipped to highlight on the strategies
that they are taking in reaction to the global financial crisis.
The
number of SMEs in China runs into thousands of enterprises. It is therefore not
possible to factor all of them into the research in view of the time and
resources available. It was therefore necessary to come up with a sample whose
experiences and characteristics were viewed as a representative of the whole. Samples
are believed to be representative of the whole population and can therefore be
used to generalise the experiences in the whole population (Saunders, Lewis and
Thornhill, 2007). The determination of the sample size is a function of
resources and time available to the researcher for the study. Larger samples
tend to be preferable than smaller samples. However, a researcher should be careful
to ensure that the sample size picked is both adequate and manageable.
The
sample size picked in this study was 200. A total of 200 respondents were
involved in the survey. The fact that some of the responses collected were
highly personalised means that sampling may not be entirely reflective of the
opinions of others. However, with correct sampling, the margin of error was
predictably reduced to an acceptable level. These respondents were sourced from
the three categories of SMEs as well as the relevant government agencies. 60
respondents were sourced from each of the three categories namely very small
enterprises, small enterprises, and medium enterprises. The remaining 20
respondents were sought from government agencies. The sampling process was random.
The desired categories were established after which the samples were picked
randomly. Random sampling refers to a process where samples are picked
arbitrarily without the use of any formula. Under this process, every part of
the population has an equal chance of being selected.
Raw
data is often incoherent, bulky, and unpalatable. The importance of analysis
and interpretation cannot be overemphasised. Without interpretation and proper
analysis, the information remains an incoherent bunch of information whose
value cannot be realised. Proper presentation tools also enable a quick
understanding of the findings of a research. Presentation aids enhance ease of
reference and encourages ease of understanding among a cross section of the
users of the information. The data analysis methods embraced in this research
were both qualitative and quantitative. Quantitative analysis provided
statistical information using ratios and percentages to give an easy image of
the proportions involved. Qualitative analysis on the other hand captured
various sentiments and observed strategies as well as their observed and
anticipated levels of effectiveness. The analysis also factored in the known
effects of the experiences that such respondents have had in the past. The
analysis and interpretation also factored in the inputs from other secondary
sources that enabled the correlation between the different variables.
The
use of email to administer questionnaires meant that there was very limited
personal communication. The general suspicion towards anonymous email in China
proved to be a challenge with many respondents initially disregarding the
request for participation. However, consent was obtained after a couple of
requests. Moreover, the researcher provided their personal information
including daytime contacts and the university contacts in order to assure
respondents of the intention and integrity of the research. The researcher also
experienced a certain level of lack of responses where some of the respondents
failed to attend to the questionnaires. The researcher sought to maintain the
sample size in response to this problem through quick addition of other
respondents. The fact that email addresses tend to be personal posed a
challenge for the respondents to maintain anonymity. The researcher had to make
a commitment assuring the respondents that their identities would remain
protected at all costs.
The
results outlined in this chapter reflect on the information obtained from the
questionnaires. The main questions asked during the research have been
paraphrased and the intention for asking such questions outlined before giving
a brief description of the obtained results.
The
research sought to obtain information about the level of experience held by the
respondents in their respective fields. The level of exposure to the strategic
management processes of their organisations was also sought. This would help
appreciate the reliability of the information provided by the respondents.
The
vast majority of the respondents were recorded to have had an aggregate
experience of between 5 and 8 years as outlined below:
Experience
in yrs
|
0-4 yrs
|
5-8yrs
|
9-15
yrs
|
16 yrs
and over
|
No. of
respondents
|
30
|
99
|
51
|
20
|
%age
|
15%
|
50%
|
26%
|
10%
|
From
the statistics, only 15% of the respondents could be categorised as
inexperienced in the industry. The rest of the respondents had over 5 years
experience in the SME industry. This has the implication that the respondents
were well versed with the subject of the research and that their input would be
reliable. The statistic can be explained by the fact that the respondents
targeted were mostly SME managers, entrepreneurs or employees normally involved
in strategic management of the organisations. Of the respondents with more than
5 years experience, over 90% stated that they were actively involved in the
strategic management processes of their organisations, or were at least privy
to the strategic management processes in their organisations. Only about 40%
among the less experienced ones (0-4 yrs) claimed to have such knowledge.
The
respondents were then asked to conduct an internal analysis of their
organisations listing the three strongest sources of strengths and the three
most formidable weaknesses and their opinions of how such factors were relevant
in the organisations’ favour or otherwise. This question sought to create
understanding of the internal environments of the typical Chinese SME. This
information would be useful in understanding the strategic approaches taken by
these firms as well as make recommendations on the best ways of harnessing
these strengths and mitigating the weaknesses.
