Strategy Development by Indian Smes in Plastic Sector: an Empirical Study

Strategy development by Indian SMEs in plastic sector: an empirical study.

By Deshmukh, S.G. Publication: Singapore Management Review Date: Jul 1 2006 12:00AM 2006

Abstract

This paper examines the issues of pressures and constraints, strategies for investments, competencies development, cost reduction, quality improvement, and relationship of strategies with overall performance for small and medium enterprises in Indian plastic sector under an emerging economy. Using data acquired from an extensive survey of Indian SMEs in the plastic sector, cost, quality, and range of products have emerged as the major pressures. This study has reflected the flexible nature of SMEs in developing competitive strategies. However, it is observed that SMEs are not making clear distinction in developing strategies for reducing cost and improving quality.

Small and medium enterprises (SMEs) represent the largest proportion of the manufacturing sector in many countries. They have always played a key role in the economies of major industrial countries. In India, 95 per cent of industrial units are in small-scale sector with 40 per cent value addition in the manufacturing sector and 6.29 per cent contribution to the Indian Gross Domestic Product (Times of India, 2002). In India, industries having investment in plant and machinery less than Rupees (Rs) 10 million are called small-scale industries (SSI). There is no formal definition for medium scale industries but according to some studies, industries having investment between Rs 10 million and 1,000 million in plant and machinery are termed as medium scale industries, MSI (Karandikar, 1999).

In the present era of technology, the plastic sector has become an integral part for most of the manufacturing industries. Asia has been the world's largest plastics consumer for several years, accounting for 30 per cent of the global consumption excluding Japan, which has share of about 6.5 per cent. Next to Asia is North America with 26 per cent share, then western Europe with 23 per cent share in the global market (Verma, 2005). Plastics processing or product manufacturing industry worldwide is facing increased competition due to globalisation of the plastics trade. The major challenge for SMEs is to continuously provide innovative and customised products using the best available process technologies. Improvements in competitors' capabilities have shortened product life cycles, elevated product complexity and expanded accessibility to new technical breakthroughs (Gupta and Garret, 1996). According to Ajitabh and Momaya (2004) in such kind of environment, firm's competitiveness will depend on its ability to provide goods and services more efficiently than others involved in the market place.

In recent years, many large organisations all over the world have been focusing on their core business, downsizing, and outsourcing. This trend has given many opportunities for SMEs to work in partnership with them. As business success depends on the formulation and implementation of viable strategies (Pun et al, 2000), therefore to grab these opportunities SMEs in all sectors need to develop effective strategies for providing higher added values to customers in terms of cost, quality, and services at shortest possible time. According to Porter (2004), if an organisation wants to make a difference as a leader, it has to give time for developing strategies.

There have been very few studies aimed at strategy development by SMEs for competitiveness. Even in developed countries, most of the studies have been devoted to sectors such as the auto component and electronics sectors. Small firms with limited resources will be expected to perceive its business environment as being different from that of a large firms with perhaps more resources and it is also likely to face different environment pressures with regard to market competitiveness (Gyampah et al, 2001). The approaches that large firms use to benchmark their competitors and negotiate with suppliers are expected to be different from the approaches used by small firms (Vickery et al, 1999). Therefore, this study being an empirical study for SMEs, has its own importance for enhancing the knowledge of strategy development. It will help to understand major pressures and constraints on SMEs, dynamic nature of strategy development as well as relationship of strategies with performance.

Research Propositions and Methodology

In sustaining their competitiveness, SMEs face many pressures and constraints due to their limited resources like finance, skilled manpower, and advanced technology. Thus, their strategy should match the organisation's resources to the changing environment and in particular its markets and customers in the pursuit of its goals and objectives (Porter, 1998).

The new competition is in terms of reduced cost, improved quality, higher performance products, wider range of products, better service, all delivered simultaneously (Dangayach and Deshmukh, 2001). To survive in this new competition, SMEs will have to develop strategies for cost reduction, quality improvement, making new investments, and development of competencies. Williams et al (1995) identified significant relationship between manufacturing strategy and firm performance. It is generally believed that SMEs are reluctant to change due to fear of failure and other constraints but due to the dynamic nature of the market scenario, SMEs will need dynamic strategies. According to Tidd (1997), the main task of corporate strategy is not to describe the current state of art, but to identify and explore core competencies that must be added. Otherwise, the current competencies can become obsolete and begin to function as core rigidities. A more natural and fruitful approach is therefore to think of knowledge and skills required by a company in order to maintain or improve its competitiveness. Chaston et al (2001) have observed that the areas of competence concerned with new product development, human resource management practices, organisational productivity, the management of quality and management of information were extremely crucial in terms of influencing small firm growth rates. They observed that firms which have adopted a higher level learning orientation can be expected to exhibit statistically significant higher competencies across the areas of measuring customer expectations, identifying quality variance, implementing quality improvements, using information to optimise information, create control systems, identify market changes and use information technology to acquire data with the foregoing discussion as the background, this paper tries to test the following propositions:

Proposition 1

Priority and level of investment in different areas change significantly with time.

