Master's Thesis, 2011
110 Pages, Grade: 12 (Distinction)
Abstract in English
Abstract in Swahili
CHAPTER ONE INTRODUCTION AND PROBLEM FORMULATION
1.2 Research Question
1.3 Definition of Terms
1.5 Structure of the Study
CHAPTER 2 Literature Review and Conceptual framework
2.2 How do we define Small and Medium-sized Enterprises (SMEs)
2.3 SMEs Growth and Performance context
2.4 SMEs Growth Strategy
2.5 Product Development
2.6 Market Development
2.7 SMEs and Internet Adoption Growth Strategies
2.7.1 Teo and Pian Model
2.7.2 Afuah and Tucci model
2.8 Conceptual framework
2.9 Categorisation of firm Growth
CHAPTER THREE METHOD
3.2 Survey Research
3.2.2 Questionnaire Development
2.2.3 Question Formulation
3.2.4 Questionnaire design
3.2.5 Software for Questionnaire Design and implementation
3.2.7 Data Collection
3.2.8 E-mail Questionnaire
3.2.9 Quantitative data management and analytical approach
3.3 Qualitative method
3.3.1 Qualitative method as complimentary to quantitative method
3.3.2 Interview and data collection
CHAPTER FOUR OVERVIEW OF THE ROLE OF SMALL AND MEDIUM-SIZED BUSINESSES IN DANISH ECONOMY
4.2 Brief overview of Denmark Economy
4.3 Role of SMEs in Denmark Economy
4.4 Role of Danish Government in SMEs development
CHAPTER FIVE QUANTITATIVE AND QUALITATIVE DATA ANALYSIS
5.1 Quantitative data analysis
5.1.1 Firms Demographic
5.1.2 Internet Adoption
5.1.3 Purpose of Internet Adopting
5.1.4 Internet adoption and Firm efficiency
5.2 Product and Market Development
5.2.1 How Internet facilitates Product or service development
5.3 Competitive Advantage
5.3.1 Value Proposition
5.4 Qualitative Results
5.4.1 Characteristics of the Firms
5.4.2 General-use internet purposes
5.4.3 Market-oriented internet purposes
5.4.4 Internet- adoption for innovation and production purposes
CHAPTER SIX DISCUSSION AND CONCLUSION
6.2 Internet adoption
6.2.1 High Growth Quadrants: Business Integration and Business Transformation
6.2.2 Low Growth Quadrants: prospecting and brochureware
6.3 Competitive Advantage
6.4 Market development
6.4.1 Internet websites and market development
6.4.2 Internet Ubiquity on market development and communication
6.5 Product development
6.6 Final Conclusion
It is widely recognised that Small and Medium-Sized Enterprises play a significant role in the economic vitality of local and national economies in Denmark. Over the years, these sectors are faced with an increasingly unstable marketplace and stiff competition from large firms. It is believed that the advancement of internet and its related communication technologies have the ability to give these firms the potential advantage to reach wider geographical markets and compete with larger organisations for customers ’ attraction, market share, and sustainable growth. As a result, the Danish government has over the years collaborated with industry and commercial associations to bolster the integration of Information Technology and diffusion of e-commerce among SMEs.
This thesis used quantitative survey questionnaire and qualitative interview approaches to assess how SMEs in Denmark are using the internet as a business strategy to enhance growth and sustainability. In accordance with the theoretical model developed by synthesising existing internet adoption and business growth models, three key determinants such as: the level of internet adoption, growth strategy, and competitive environment were investigated. Result indicates that SMEs have a considerable integration of internet particularly at the lower level which includes e-mail and website. While more than half of the firms who have fully integrated internet as part of their growth strategy have experienced exponential growth by developing new product and reaching new markets. Competitively, these firms are also able to offer high and unique value of proposition mainly through niches.
Inakubalika ya kwamba viwanda vidogo vidogo hushiriki na kujangia kwa uchumi ya nchi ya Denimaki kwa kiwango ya juu sana. Kwa muda mrefu, viwanda hivi vimekuwa vikipata ushindano mkubwa kutoka kwa viwanda vile vikubwa, hasa kwa kupata wateja. Inaaminika ya kwamba, kwa kuwa na technlojia ya mtandao wa internet, hivi viwanda vidogo vitaweza kujimdu na kujinyakulia soko la wateja, nje ya nchi. Hili ni jambo halingewezekana hapo awali. Kwa sababu ya hiyo, serikali ya kideni imeshirikiana na sekta ya viwanda hili kuhakikisah ya kwamba hii teknolojia ya internet inapatikana kwa bei ya rahisi.
Hili somo lilitumia njia za quantitative survey questionnaire and qualitative interview kwa kukuzanya jinzi na namna ambayo, hivi viwanda vidogo vinatumia teknolojia ya internet hili viweze kufanya vizuri kiuchumi. Na pia kutafuta jibu ya kuwa inakuwaje hii teknolojia inazaidia kwa kutengeneza vitu mpya na kueneza soko yao. Kwa kushindana na viwanda vikubwa, hivi viwanda vidogo vina uwezo wa kujinyakulia soko yao ya kipekee. Kwa kufikia jibu hili, somo hili lilizingatia vitu vitatu kwa mhimu: Kiwango ya teknolojia ya internet, njia ya kukuwa na mahali ya kufanya biashara.