The
most commonly quoted factor was the prompt decision making structures that
characterise most Chinese SMEs. The lack of bureaucracy in decision making
procedures breeds an entrepreneurial spirit among the members of the
organisations. This leads to a situation where innovative ideas are easily
generated by any of the employees and quickly transmitted to the decision
makers (in many cases, the entrepreneur) who then takes a decision on whether
to pursue the ideas to a logical conclusion or not. The absence of a board of
directors, who would be required to sanction all investment decisions in other
organisations, makes the entrepreneur as the final authority and can therefore
make binding decisions without taking unnecessarily long periods in seeking
approval. The knowledge that their ideas can be adopted with ease in the
organisations encourages the employees to become more innovative. The findings
revealed that some of the most brilliant innovations in terms of product
designs and business processes tended to originate from the employees rather
than the entrepreneurs themselves.
Closely
related to the first strength is the existence of warm interpersonal
relationships between the members of the organisations which help them foster a
unique sense of cohesiveness across all levels of the organisation. The fact
that the organisations generally tend to be smaller allow employees to know
each other beyond the professional level. This leads to a scenario where the
employees and the managers in the enterprises are closely knit into a
family-like structure where employee’s personal needs become relevant to the
organisation. The end result of such an atmosphere is the general reluctance to
declare redundancies or lay off workers even in difficult economic times.
Employees on the other hand reward the organisations’ commitment to them
through hard work and increased productivity hence contributing to the overall
performance of these organisations.
The
SMEs were also observed to generally have a small structure which often
translated to low fixed costs. This served to allow low volume production at
reasonable costs which in turn allow these organisations to charge their
products competitively. Their small structures also enable a high level of
flexibility when it comes to the embracing of new technologies and business
processes. The existing cohesiveness in the work force helps apply some measure
of peer pressure on the employees to quickly learn the new technologies and
internalise any process changes making such organisations a step ahead of their
industry competitors.
The
weaknesses of the organisations were outlined as those factors that compromise
the ability of the SMEs to perform to their optimum. First among these was the
lack of financing. The respondents decried the difficulties encountered when
trying to secure funding for their ventures due to hiked up interest rates. The
highly personalised nature of the SMEs that make them largely informal also
discourages investors who prefer to invest in the highly formalised large
corporations. The respondents also decried insufficient government support
quoting the experiences of other governments’ initiatives in supporting SMEs in
their national economies. The firms are therefore for the most part forced to
rely on their retained earnings to fund their capital projects. These earnings
are seldom enough for any meaningful investments. This lack of capital limits
their ability to take advantage of arising opportunities in the markets.
SMEs also have to grapple with the effects of
their small nature of operations. The lack of highly sophisticated equipment
limits their ability to reap the benefits of economies of scale. Such economies
are therefore enjoyed by the larger firms. Their inability to produce en mass
limits their potential to serve larger market segments hence limiting their
growth. Closely related to this weakness
is their lack of networks. Their lack of regional and international networks
limits the level of experience at their disposal. This limits their ability to
compete internationally due to insufficient expertise in international markets.
This also limits their ability to gather market intelligence with ease.
Organisations with large national and international networks are able to gather
information about the markets with relative ease. The SMEs tend to lack the benefits
of this feature.
The
Chinese SMEs were also observed to lack core technology. Production by sticking
to brand among the Chinese export oriented SMEs. Those with their own brands
tend to have weak brands that do not command awareness in the international
market. This weakness compromises the chances of success of the SMEs on a
global scale.
The
respondents were then required to give an external analysis to identify threats
and opportunities available to the SMEs. The respondents were however asked to
restrict themselves to the subprime mortgage crisis and its impact on the
business environments. It is from these analyses that the opportunities and
threats were identified.
The
most respondents agreed that the subprime mortgage crisis had significantly
impacted the business environments. The main source of threat is the
diminishing global demand and slowing economic growth within the country. This
lessening of demand was as a result of diminishing disposable income in the
global markets. The end result was increased level of rivalry in the economy. This
was coupled a reduction in the investor confidence where most investors
preferred to refrain from making investments until the economic conditions
improved. The financial institutions were similarly reluctant to advance loans
in fear of accumulating bad debts. This had the effect of inhibiting growth in
the Chinese SME sector.