Proposition 2

Priority and level of focus for developing competencies change significantly with time.

Proposition 3

Level of various strategies for reducing cost and improving quality differ significantly.

Proposition 4

The degree of emphasis that firms place on different areas of strategy development will be positively correlated with their overall performance.

For data collection from industries, a structured questionnaire was framed. This was also pilot tested and then administered to industry. Extensive visits were made to SMEs in the plastic sector to collect first hand information. The research methodology for this study is shown as a flow chart (Figure 1). Identification of issues and development of preliminary framework for study was done after extensive review of literature and discussions with industry professionals. The framework developed for this study is shown in Figure 2.

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Ward et al (1995) have observed that link between environment and operations strategy determines firm performance. Therefore, based on the market environment, SMEs should decide their strategies for investments, development of competencies, and priorities for reducing cost and improving quality. Formulation of strategies and their effective implementation will influence their performance.

In this study, executives were asked to rate the intensity of each factor for their respective organisation on a five-point Likert scale (1 being lowest, 5 highest). About 375 organisations in the plastic sectors in India were contacted for collecting responses. These organisations were selected from various directories available at Confederation of Indian Industries (CII), Auto Component Manufacturers Association (ACMA) of India, Federation of Indian Chambers of Commerce and Industries (FICCI) and Department of Industries, (Government of India). In spite of continuous reminders, phone calls, and E-mails only 37 valid responses were obtained for this empirical study. A detailed profile of the responding organisations is given in Table 1.

Results and Discussions

To measure the scale reliability and internal consistency of data, Cronbach's coefficient alpha was calculated for all items of the questionnaire. A summary of statistics is given in Table 2. The coefficients of Cronbach's alpha for all constructs range from 0.69 to 0.87. These values exceed the minimum requirements of 0.5 to 0.6 for an exploratory study such as this (Nunnally, 1978).

Data acquired from the survey of the plastic sector were analysed by statistical tests such as one sample t-test, paired sample t-test (PST), and correlation and regression analysis. Although the focus of this study is on strategy development and its impact on performance but to analyse the business environment, pressures and constraints on SMEs have been also analysed.

Pressures and Constraints

In general, smaller firms experience greater market and customer uncertainty. Those who own and manage the smaller businesses exhibit a vastly greater range of aspirations than owners/managers of large firms. The smaller firms rationally respond by favouring short over longer term gains, and flexible over specific investments even where there is some cost penalty (Chen and Hambric, 1995). The main barriers to be competitive for SMEs are inadequate technologies as well as inadequate inhouse human expertise and poor financial resources (Armstrong and Coyle, 1999). Resource scarcity can impact on the ability of smaller firms to enter export markets and can also limit a smaller firm's ability to reach more advanced stages of internationalisation (Moen, 1999).

The results of the various pressures being faced by Indian SMEs in the plastic sector on a Likert scale of five are presented in Figure 3. It is observed that the highest pressure is to reduce cost (3.54), which is followed by pressure to improve quality (3.50) and to increase range of products (3.36). Pun et al (2004) have observed that for the electronics industry in Hong Kong, product/service quality and customer services have emerged as the critical success factors. Singh et al (2004) have also observed same findings in their study for Indian auto component sector.

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Various constraints felt by Indian SMEs in the plastic sectors to become competitive in the market are shown in Figure 4. Most of the constraints are significantly below moderate level. Lack of growth conducive environment (2.42), raising funds from market (2.38), inadequate government support (2.36), are observed as most severe constraints. In creating a growth conducive environment, government policies play important role. Government policies have played a facilitative role in countries like Japan, South Korea, and Taiwan (Wang et al, 1995) but in India, poor infrastructure, red tape, and various government policies are still considered as main barriers for the expansion and growth of the industry.

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Strategies Adopted by Indian SMEs in Plastic Sector

According to Eren (2004), firms have to develop competitive strategies in order to compete. A firm cannot have a strategy for only a month. Factors concerning long-term stability and short-term need for continual updating in response to evolutionary changes in the environment have to be considered. But the concept of long term can vary from sector to sector depending on its internal dynamics. A long-term strategy for the plastic sector may be two to three years whereas for the chemical sector, it might be eight to 10 years or more. However, to compete in an uncertain environment, strategy development should be flexible according to the needs of the market.

Development of competencies, making new investments, reduction of product cost, and improvement of quality have emerged as critical areas for developing effective strategies. Strategies adopted by SMEs in these areas will be discussed.