It is widely acknowledged that the success of Small and Medium-sized Enterprises (SMEs) have a direct impact on national economy. In many countries, SMEs form the economic foundation on which major economic activity is based (Poon and Swatman, 1998; Haynes et al 1998). Growth oriented SMEs have the potential to generate employment within community and national level, enhance innovation, and create wealth in many countries (Hagen 2010; Leng Tan et al 2006). For example, in Denmark SMEs constitute the highest amount of companies and account for almost 70% of total employment (Scupola, 2009; OECD, 2000).
It is believed that the advancement of internet and its related communication technologies has the ability to give SMEs the potential to leapfrog some traditional growth stages to reach wider geographical markets and compete with larger organisations for customers’ attraction, market share, and sustainable growth (Chapman et al 2000). Acknowledging this and the economic potential of these sectors (SMEs), governments around the world have over recent years engaged in offering financial incentives and supporting projects that are designed to increase the adoption and awareness of Internet and e-commerce, technology diffusion, virtual business networks among SMEs (Jeffcoate et al 2002; Levy, and Powell 2005; Poon and Swatman 1998). In Denmark, the government developed a set of measures to improve SMEs competitiveness. These measures include regulatory reforms tailored to simplifying rules and regulations: for example the introduction of e-government and preferential tax treatment to SMEs (Scupola, 2009). In addition, the Danish government has also collaborated with industry and commercial association to bolster the integration of Information Technology (IT) and diffusion of e-commerce in SMEs, this is marked by the introduction of ‘IT for all’ policy in 2002 (OECD, 2002).
This thesis seeks to find out on how Small Medium-sized Enterprises in Denmark put the internet into use in achieving organizational strategic business objectives and enhancement of performance and sustainability. Strategy plays a central role in the development of any company - small or large (Holm and Poulfelt 2002), but adopting appropriate strategy that is tailored to accomplish organisational goals and facilitate firm performance may be challenging. In most cases, organisational strategies and firm performance often rest on ‘business model’ and ‘environment’ (Afuah and Tucci 2003). While the business model details how a firm makes money now and how it plans to do so in the long term, the firm environment (e.g. competitive and micro environments) provides the conducive atmosphere for the effective execution of the business model (Ibid). The interplay between business model and environment is crucial for firm performance particularly in relation to profitability. The adoption of internet is vital in accomplishing this assignment. Thus as the business environment is dynamically changing the small medium-sized enterprises have awaken to the fact that internet is a resource that is a must for gaining competitive advantage.
In recent years, the emergency and advancement of electronic commerce (e-commerce) has increasingly catapulted the adoption and penetration of internet in SMEs and subsequently altering the way they operate. Many SMEs have naively seized this opportunity and hastily adopted some kind of internet commerce strategy (Poon 2000) without clearly understanding the question of whether and how internet adoption and e-commerce strategies improve firm performance. In Denmark, studies indicate that the rate of internet adoption among SMEs is overwhelming (Statistics Denmark, 2010; Eurostat, 2008; Beck et al, 2003), but there are not enough evidences in literatures to suggest how these firms are strategically using this technology to enhance performance.
However, shortage of enough evidences suggesting the use of Internet for growth purpose does not mean that firm owners are not aware of the potential benefit of internet in their businesses. Since the decision to adopt internet technology by SMEs may be anchored on several reasons. For instance, several studies had shown that major Internet adoption decisions in SMEs are based on perceived benefits, (Poon and Swatman 1997; Daniel and Grimshaw 2002; Santarelli and D’Altri 2003), communication requirements (Sadowski et al 2002), Improve social contact with customers and Vendors (Riemenschneider et al 2003) and relative advantage, top management support, organisational size, external size and competitive pressure Premkumar and Roberts (1999). Nonetheless, studies in other countries (e.g. UK, Australia ) indicate that there are few evidence of Internet and e-commerce adoption decisions in SMEs based on performance and business strategies (Poon 2000; Kim et al 2008; Levy and Powell 2000, 2002, 2005). Anecdotal evidence shows that start up SMEs embracing e- commerce strategies have achieved multi-million dollar turnover in a couple of years (Poon 2000). According to Poon (2000), certain conditions need to be satisfied in order to achieve such significant benefits. Such conditions include: actual experience of competitive advantage, quality information support, percentage of customers who participate in internet commerce, complementary cost for training, and organisational changes as well as direct cost of investing in hardware and software solutions. Similar studies demonstrate that most SMEs do not adopt the Internet as a main strategy for firm performance, but rather view the role of Internet as any other technology purposely meant to aid organisational work (Levy and Powell, 2002, 2005). In addition, these authors also note that most SMEs adopt the internet to facilitate product innovation rather than market penetration
Current study shows that, some SMEs have attempted to incorporate internet business strategy into their business model, and those who have made this attempt are often faced with the challenge of developing organisational strategy that incorporate both the traditional bricks-and-mortal and e- commerce strategy (Enders and Jelassi 2000). According to Enders and Jelassi 2000, rapid penetration of e-commerce has made it impossible for pure physical retails to ignore the importance of online retailing and exponential growth of e-retailers. Therefore, for pure physical retailers to compete and meet the emerging challenges there is need to design and expand a business model that incorporates both the internet and bricks-and-mortal model.