This
crisis however came with a myriad of opportunities which could be exploited to
the advantage of the SMEs. The economic crisis caused a general shift from
highly priced items towards cheaper and simpler products that could offer the
same utilities. This became the opportunity that the SMEs sought to advance
their market shares. Given that the Chinese currency is weak in the international
currency markets, coupled with the fact that labour costs and other costs in
China are relatively lower than in the international markets, the prices of
Chinese products ended up being cheaper than those produced in the developed
countries. This coupled with the fact that the increasingly cash-strapped
Western consumers were opting for cheaper products led to an increasing demand
for Chinese exports. The SMEs in China therefore had the opportunity to pursue
growth opportunities through exports. However, this growth is only expected to
be in terms of relative market shares and not in absolute figures due to the
fact that the suppressed demand levels cannot be easily offset by the general
changing preferences towards the Chinese products. The SMEs may at a later time
be able to come up with measures to ensure that upon resumption of the economic
vibrancy, the market shares gained during the downturn are not lost back to the
larger corporations.
The
respondents were asked to make a recommendation of the strategic options that
could be put in place in order to ensure that the SMEs continue to remain
competitive in the markets in view of the internal and external analyses
provided. These strategic options would be those that have currently not been
pursued intensively by a vast majority of the Chinese SMEs.
Key
among the suggestions was the strengthening of internal capabilities through
additional training of the employees in order to sharpen their innovative
skills. Innovation was cited as the main strategic advantage associated with
SMEs and it was therefore suggested that such organisations work to ensure that
they are unrivalled as far as the innovation is concerned.
The
respondents also suggested that SMEs work together in order to ensure availability
of the much needed capital. The lack of capital is known to be crippling in
many SMEs and its availability is believed to be able to boost the growth of
the enterprises. It was accordingly suggested that the player in the SME sector
lobby for more participation by the Chinese government through the availing of
finances as well as the establishment of appropriate agencies that would be
charged with capacity building to enable such organisations face global
competition with higher tact. The capacity building programs can also be
designed to empower entrepreneurs on how to reform their organisations’
structures in a manner that makes them more attractive investors hence
resolving the problem of lack of finances. Moreover, the government could also
come up with relevant agencies that offer sufficient reliable information about
the operations and the potential of SMEs. This information would get rid of the
information asymmetry that often leads to an increase in the cost of credit.
Reduced rates of interest would further lead to the resolution of the problem
of lack of capital. The lobbying should also be done to get governments to
pursue favourable taxation regimes that would ensure enhanced growth of the
SMEs.
While
the much needed capital proves elusive, the SMEs can come up with strategic
alliances that help them pool their resources for some mutual benefits. The
sharing of technology and distribution networks are some of the important
benefits of entering into strategic alliances.
Some
forward looking strategies aimed at ensuring future downturns do not affect the
businesses were also suggested. These measures included the implementation of
programs aimed as encouraging client loyalty. This could be done through the creation
of client history and offering incentives to clients who purchase the
organisations’ products most frequently. Such rewards could include shopping
vouchers and other benefits that the organisation may choose to offer. This
approach is bound to yield results due to the fact that a loyal clientele tend
to stick with the preferred distributors in hard economic times.
A
good number of respondents took exception with the massive movement towards
cost cutting in the industry. They were of the view that cost cutting has the
overall effect of diminishing employee productivity due to an increased sense
of job insecurity. Instead, the more acceptable modes include the cultivation
of stable relationships with stakeholders such as suppliers who may readily
provide credit facilities or other negotiated deals in times of economic
downturn. The maintenance production capacity enables the SMEs to capture the
market shares of the businesses that tend to hurriedly close operations during
the difficult times.
The
pursuit of alternative means of marketing may come as a welcome strategy in
times of economic hardships. Instead of cancelling the marketing programs which
may in turn translate to reduced brand awareness, the SMEs could opt to
continue their marketing efforts but in an easier manner. Less costly mediums
of marketing such as the internet may come in handy. This would enhance the
promotion of the brand image while ensuring that organisational funds are
preserved for important functions.
The
possibility of creating new markets was also suggested. Instead of staying in
areas where competition is rife and the level of growth attainable highly
restricted, it may be advisable to try new markets. For instance, some of the
Chinese export oriented SMEs mainly exporting to the Western countries that
were worst hit by the recession should look to other markets in Asia and local
markets in China in order to attract increased sales. To this end, it was noted
that the Chinese government had provided a 4 trillion Yuan facility to enable
stimulate local demand for SMEs.
Strategies
embraced by the Chinese SMEs were also outlined. Some of the measures observed
are in line with international strategic management approaches while some
tended to be peculiar only to the Chinese SMEs.