(a) Investment Priorities

According to Chanaron and Jolly (1999), global competitive strategies are incrasingly becoming technology driven in the context of extremely dynamic and turbulent environments. Technology operates on competitiveness in two ways. First, by altering the price structure through the development of more efficient and flexible processes, and second by enabling the creation of better products of greater quality, better design, aftersales service, and short delivery periods (Vinas et al, 2001).

It is commonly reported that quality and consistency of the manufacturing performance of SMEs can be improved as a consequence of the use of the most appropriate information technology tools without any major changes in business practices, manufacturing operations or production facilities (Chan and Tang, 1995). Several studies (Lal, 2004, Hodgkinson and McPhee, 2002) have found that users of advanced E-business technology perform better in the export market than non-users.

In this study, research and development, automation of processes, information technology, training of employees, welfare of employees, market research, and advertising were considered as potential areas of investment. Respondents were asked to prioritise these areas. The results of this study regarding investment priorities are shown in Table 3. For Indian SMEs, market research, welfare of employees, research and development had been major areas of priority for investment in the past three years. In the following three years, automation of processes, market research, and training of employees will be top priority for investment. On the basis of paired sample t-test (PST), a significant difference between mean values for level of priority in past and next three years is observed for all areas of investment. This change reflects the dynamic and flexible nature of SMEs and supports the first proposition.

The above findings show that the level of investments in all areas is not very high. Specifically in areas of information technology, training of employees, and advertising, the level of investment is significantly less than moderate level. A study made by Oyelaran-Oyeyinka (2004) also observed that internal training opportunities greatly contribute to improving the performance of organisations.

(b) Priorities for Developing Competencies

Chaston and Mangles (1997) have found that the areas of competence relates to new product development, human resource management practices, organisational productivity, and the management of quality. According to Nonaka and Takeuchi (1995), knowledge and skills have become a company's means to gain a competitive advantage because it will help in developing various competencies by organisations for sustaining their market position.

Development of competencies may vary, depending upon the sector and size. Results of competencies development by Indian SMEs in the plastic sector are given in Table 4. In the past three years, SMEs have given maximum focus for developing competency in using customers to define quality standards. In addition to this, optimisation of work environment and use of information to optimise decisions were other major areas of competencies development. In the next three years, identification of market changes and introduction of new technology will become top priority for developing competencies. This change is being observed due to the fast changing market for the plastic sector in India. On the basis of the paired sample t-test, it is observed that level of focus for developing majority of competencies have increased significantly with time as difference between mean values is found significant at 95 per cent confidence level except for optimisation of work environment, use of customer to define quality standards, and information to optimise decisions. Therefore, these observations support the second proposition.

Firms in industrialised countries that have adopted a quality oriented strategy have achieved improved productivity, greater customer satisfaction, increased employee morale, improved management labour relations, and higher overall performance (Mersha, 2000). According to Corbett et al (2002), SMEs can gain competitive advantage through the quality of their products because they can implement a just-in-time system with low defect rates or higher quality of products. It will also help in reducing product cost. Lau (2002) has also found higher quality and lower cost as top ranking competitive factors among United States electronics and computer industries.

The results of strategies adopted by Indian SMEs for reducing cost and improving quality are given in Table 5. It is observed that for reducing cost, SMEs in plastic sector are giving maximum focus on improvement of maintenance followed by improvement of process capability and product design. For improving product quality, improvement of maintenance continues to be top priority. In addition to this improvement of process capability and automation of operations, there are other major priorities for improving product quality. On the basis of paired sample t-test, it is observed that most of the strategies for cost and quality except improvements in product design does not differ significantly at 90 per cent confidence level. It means Indian SMEs do not make a clear distinction in terms of strategies adopted for cost and quality thereby not supporting the third proposition.

Performance

For measuring performance both subjective and objective measures are considered. Although according to Vickery et al (1994), use of only subjective measures is also a reliable alternative to actual performance because managerial assessments are consistent with objective internal and external performance.

Subjective performance of Indian SMEs in the plastic sector in comparison to national standards is given in Table 6. Respondents were asked to mark their performance in comparison to national standards on a five-point Likert scale (1 for very inferior, 2 for inferior, 3 for equal, 4 for high, 5 for very high) for various measures. Performance of Indian SMEs in the plastic sector in comparison to national standards is significantly higher than moderate level for measures such as manufacturing cost, level of inventory, delivery speed, percentage rejection, employee turnover rate, and customer satisfaction. Objective performance is measured in terms of average percentage change in the past three years on certain financial parameters such as market share, return on investment, profit after tax, and sales turnover. The objective performance of SMEs is given in Table 7. For most of the financial performance measures except return on investment, change is significantly higher than moderate level.