Given the explanation above, it is evident that extensive researches have been carried out on reasons for internet adoption by SMEs. But there is substantial information gap in existing literatures that explains the relationship between internet adoption and firm performance strategy, particularly growth strategy. The truth remains that few studies have attempted to investigate the role of internet adoption in enhancing SMEs performance by the difficulties involved in identifying suitable companies and persuading them to participate in the study (Jeffcoate et al 2002). Acknowledging the acute shortage of literature in this area, the objective of this study is to contribute in fulfilling the existing gap by exploring the relationship between adopting internet and fulfilling business strategic objectives that are tailored to enhance performance in SMEs.
The results of this research are intended to be of benefit to the organizations which are in the thresholds of integrating internet into their business models. Also, the results will help those organizations which, after adopting internet use have failed, due to various reasons, to register competitive advantage as expressed in their business models. Further still, organizations which have established internet use will benefit from the results of this study. Simply because new information might unfold in the process of this research as it has become evident that uses of internet technology are dynamically changing. Thus, in addressing this gap in the current literature, the following question is developed:
How has the adoption of internet as a business strategy impacted on SME performance and sustainable growth?
This thesis seeks to answer this question by carrying out a quantitative questionnaire survey and qualitative interview approaches on the use of internet by SMEs in Denmark. As mentioned above, a study by OECD indicates that Denmark has the highest penetration rate (85%) of internet in SMEs among other OECD countries (OECD 2004). Thus, this provides the basis for choosing Denmark as an appropriate environment for carrying out this study.
Unlike other dominant research approaches in this field such as: case studies and laboratory experiments, survey research involves examination of a phenomenon in a wide variety of natural settings where the researcher has a specific model of expected relationship which is tested against observation of the phenomenon (Pinsonneault and Kraemer 1992). Therefore, based on the following three models 1) Ansoff (1987) product market development model, 2)Teo and Pian (2003) level of internet adoption model, and 3) Afuah and Tucci (2003) internet business model, a conceptual model of this research is developed and tested against the natural setting of Small and medium-sized business using the two approaches identified above.
In addition to some of the key terms such as: Small and Medium-sized Enterprises, business strategy, performance and sustainability explained in chapter two, this section attempts to define and explain other key terms that are relevant for this study. This is to provide a clear meaning and understanding of how these terms are used in this study, since most of them have ambiguous meaning.
The Internet as defined by Afuah and Tucci refers to a vast collection of networks of computers that are interconnected both physically and through their ability to encode and decode certain specialised communications protocols called the Internet Protocol (IP) and Transmission Control Protocol (TCP). The concept of Internet started in the USA as way to curb the persistent military threat emanating from the soviet bloc in the early 1960s by dismantling the centralised forms of communications and introducing a network like communication system that linked computers together. The suggestion came during the late 1960s to early 1970s by USA Defence Ministry based on feared that reliant on centralised forms of communication through very few and large computers may jeopardise their information systems in case there is damage to these computers and the resultant effect may lead to increasing vulnerability to nuclear attach from their opponent. Therefore, “there was a need to link computers together in such a way that was not dependent on any single machine for integrity of the whole network” (Stroud 1998:3). In response to this suggestion, a technological development project called the Advanced Research Projects Agency Network (ARPANet) was initiated and developed (Stroud, 1998; Afuah and Tucci, 2003). From this point the number of computers connected to the network continues to grow until 1983 when all the computers connected to ARPANet were converted to using one set of protocols (TCP/IP) for communicating with each other. TCP and IP are transmission control protocols over the internet that provide the basic standards by which network functioned. According Stroud (1998), it was from this period the term ‘internet’ became more widely used refer to a collection of networks that specifically used TCP/IP protocols to communicate.
Recently, apart from TCP/IP protocols, other protocols such as FTP and HTTP have also emerged and widely used as transfer protocols. FTP is a file transfer protocol that uses both IP and TCP to send complete files across a network from one FTP server to another FTP client. While HTTP (Hypertext Transfer Protocol) is a specification for sending and receiving World Wide Web page from a web server to a web client, which is also called a browser (Afuah and Tucci 2003). In addition, after the HTTP was developed, a general way of specifying a specific Internet address known as Universal Resource Located (URL) came into use. URL consists of three parts: the protocol, separator (://) and the part to a specific file resident on a specific computer (Ibid). Nowadays, URL has become almost synonymous with HTTP but, however, can be used by other protocols.
In the early days of the Internet, the two main internet applications widely used are the Electronic mail (E-mail) and World Wide Web (WWW). E-mail provides a very simple and effective way of sending both simple text messages and computer files (for example, spreadsheets and word processed documents) to one or a number of recipients, while WWW enables individual and organisations to provide a global audience with a full gamut of multimedia information that can be accessed easily (Afuah and Tucci 2003; Stroud 1998).
Since the inception of internet to early 1990s, it was still very much in use as a tool by researchers and educational institution (Stroud, 1998). According to the same author, around 1991 the first commercial providers of Internet connection started to appear. This paved way for commercial and non-profit information service providers to start connecting to the network. However, as the number of commercial users of the internet grew yearly, it became apparent for private Internet service provider (e.g. telecommunications companies) to jump into the void and began providing their own high-speed lines to users or companies that wanted to access it.
Following commercialisation and introduction of private Internet service provider, it has over the years gone from being a communications tool used by a small sector of the society to become a major business tool in the corporate and consumer world. In fact, some writers and academics saw the Internet as revolutionary, partly because the advent of this technology has led to profound changes in businesses. Emerging from these changes are two sets of business terms: Electronic Commerce (Ecommerce) and Electronic Business (E-business).