The
most commonly embraced strategy taken by most SMEs was cost cutting. This had
led to significant labour layoffs and in many cases employees were convinced to
take pay cuts in order to enable businesses compete. These reduced costs were
then translated into price reductions in order to enable the average consumers
to purchase the products. This strategy was also observed among the export
oriented SMEs which made efforts to reduce the prices of their export products.
Even though these measures led to reduced profits, they enabled the affected
SMEs to retain their market share and therefore able to emerge out of the
crisis with a stronger base.
Another
approach taken by a good number of Chinese SMEs was product diversification.
Instead of relying on a narrow product range that would be expected to produce
high sales, the product diversification allowed for the production of a higher
product range in order to generate sales for the organisations. The existing
products were also produced in units that the consumers would be able to afford
with relative ease.
The
SMEs, especially the export oriented ones were able to pursue growth by
utilising the new found policies that allowed them to supply the Chinese local
markets as well. The Chinese markets remained considerably liquid and the
demand levels were not as low as in the Western countries. However, the demand
levels had sunk low enough to warrant government intervention which injected 4
trillion Yuan in order to stimulate demand to support their SMEs.
The
more forward looking approach to strategy in the post crisis error shows that
the SMEs are keen to turn the lessons of the crisis into sources of competitive
advantage. To start with, their is a general movement in the Chinese SMEs
sector to strengthen internal management procedures in a manner that would
enable organisations to capitalise on emerging opportunities as well as convert
arising threats into exploitable opportunities in future crises. Most
respondents were of the view that should any recession hit the world again; the
Chinese SMEs would be better prepared and would therefore be able to wither the
storm without suffering much loss.
This
chapter highlights the concepts picked out in the review of secondary data and
seeks to relate them to the findings outlined above. The section provides
insights that enable deeper understanding of the strategies and suggestions
made by the respondents in the previous section.
The
influence of the economic factors on the strategies of organisations is a well
acknowledged phenomenon among strategy analysts and business executives. In
fact, the process of good strategic management must first start with a thorough
analysis of both the internal and the external environments of a business
(Naidoo, 2010). Organisations do not operate in vacuums and the strategic
manager’s main aim is to place their organisations strategically in order to
exploit emerging opportunities in the environment and escape the threats posed
by the same environments, if not to have them converted into opportunities. The
internal analysis reveals the strengths and weaknesses of enterprises and
enables the executives map out their strategic positions in the market (Ma,
2000). Armed with the right information, strategic managers are able to match
their strengths with the external opportunities and therefore realise the
desired levels of growth (Chakravarthy, 1997). They can also seek to work on
their weaknesses in order to improve their internal capabilities. For instance,
the lack of core technology experienced by most export oriented SMEs in China
limits their profitability and the acquisition of such core technologies would
certainly contribute to their growth. The subprime mortgage crisis which had
resulted in a global economic meltdown is such an environmental factor. This
crisis has attracted the attention of many analysts who wish to understand its
cause and its impact on the business environments around the world.
The
most notable effect of the crisis was its triggering of sharp declines of
demand for goods and services on a global scale. This was as a result of
reduced disposable incomes among consumers due to reduced investments. The end
result is that businesses suffered major blows to their performance with many
organisations being forced to close shop. SMEs in China were also adversely
affected by the crisis with the most damaging effect being the reduced demand
for their products (Zheng and Yanjun, 2010). Faced with the prospect of reduced
sales, many SMEs in China opted to embrace cost cutting measures in order to be
able to maintain their liquidity levels and where possible, pass the benefits
to the consumers through price reductions. However, analysts view the cost
cutting approach as highly reactionary and driven by unproductive emotions such
as panic. These analysts hold the view that SMEs are better equipped to ensure
continued growth even in times of economic downturn (Chung, 2008). Instead of
embracing cost cutting measures, analysts recommend that SMEs pursue
relationships with suppliers and other stakeholders in a manner that may allow
them to remain afloat in the face of shrinking demand without unnecessarily
compromising on their production capacities (Jianglin, 2008). The constant
production allows the strategic SMEs to cash in from the exit of the panicking
businesses and larger corporations whose bureaucratic structures render them
unable to adapt swiftly to the changing economic environment (Ding, 2001).
Another
effect of economic crises is the reduced amounts of investment funds in the
market (Gu, 2008). All the major global recessions in history were
characterised by a collapse or a sharp decline stock markets. The effect of the
subprime mortgage crisis did not translate into a global crisis until the stock
markets in the USA started declining rapidly. China’s stock market is known to
have declined by about 50% for the period between 2007 and 2008 as a result of
the crisis (Gu, 2008). The performance of the stock markets provides the best
indicators of the health of the economies. In times of economic decline,
investors refrain from making investments in fear of the fact that they may not
realise returns on such investments. In fact, the bigger fear involves the fear
of losing the investments completely. This investor apathy results in a
situation where businesses cannot find capital from investors and are in many
cases forced to turn to their retained earning for their investment projects
(Fangfang and Yuangpin, 2009). These earnings are of course very limited and
this reduces the prospect of growth for such businesses. Moreover, financial
institutions find it difficult to lend due to the heightened risk of default.
The end result is a credit crunch in the economy that reduces investment
opportunities and in turn results in inhibited economic activities. This is the
main reason why governments inject funds into the economy in order to stimulate
economic activity. For instance, the Chinese government injected 4 trillion
Yuan into the economy in 2008 with the aim of stimulating demand to allow for
the survival of its SMEs which were running out of funds due to poor demand
levels (Economist Intelligence Unit, 2010). Other governments are known to have
taken similar measures with the USA and most European countries providing funds
to bail out their major financial institutions and major corporations where the
funds provided were expected to stimulate the economy by providing the credit
needed for SMEs and other businesses to grow.
As
analysts would observe, recessions come with the proverbial ‘silver lining’.
The economic times make consumers to demand different products especially where
their favourite products prove to be unfriendly to their constantly diminishing
disposable incomes (OECD, 2000). It is in such circumstances that scholars see
economic recessions as opportunities for the innovative SMEs who are supposed
to promptly create solutions that can serve the emerging market needs
effectively. Such innovations enable the SMEs to capture additional market
shares which they should be able to retain even after economic recovery. SMEs
are believed to be the best equipped institutions when it comes to the
exploitation of emerging opportunities in the environment (OECD, 2000). This is
due to their prompt decision structures and an enhanced level of cohesiveness
among the employees. This allows for not only quick decisions, but also full
support by the employees who tend to go out of their way to ensure that such
innovations are executed with relative success.
As
observed in the results above, the subprime mortgage crisis not only inspired
the strategies necessary for surviving its adverse effects, but it also
inspired SMEs’ managers and entrepreneurs to be better equipped in case of
future upheavals. One of the most effective ways of ensuring survival during
perilous economic times is through the enhancement of customer loyalty (Li,
2005). This is of course done through well coordinated branding exercises
together with customer loyalty programs that make customers feel like part of
the business and not just an external stakeholder.
The
use of appropriate strategies is crucial to ensuring the continual growth of
the organisations. For these strategies to be successful, all internal
resources and processes must be realigned to be in line with adopted
strategies.
This
chapter is divided into two main sections. The conclusion captures the main
highlights of the paper while the recommendation draws insight from the paper
and other sources to make recommendations for SMEs’ strategies during times of
economic hardships.
Small
and Medium Enterprises are key drivers of economic development and growth in
national economies. The enterprises prove to be useful in the provision of
employment with global statistics indicating that over 50% of employments are
attributable to the SME sector (Economist Intelligence Unit, 2010). SMEs in
China alone contribute to about 50% of their GDP with over 80% of the total
number of enterprises in China being SMEs (Zhou, 2009). SMEs are therefore a
crucial part of the national economies and must be nurtured with utmost care.
Like
other business organisations, SMEs are often faced with strategic dilemmas
arising from their position in relation to the larger micro and macro
environments. Changes in the environments bear great significance on the choice
of generic strategies that these firms choose to take. The subprime mortgage
crisis which had been sparked off in the USA and led to the generation of a
global financial crisis is known to have greatly impacted the business
environments both in China and in the rest of the world (Xiaojing, Duoduo and
Yueqin, 2010). The crisis resulted in drops in the global demand levels and
lack of investment capital in most markets among other effects.
As
a result, the SMEs around the world and in China were forced to make various
strategic options in order to survive the crisis, if not to grow in spite of
it. The choice of strategy comes after a thorough analysis of the internal and
external environments in which businesses are operating. The internal analysis
allows for the determination of strengths and weaknesses possessed by the
business and therefore determine its ability to react to external stimuli
(Naidoo, 2010). The main strengths of SMEs in China and around the world were
identified as: their prompt decision taking structures; their interpersonal
relationships with employees that breed a unique sense of cohesiveness; and
their low cost structures that limit their fixed costs enabling them to break
even without the need to overprice their products. These strengths when taken
collectively contribute to the flexibility of these SMEs where the
organisations are able to embrace new technologies, business processes, or
generic strategies and implement them effectively with relative ease.