Several definitions have been put forward to explain E-commerce. For example, some defined e- commerce as a technology-mediated exchange between parties (individuals, organisations, or both) as well as the electronically based intra- or inter-organisational activities that facilitate such exchanges (Rayport & Jaworski 2001, p. 3 sited in McKay and Marshall 2004, p. 4). While others view e- commerce as a transaction process, by which companies exchange real products for real money through online channels (Afuah and Tucci 2001). However, for the purpose of this study, we define e- commerce as a commercial transaction which involve the direct buying and selling of goods or services via the internet. In addition, apart from the actual buying and selling of goods or services, this study also takes into account that e-commerce includes pre-sale and post-sale activities as noted by Chaffey (2004). E-commerce transaction can either take place wherein a business sell goods and services over the internet to individual end consumers which is known as B2C or the transaction take place between two organisations (B2B), or still commercial transaction occurs from one consumer to another consumer (C2C). These three categories (B2B, B2C, and C2C) of e-commerce are the most popular ways of carrying out business transactions via the internet. However, study indicates that B2B e- commerce has grown much more rapidly than B2C and C2C (McKay and Marshall, 2004).
Although the relationship between E-commerce and E-business is extremely closed in such a way that people often use them interchangeably, the question is whether e-business is identical in meaning to e- commerce so that it can be used interchangeably. However, it is evident in literature that e-business goes far beyond e-commerce, and deep into the technological process of an enterprise. For instance according to McKay and Marshall (2004), E-business takes on a much broader meaning and includes the use of Internet-based technology and other information to support commerce and improve business performance. Such internet-based technology traditionally called information system (IS) or information technology (IT) includes intranet, extranet and EDI (electronic data interchange). Thus, e- business does not only embrace e-commerce but also comprises of information system or information technology. In short, the relationship between e-business and e-commerce is explicitly indicated in the Venn diagram below:
Figure 1.1: The relationship between e-business and e-commerce
illustration not visible in this excerpt
Source: Adopted from McKay and Marshall 2004:5
Given the above explanation, this study therefore agrees with McKay and Marshall’s definition of E- business:
As a business that creatively and intelligently utilises and exploits the capabilities of IT and Internet technologies to create efficiencies, to achieve effectiveness gains such as flexibility and responsiveness, and to create strategic opportunities through competitive use of IT to alter market and industry structures (McKay and Marshall 2004: 5).
The use of Internet and its communication technologies as a business tool to facilitate the performance of SMEs and sustainability is a complex phenomenon with diverse angles to analyse, particularly when the business itself has different components that need to be assembled in order to get the business running effectively. For example, the use of internet has proven to be very effective in the following business sectors: customer relationship management, Knowledge Management, Supplier Chain and logistic Management to name but a few. However, the focus of this study is restricted mainly on business use of the internet emerging from the perspective of growth strategy. This is underscored by focusing on the underlying factors that could facilitate firm growth and sustainability when using the internet. As explained in chapter two, these factors include level of internet adoption, competitive environment, product development, and market development. However, this does not mean that other factors are not relevant for business growth, but due to the available space required and the time frame given to complete this study, we are forced to limit this study to the areas specified above. Further, the focus of this study is restricted on SMEs in Denmark. Based on the objective of this study highlighted above, it requires environment wherein there is a significant amount of Internet adoption rate among SMEs. Due to the fact that SMEs in Denmark have the highest internet adoption rate among OECD countries, thus makes it a good candidate for this study.
Theoretically, the Internet seems to have altered the traditional theoretical growth model, which for many years has been used by academicians and researchers to explain how firms grow. Studies had shown that most SMEs adopting the Internet as growth strategy do not follow any traditional growth stages (e.g. Levy and Powell, 2002). This anomalous behaviour of the Internet in businesses has left the theoretical aspect in this field bewilder thus, posing a daunting challenge to researchers. However, over the years there has not been a single theory to explain this new way of doing business. As a result, most researchers settled down by combining two or more theoretical models. Nonetheless, this study is no exception - it also limit its theoretical approach by following similar procedure by synthesising three existing theoretical business models to develop a comprehensive model (see chapter two) to analyse this new phenomenon of business.
Concerning methodological approach, although there are several methods for collecting and analysing research data, this work is restrict to quantitative survey and qualitative in-depth interview. A detail explanation for chosen these two approaches is given in chapter three.
This study comprises of six chapters, in addition to the first chapter presented above, the rest of the thesis is structured as follows: Chapter two presents detailed outline of literature review and theoretical framework. This chapter argues that the growth and performance of SMEs using internet as business strategy are built on three factors, namely: level of internet adoption, product and market development and lastly competitive environment. The chapter concludes by designing a second theoretical business model which can be used to measure the growth capability of firms based on the level of internet adoption. The third chapter is the methodological approach. This chapter explains how the entire study is carried out, starting form research design, collecting data and to the analysis of these data. The Two dominant research approaches explained in this chapter are quantitative survey research approach and qualitative research approach. Further, due to the fact that it may be impossible to carry out research on SMEs in Denmark without providing background information about SMEs in Denmark, the government role and internet penetration in these firms, thus chapter four explains some of these important information. In addition, chapter five provides detail presentation and analysis of the research results obtained from both methods. In the final chapter, overall findings are discussed followed by the final word to take home.