The
weaknesses of SMEs according to the results of the survey have been identified
as: insufficient access to funds for capital investments, lack of economies of
scale, and lack of networks. These factors limit the ability of the SMEs to
expand their operations. Having restricted the analysis of the external
environment to the effects of the subprime mortgage crisis, the threats were identified
as follows: reduced demand for products characterised by a reduction in the
amount of disposable incomes among consumers; and reduced access to capital
funds due to investor apathy and reluctance of financial institutions to offer
credit. Given the negative nature of the recession in terms of business
activity, the opportunities presented by the same could be said to be a
creative interpretation of the threats presented to the industry: threats from
which SMEs can smart faster than their larger counterparts. The shift in
consumer demands towards less costly substitutes present the SMEs with the
opportunity to quickly design such products and capture the market share. These
market shares can be retained even after recovery hence helping the SMEs expand
their operations.
The
most common approaches to strategy as influenced by the crisis include cost
cutting measures, product diversification and differentiation, and a change of
focus towards new markets. The Cost cutting measures were adopted by these organisations
in anticipation of likely liquidity problems due to the reduced demands. The
expenses that were struck from the budgets or reduced substantially included
the staff allowances, the marketing budgets, and a revision of logistics
management to ensure that as much funds as possible were saved. Product
diversifications were carried out by many SMEs in order to enable them cast
their nets a little wider due to the fact that their initial lines may not have
been able to sustain them. Product differentiations were also done in
anticipation of changing needs. Repackaging and division of such products to
smaller were designed to serve the need for cheaper and more affordable
products. The pursuit of new markets was mainly done by the export oriented
Chinese SMEs who sought to take advantage of the government stimulated demand
in order to drive sales for their products.
There
are several strategic options that would be readily available to the Chinese
SMEs that they haven’ fully utilised in order to ensure proper and sustained
growth. To start with, the SMEs should endeavour to tackle their weaknesses in
order to remain safe in the business environments. For instance, it would be
hazardous for the SMEs to remain without any tangible plans for expansion just
because there is little availability of capital. Alternatives to the
insufficient capital could involve the formation of strategic alliances with
other organisations based on their core competencies and the need to realise
the benefits of such a union (Jianglin, 2008). For instance, combining forces
in order to exploit each other’s distribution networks would allow each of the
organisations to market their products to a wider range of clients without
having to make the heavy capital investments normally associated with the
establishment of a distribution network. Other weaknesses such as lack of
networks can be solved in a similar manner. SMEs operating in different parts
of the country or in different countries can enter into a cooperative
arrangement where information is shared for the benefit of each of the team
members. This would solve the problem of having to incur hefty sums of money in
the form of research into market trends.
Other
creative strategic approaches that can be used to place the SMEs strategically
have largely gone unexploited. One such approach would involve a cooperative
approach between the SMEs and the government to create information centres that
are aimed at creating a pool of information that would help investors and
financial institutions to evaluate the riskiness of the SMEs seeking to raise
capital for their major projects (Jappelli and Pagano, 2001). Having a reliable
source of information reduces the risk premium chargeable on the funds provided
for investment and also leads to a reduction of the interest rates. This
approach would effectively cure the problem of difficulty in accessing credit.
The problem of low access to capital ails the SMEs even in times of economic
fortunes and its resolution is bound to greatly contribute to the growth of
such firms, and in turn contributing to economic development and growth in the
national economies.
The
use of the blue ocean strategy is also crucial in ensuring survival in
difficult financial times. The blue ocean strategy is regarded as risky by many
investors due to the fact that little research has been done to provide outright
risk assessments (Naidoo, 2010). This is due to the fact that such a strategy
varies in specification from time to time depending on the type of products in
question and the nature of new markets that the firms may want to enter into.
Although the SMEs in China were able to smart their way into the domestic
market, it may not qualify as a blue ocean due to the fact that the consumers
targeted would still have been targeted by the locally based SMEs. Blue oceans
refer to the demand creation in markets that do not ordinarily consumer the
services in question (Naidoo, 2010). For instance, getting a population that
has never consumed or desired to consume a certain product to start demanding
for it is an example of demand creation and a blue ocean strategy.
In
conclusion, internal and external analysis of the organisations must always be
done with utmost care in order to make accurate strategic reactions to the
changing environmental factors.
For more theory and case studies on: http://expertresearchers.blogspot.com/
For more theory and case studies on: http://expertresearchers.blogspot.com/
Barney,
J., 1997. Gaining and Sustaining
Competitive Advantage. Reading MA: Addison-Wesley
Barney,
J., 2000. Firm Resources and sustained competitive advantage. Advances in Strategic Management, 17,
pp. 203-227
Bureau
of Statistics of China, 2003. The interim
regulations on small and medium enterprises categorising criteria. Beijing:
NDRC
Chakravarthy,
B, 1997. A new strategic framework for coping with turbulence. Sloan Management Review, Winter, pp.
69-82
Chen,
2009. The present situation and perspective of small and medium enterprises. Small and Medium Enterprises Review, 5,
pp. 4-5
Chia,
R., 2002. The Production of Management Knowledge: Philosophical Underpinnings
of Research Design. in Partington, D. (ed.) Essential Skills for Management
Research, 1st Ed. London: SAGE Publications Ltd, pp. 1-19
Chung,
A., 2008. Asia’s SMEs see healthy outlook. (Online)
Available at: http://www.atimes.com/atimes/China_Business/JB12Cb02.html
(Accessed 19 July 2011)
Ding,
Y., 2001. China’s SMEs Development confronting globalisation. SMEs Review, 3, pp. 5-6
Easterby-Smith, M., Thorpe, R. Jackson, P.,
2008. Management Research, 3rd
ed., London: SAGE Publications Ltd.
Economist
Intelligence Unit, 2010. Towards the Recovery:
Challenges and Opportunities Facing Asia’s SMEs. (Online) Available at:
http://graphics.eiu.com/upload/FedEx_main_Jan12_Eng_lowres.pdf (Accessed 19
July 2011)
Eriksson,
P., Kovalainen, A. 2008. Qualitative Methods in Business Research, 1st Ed. London: SAGE Publications Ltd
Fangfang,
L., Yuanping, D., 2009. Research on
China’s Factoring Development under the Sub-prime mortgage crisis.
International Economics and Trade Research, 25 (7), 50-54
Fuxin,
J., Chumping, Z., 2009. Transaction costs, informal finance, and SME financing.
Forum of World Economics, 2, pp.
22-26
Gao,
Y., 2008. Policy Funds and SMEs Financing. Reformation
and Strategy, Cumulatively, 175, pp. 128-130
Gu,
H. 2008. Finance Structure Innovation and the Development Credit Guarantee System
for SMEs in China, Enterprise Economy, 1,
157-160
Hai,
G., 2009. SMEs financial management
strategies in a financial crisis. Money
China, 10
Hallberg,
K., 2000. A Market Oriented Strategy for Small and Medium Scale Enterprises. IFC Discussion Paper No. 40. Washington
DC: World Bank
Harvie,
C., 2011. SMEs and Regional Production
Networks. (Online) Available at:
http://www.eria.org/pdf/research/y2009/no8/CH02_SMEs.pdf (Accessed 19 July
2011)
Hines,
P., 2008. From Crunch to Squeeze: Global
Impact of the Credit Crisis on Commercial and Small Business Lending. (Online)
Available at: http://www-903.ibm.com/kr/financing/pdf/GFL03040USEN.pdf
(Accessed 20 July 2011)
James,
K., Vinnicombe, S., 2002. Acknowledging the Individual in the Researcher. in
Partington, D. (ed.) Essential Skills for Management Research. London: SAGE
Publications Ltd
Jappelli,
T., Pagano, M., 2001. Information Sharing, Lending and Defaults: Cross-Country
Evidence. Journal of Banking and Finance,
26, pp. 2023-2054
Jiang,
Z., 2006. The Report of SMEs Development
in China. Beijing: Social Science Academic Press
Jianglin,
L., 2008. The SMEs strategic alliances in the market competition. Southern Forum, 10, pp. 28-29
Kongolo,
M., 2010. Job Creation versus Job
Shedding and the role of SMEs in economic development. (Online) Available
at: http://www.academicjournals.org/ajbm/pdf/pdf2010/4Sept/Kongolo.pdf
(Accessed 20 July 2011)
Kumar,
R., 2005. Research Methodology-a
step-by-step guide for Beginners. 2nd Ed. Singapore: Person
Education
Kvale,
S., 1996. Interviews: introduction to
Qualitative research Interviews. California: Sage publications
Lengick-hall, C.A.,
1992. Innovation and Competitive Advantage: What we know and what we need to
learn. Journal of Management, 18 (2),
399-429
Li,
D., 2005. Review of SMEs’ International Cooperation in Southern SuZhou. Business Modernisation, 451, pp. 33-35
Li,