Although the importance of internet is increasingly becoming visible in SMEs, there is a wide spread debate concerning a single conceptual framework that can sufficiently explain and understand SMEs performance in relation to profitability and sustainable growth (Smallbone et al 1995). While earlier studies have focused on the traditional stage growth model in explaining on how firms gradually grow from small to big by passing through several stages—inception, survival, growth, expansion and maturity stage (Scott and Bruce 1987), the advent of internet technology is claimed to have altered this model and renders it obsolete. Largely because advancement of internet has given the opportunity and competitive advantage to most SMEs to grow and compete in domestic and international market without passing through predefined stages of growth. The concept of business model, though it has existed for a long period, has over the years gained significance for academic researchers and business consultants. Simply as a benchmark in designing business strategic objectives and evaluating firm’s output (Lambert 2008). According to Afuah and Tucci (2003), in order for the firm to take the advantage of internet and its communication technologies, there must be an internet ‘business model’ that clearly defines the firm’s strategic objectives geared towards increasing firm performance and sustainability. Such model should clearly explain how the firm plans to make money both in the short and long term by using the internet.
In acknowledging the importance of business model in e-business, it has been widely accepted by researchers as a conceptual framework to explain and understand this new way of doing business. However, despite this popularity of the concept of business model in e-businesses research, the empirical use of the concept has been criticised for being unclear, superficial and not theoretically grounded (Porter, 2001). He further agrees that the internet is a powerful technological tool that complements existing business strategy but argues that the widely assumed notion of the internet in changing everything, rendering existing strategy and competition obsolete as a dangerous one (Porter (2001). In part, the internet tends to alter and dampen overall firm profitability by undermining two fundamental factors such as: industry structure and sustainable competitive advantage. Industrial structure is determined by five underlying forces of competition such as: the intensity of rivalry among existing competition, the barriers to entry for new competitors, the threat of substitute products or services, the bargaining power of suppliers, and the bargaining power of buyers (Porter 2001:66). According to Porter (2001), the combination of these forces determines how the economic value is created by any product, service, and technology. In addition, it also determines competition among companies and customers, suppliers, distributor, substitutes, and potential new entrants. Equally, achieving sustainable competitive advantage sets individual companies apart from other competitors. This can be done for example by delivering a unique type of value to customers and operating effectively by providing better technologies, superior inputs, better trained people, or a more effective management structure (Ibid:70). Thus, from Porter’s perspective, these two fundamental factors determine firm profitability. As a result, using them superficially in a conceptual framework of research approach, does not only weaken the research credibility but tends to undermine the scientific holy sanctuary of research paradigms that is geared towards understanding firm performance from the perspective of the emerging technological business model.
The complexity in merging traditional and e-commerce business model that is theoretically grounded is often considered as a daunting challenge for researchers in e-businesses research. In overcoming this challenge, most researchers in this field often combine two or more business models, such that, they are able to establish a well grounded theoretical model. And this to certain extent is driven by the research objectives and the trustworthiness of the study in question (see for example Hedman and Kalling 2001, Howe et al 2000, Poon and Swatman 1999, Daniel and Grimshaw 2002, Levy and Powell 2002, Teo and Pian 2003).
Thus, while we take Porter 2001 criticism into account seriously, we, at the same time follow similar footsteps of other researchers, such as the ones identified above, in choosing and designing a theoretical framework that is suitable for this study. This is done by synthesising existing growth and internet adoption models that have been used by other researchers in similar studies. So as to produce a comprehensive theoretical model, that is capable of fulfilling the research objectives of this study and at the same time provides a research result that is credible.
This chapter comprises of three sections, the first section explains the meaning of SMEs, performance, and growth strategies. Although there are different explanations of strategies for growth and sustainability of SMEs, in this chapter we argue that SMEs growth strategy is based on two fundamental factors, that is, product development and market development. The second section highlights SMEs and internet adoption, we focus on SMEs and internet growth strategies by looking at two research models developed by Afuah and Tucci (2003) and Teo and Pian (2003). The combination of these two models provides us with a solid platform for understanding the impact of internet on SMEs performance. At the same time, it gives us the tool to develop a suitable conceptual model for this study. Hence, in the final section, we develop a conceptual framework based on the theoretical propositions in the above two sections of this chapter.
The definition of SME is complex and controversial by virtue of the fact that different countries have their own definition of SME. For instance the U.S. SME administration defines SME as ‘an independently owned and operated and not dominant in its field of operation’ (Street and Meister 2004:475). Like Levy and Powell (2005) and Storey (1994), we have also adopted a commonly used EU definition of SME for this study. EU definition of SME is based on staff head count, annual turnover and annual balance sheet. According to the EU, micro organisation is an organisation that employs less 10 employees with an annual turnover or annual balance sheet less than 2 million euro. A business with the number of employees greater than 10 but less 50 and annual turn over not exceeding 10 million is referred to as a small business. A medium-sized enterprise is defined as a business whose number of employees lies between 50 to 250 and an annual turnover below 50 million euro. These figures are summarised in the table below.