X., 2008. Develop SMEs and enlarge employment. Production Ability Studies, 4, 129-134
Li,
Y., 2001. SMEs and Banks. Shanghai:
Shanghai Finance and Economic University Press
Liu,
X., 2009. Impacts of the Global Financial
Crisis on Small and Medium enterprises in the People’s Republic of China. (Online) Available at:
http://www.relooney.info/SI_FAO-Asia/China_288.pdf (Accessed 20 July 2011)
Ma,
H., 2000. Competitive Advantage and Firm Performance. Competitiveness Review, 10 (2), pp. 15-32
Miller,
D., Toulouse, J.M., 1986. Strategy, Structure, CEO Personality, and performance
in small firms. American Journal of Small
Business, 10 (3), 47-62
Minghui,
L., 2011. The Plight of Chinese Export
Oriented SMEs in the financial crisis and the countermeasures. (Online)
Available at:
http://www.seiofbluemountain.com/upload/product/200911/2009zxqyhy06a5.pdf
(Accessed 19 July 2011)
Mo,
D., 2009. The impact of the global financial crisis on China’s steel market. Metallurgical Management, 3, pp. 15-18
Naidoo,
V., 2010. Firm Survival through a crisis: the influence of market orientation,
marketing innovation and business strategy. Industrial
Marketing Management, 39, pp. 1311-1120
OECD,
1997. Globalisation and small and medium
enterprises, Synthesis Report. Paris: Organisation for Economic Cooperation
and Development
OECD,
2000. Enhancing the competitiveness of SMEs through innovation. Workshop Paper No. 1. Paris: Bologna
Meeting OECD
Renlong,
Y., 2001. Survival of the Fittest:
Technological innovation of SMEs. Changsha: Hunan University Press
Saunders,
M., Lewis, P., Thornhill, A. (2007), Research Methods for Business Students, 4th
Ed. Harlow: Prentice Hall Financial Times
Savlovschi, L.I., Robu, N.R., 2011. The Role of SMEs in Modern
Economy. (Online) Available at:
http://www.management.ase.ro/reveconomia/2011-1/25.pdf (Accessed 19 July 2011)
Winter,
S., 1987. Knowledge and competence as
strategic assets: The competitive
challenge. Berkeley, CA: Centre for Research in Management
WTO,
1998. Small Business Report. Washington
DC: World Trade Organisation
Xianmei,
X., 2008. Discussion on Small and Medium Size Enterprises Financing. Journal of Nanjing University of Finance and
Economics, 1 (39), pp. 41-69
Xiaojing,
Z., Duoduo, T., Yueqin, L., 2010. Global
Imbalance, Financial Crisis, and China’s Economic Recovery. (Online)
Available at: http://www.xiaojingzhang.com/pdf/economicrecovery.pdf (Accessed
20 July 2011)
Xuezhen,
W., Yongshen, M., 2007. Promoting independent innovation and establishing
innovation-type society. Economic
Research Reference, 5, pp. 46-47
Xuezhong,
C., Xing, W., 2010. The Strategy Research
for Chinese SMEs to address the Financial Crisis. (Online) Available at: http://www.seiofbluemountain.com/upload/product/201005/2010qyjjhy07a7.pdf
(Accessed 20 July 2011)
Yahong,
Y., 2011. Research on Independent
Innovation of SMEs under the influence of the financial Crisis. (Online)
Available at: http://www.seiofbluemountain.com/upload/product/200911/2009zxqyhy06a2.pdf
(Accessed 20 July 2011)
Yang,
J., 2011. A bumpy yet promising road for
the China footwear industry. (Online) Available at:
http://www.fibre2fashion.com/industry-article/10/984/a-bumpy-yet-promising-road-ahead-for-china-footwear-industry1.asp
(Accessed 20 July 2011)
Yanhua,
C., 2009. The Opportunities and Challenges facing the SMEs under the global
financial crisis. Times Finance, 1, pp. 65-67
Yifu,
L., Xifang, S., 2005. Information, Informal Finance and SME financing. Economic Research Journal, 7, 35-44
Yue,
F., 2011. Factoring: An Effective
Financing Option for SMEs in China. (Online) Available at:
http://www.seiofbluemountain.com/upload/product/200911/2009zxqyhy03a18.pdf
(Accessed 19 July 2011)
Zheng,
Q., Yanjun, C., 2010. The Bankruptcy Prediction of Chinese Export Oriented
Enterprises: base on the financial crisis. International
Journal of Trade, Economics and Finance, 1 (3), pp. 283-287
Zhou,
E., 2009. Pioneering China’s Financial
Innovation. (Online) Available at:
http://www.ceibs.edu/link/latest/44271_2.shtml (Accessed 19 July 2011)
No comments:
Post a Comment