Table 2.1 SME classification
illustration not visible in this excerpt
Source: Adopted from EC 2005:15
Firm performance is an outcome of a firm’s objectives which are primarily set to be achieved at a certain level within a given time frame (Ansoff, 1987). Embedded in this outcome is the ability of the firm to increase in physical resources for example number of employee and or assets and financial resources such as firm profitability (Afuah and Tucci, 2003). Growth is assumed as an indicator of firm performance (Brush and Vanderwerf 1992); it provides the necessary yardstick to measure firm success in business. Such yardstick is heterogeneous in nature and involves complex methodological approach, given the variation in time, processes, characteristics, and the environment in which the organisations operate (Delmar et al, 2003). Regarding heterogeneity in firm growth, Delmar et al (2003) lay emphasis on the importance of firm demographic characteristics in measuring firm growth. They argue that the failure of the research to account for differences in firm size, firm age, type of industry, and type of governance among firms could possibly lead to conflicting results among firm growth studies (Delmar et al 2003:196). The measurement of firm performance and growth by demographic indicators does not only remain within the jurisdiction of Delmar et al (2003), similar study by Patel (2005) on SMEs also hold the same view that firms of different ages have a disproportionate impact on performance. But, however, following the advent of internet technologies, the issue of demographics particularly age, as a firm growth determinant may no longer hold. Partly, irrespective of firm’s age, the internet can increase growth by given equal advantage to old and new firms to reach wider geographical markets with their products or services and provide them with new, more direct avenues to customers
SMEs play a significant role to government and policy makers, in that they contribute to economic development and offer employment opportunities. This makes it difficult for researchers to choose specific ways of measuring SMEs growth and performance. This is partly because both government and business owners have different desires and different growth indicators while assessing SMEs performance. Many government and policy researchers for example assess SMEs performance based on the ability to provide increased in employment, economic development, and innovation (Robson and Bennett, 2000; Dalrymple, 2004). Contrary to this, most business owners gauge SMEs performance based on financial reason. For them, SMEs growth is measured by looking at how the firm makes financial profit for its owners (Robson and Bennett, 2000). By focusing on the earnings of firm owners, various measures of profitability are assumed: absolute profitability, profitability per employee, profitability as a percentage of turnover, or percentage change in profitability (Robson and Bennett 2000:194). Dalrymple (2004) also highlights similar profitability measures and asserts that return on Net assets and return on total assets as another possible ways of measuring firm profitability.
In this study, we use the measure of SMEs performance based on financial profitability (Afuah and Tucci, 2003; Robson and Bennett, 2000). Although there are several ways of measuring SMEs as mentioned above, we argue that profitability is an important way of evaluating internet benefits in SMEs strategic approach. In part, firm strategies are important determinants of firm success (Weinzimmer, 2000; Ansoff, 1987) and it give detailed explanation on how a firm makes money now and in the long term (Afuah and Tucci, 2003). Storey (1994) also dwells on similar issue of firm growth; he argues that firm growth is a simple measure of success in business underscored by the achievement of financial goals of business. In addition, recent studies indicate that internet is a key driver in facilitating SMEs strategic objectives that are geared towards profitability, it is believed that the internet enables SMEs to penetrate wider geographical market and facilitate the development of new product and market (Levy and Powell, 2005; OECD, 2004; Andersen, 2001). According to Levy and Powell (2005), this kind of strategic approach in SMEs may be understood using Ansoff (1987) framework. Thus, the section below provides detailed discussion of Ansoff (1987) framework and how it can be used to explain SMEs performance from the perspective of internet technological adoption.
Strategy is a complex phenomenon and researchers have over the time emphasised its complexity particularly in defining and explaining what strategy constitute. For growing businesses, firms often set specific milestones and target objectives aimed at guiding specific action and measuring sustainable progress and growth for a given period of time. But the success of these objectives is often threatened by the increasing turbulence and propensity of changes that occur in the business environment, partly as a result of competition emanating from competitors.
The advancement of internet technology in recent years has propelled firm competition at all level of businesses, be it small or big business. It is believed that the internet has provided a level ground for firm participation in an ever increasing global market. Thus, a major question is how a firm can gain competitive advantage and outperforms their counterpart and at the same time enhances sustainable growth. Several studies on organisation performance conclude the establishment of ‘strategy’ as a valuable answer to this question (Porter, 2001; Kim et al, 2008; Levy and Powell, 2005; Ansoff, 1987; Goetsch, 2006; Storey, 1994; Weinzimmer, 2000). Similar study by Thomson and Martin (2005) also notes that the success and failure of a firm largely depends on its strategy. Simply because succeeding in the long term requires companies to compete effectively and outperform their rivals in a dynamic and often turbulent environment through a viable strategy, which creates value for their customers (Thomson and Martin, 2005). Thus, strategy is the most important determinant of firm growth (Weinzimmer, 2000), it does not only give firm an advantage to withstand competitive pressure but also gives coherency and direction to ascertain growth for growing businesses (Ansoff, 1987). For instance, in storey’s three distinctive orderly components of SMEs growth—the entrepreneur, the firm context and strategy, he identifies strategy as a key component that is highly associated to rapid growth rates of SMEs. Similar study by Smallbone et al (1995) also identifies strategy as a main driver for high growth SMEs.
However, having given the explanation above, the next question is on what exactly constitutes strategy and how can SMEs use strategy to enhance growth. A body of literature on SMEs growth strategy note, for instance, Ansoff (1987) that growth strategy provides the framework for understanding how SMEs grow (Perry, 1987; Levy and Powell, 2005; Watts et al, 1998). Ansoff (1987) identifies four strategies for growing business: Market penetration, Product development, Market development, and Diversification. The figure below illustrates the four strategies.
Figure 2.1: Ansoff’s Product-Market Grid Matrix
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Source: Ansoff 1987:109
In Market penetration strategy, a firm continues to sell current product in existing market. Product development involves the strategic approach that caters for the same market with new products. Whereas for the Market development strategy firm approaches new market with existing product. For diversification, Ansoff characterised it as a distinctive strategic approach wherein companies transcend beyond existing market and product and also operate in new markets with new products.
Ansoff’s product-market strategy grid represents a broad conceptual framework. This can be implemented by firms of any category. However, the choice of strategy may depend on individual firm motivation, characteristics, available resources, and technological capability (Watts et al, 1998). For SMEs, there is no doubt that it is limited to certain strategic alternatives owing to the small market share, limited resources and skills. Because of these limitations, it has been suggested that ‘product development’ and ‘market development’ are the most appropriate strategies for SMEs growth related strategy (Levy and Powell, 2005; Watts et al 1998; Smallbone et al, 1995). While emphasising strategic choice for SMEs, Smallbone et al (1995) succinctly put it that the basic strategy of high growth SMEs is built on established product base and market development that thrive new product or service for existing customers. Thus, these two strategic approaches that is, product development and market development provide the framework of this study from the perspective of SMEs growth strategy.
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Product development is characterised as a complete process of bringing a new product or service to the existing market. Sometimes referred to as new product development (NPD), the process often starts with an idea, design, creation and ends with a successful product on the market (Howe et al, 2000:277). Studies indicate that active product or service development particularly for existing customers increases firm competitiveness and high growth (Smallborne, 1995; Howe et al, 2000; Cravens et al, 2000). Cravens et al (2000) highlights eight key initiatives through which market-driven product development strategies can enhance firm competitiveness and sustainable growth. These dimensions include the leveraging the business design, recognising the growth mandate, developing market vision, achieving a capabilities/value match, exploring strategic relationships, building strong brands, brand leveraging, and recognising the advantage of proactive cannibalism. The figure below depicts these key dimensions of market-driven product development strategy.
Figure 2.2: Market-driven product development strategy
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Source: Cravens et al, 2000:370
The business design provides the engine for innovation by focusing on delivering superior customer value and generating profit. The growth mandate on the other hand spells out the objectives of product innovation strategy, while management’s market vision maps the path for future growth. The match between organisation capabilities and the value it creates in its product is evaluated by the buyers, based on the capability of the organisation to provide a unique superior customer value (i.e. net benefits) of the new product relative to it competitors’ value offerings. Thus indicating that, a failure of organisation’s capabilities to generate superior customer value threatens its competitiveness against potential competitors (Cravens et al 2000). A company’s capabilities or value may be enhanced by the strategic relationship dimension. This is done by collaborating relationships between customers, value chain organisation and across business which includes for example finance, operation and marketing. While the dimensions of building strong brands and leveraging the brand name provide a strong base for introducing and marketing of new product and outperforming weaker counterparts, proactive cannibalisation strategic dimension on other hand ‘assures a continuing flow of new products, and recognise that products need to be replaced as they move through their life circle’ (Ibid:382). As a result of the fear of past investment in existing products, proactive cannibalisation strategy often involves a critical decision making by examining whether the introducing new brands will not have negative impact on the sales of existing products. According to Cravens, innovative companies often resist the instinct of this fear and invest in new products that will cannibalise existing products. Such innovative organisations may ‘have developed effective market sensing capabilities, enabling them to form accurate visions about their markets and how they are most likely to change (Ibid:383).
Out of the key dimensions of new product development strategy highlighted above, emerged the concept of innovation as the key driver for effective development of new product for SMEs. Although the concept of innovation is elusive, from the perspective of SMEs, innovation refers to the capability of SMEs to process or develop new product that address superior customers needs more competitively and profitably than existing solutions (O’Dwyer et al, 2009). Such innovative capability of SMEs is built on two factors, namely: accumulated knowledge and new product experience of the people within the SMEs, particularly the owner/manager and secondly technological capability of the SMEs (O’Dwyer et al, 2009; Cravens et al, 2000; Storey, 1994).
The knowledge aspect addresses the competency of the innovative individuals to manage the whole process in developing new products. The starting point being from invention to marketing, while recognising the growth mandate and the same time taking customer value and proactive cannibalisation into consideration. Innovation in itself is an engine for high growth SMEs (Smallbone et al 1995; De Toni and Nassimbeni 2003), but the growth has to be driven by SMEs innovative individuals who have the accumulative knowledge of existing and new product. They, at the same time understand fully the firm’s strategic objectives from the perspective of sustainable profit seeking mission and inter-firm competitiveness. However, when compared with large-sized firms, the base of managerial competencies is limited, this being due to low availability of financial resources. Subsequently, the attraction towards skilled labour is weaker and the propensity for interaction with other firms is limited (De Toni and Nassimbeni 2003). These limitations to certain extent may undermine SMEs capability to produce high quality product or services that match the prerequisites for superior customer value, among which include product differentiation and low cost product (Afuah and Tucci, 2003; Geotsch, 2006). By virtue of the fact that customers are sensitive to product differentiation and cost, thus, a failure of an organisation to offer product that is of high value and quality, may prompt customers to opt for product or services from an alternative sources that offer better customer value and low price. Therefore, the consequence here is that firms that lack adequate knowledge of innovation may eventually become obsolete thus jeopardising the competitive advantage of such firm and subsequent altering its growth potential.
The interaction between the technological process and managerial knowledge increase the efficiency of new product development in SMEs. While the foundation of new product innovation rest on knowledge and experience of the people within the SMEs, effective use of advancement in technology (e.g. internet) expedites the development of the new product. With the advent of internet, product development activities are increasingly shifting from traditional centralised and sequential approaches to a distributive and robust product development network approaches (Yujun et al, 2006). This new change in product development is vital particularly in responding to the ever increasing competition and rapidly changing customer requirements, as it will enhance the ability to develop and produce quality products faster and cheaper. Moreover, in the view of Yujun et al (2006) the internet provides a platform to share information, resources, knowledge and assign tasks between different businesses. In addition, Howe et al (2000) argue that global access to people, data, software, documents and multimedia have allow organisations to shorten the development cycle of new products.
Notably, these multidimensional purposes of the internet may facilitate networked product development by allowing multi-disciplinary teams distributed in different locations to remotely collaborate over the internet. This decentralised product development network is vital for organisational success, largely because highly qualified and knowledgeable professionals are easily reached via the internet to develop high quality products or services within a short possible time frame. Most importantly, quick access to product through the acceleration of the development of new product can have significant impact on corporate profitability and competitive advantage of firms. One of the characteristics of product differentiation pointed out in superior customer value is timing (Afuah and Tucci, 2003; Cravens et al, 2000). Good timing gives a firm an advantage to introduce the new product into the market before its counterpart; As (Afuah and Tucci, 2003) notes, this may differentiate your product from others because no other product has the new features. In addition, study indicates that in a high growth market where the product life cycle is shorter, earlier introduction of new products may improve profitability from two perspectives, first by ‘extending a product’s sales life’ and second by ‘creating an opportunity to charge a premium price’ (Howe et al 2000:277). However, the good side of internet intervention into product development is that it does not only limit its opportunity to large firms, it also gives equal opportunity to SMEs. Equally like large firms, SMEs can use the internet to coordinate and develop new product faster and bring the product earlier to the market than it might otherwise have done using the traditional stage-gate approach noted by Howe et al (2000).
Market development strategy increases firm competitive advantage and profitability. This is possible through creating new market opportunities and increasing customer base by way of marketing of present products or services to new market (Smallbone et al, 1995; Geotsch 2006; Ansoff, 1987). The success of this strategy is built on existing strength, skills, competencies, and capability of the firm to modify and increase the attractiveness of existing products or services in new segment or niches (Thompson and Martin 2005). Notably, the strategic mindset of market development is built on increasing market share which may depend on its performance measure by providing superior value to its customer. However, although it is true that market development strategy can profoundly impact organisational growth, it is also important to note that entering a new market which has its own characteristics, requirements or taste needs market awareness and knowledge of that market. This can be achieved through a formal market research which is aimed at revealing special characteristics of the new market (Thompson and Martin 2005; Geotsch, 2006).
In general, market development strategy has two options, namely: international and local dimensions. Some company will go global with existing products and services while others will tailor complete strategies for local market (Thompson and Martin, 2005). A firm that operate solely in a stable domestic market design its strategy by paying much attention on competitive and technological factors for attaining success in the market place, whereas, if similar firm moves beyond its boarder to seek for new customers encounters new competitors and competitive dynamics (Ansoff 1984). However, besides the competitive and technological factors, the growth of this firm in the international market can equally be determined by a number of other variables. Among these variables includes the complexities and the variation of countries economic (variable growth rates), culture (behaviours, tastes and preferences) and political structures (Ansoff, 1984; Thompson and Martin, 2005). According to Ansoff 1984, ‘a combination of economic, political, and cultural differences can easily be as important on the new market place as the competitive factor’. This is partly because of slow growth in economies of most countries’ coupled with persistent government involvement in business activities, for example, tough regulations, limited access to firm profitability and frequent demand by local governments. This persistence undermines the ability of the incoming firm from exploiting fully, the growth potential of the new market. To reiterate, it is therefore relevant that before a firm ventures abroad, to acquire, first, a great deal of information about the new market.
As much as selling existing of products or services to new markets can increase growth and improve profitability for organisations, there is still a question of how SMEs can market their products or services to new market. This question emanate from the fact that small firms are often constrained by limited resources to develop new products and penetrate new market place. While in search for an answer to this question, it has been argued that the evolution of technology (e.g. the internet) and corresponding opening of global markets through economic globalisation have eased some of these constraints and limitations of niches (Moncrief and Cravens, 1999). Evident in studies shows that internet gives SMEs advantage to compete with large firms in reaching consumers beyond their borders
(Davis and Harveston, 2000; Moncrief and Cravens, 1999; Keogh and Evans, 1999). In recent years, the proliferation of new internet technologies for example social networking sites and online communities have opened new doors of opportunities by expanding organisational customer base at global level and performing other organisational tasks at little or no cost. Such opportunities rendered by online community members involve activities such as creating firm’s website content, market firm’s brand, recruiting new comers, and providing consumer support (Buss and Strauss 2009). In addition, increase in use of internet technology has the potential to positively impact on organisational growth and improving profitability. This is possible by strengthening internationalisation of new market development through the establishment of new distribution and marketing channels, such as online sales. Such advantage also enables SMEs to carry out low cost advertisement internationally without any physical presence in customer’s regions. Additionally increasing export at a low cost. Internet facilitates instant internal and external communication (Anderson, 2001) which is vital for developing a viable market. The phenomena growth of E-mail and social networking associated with the internet allow business to occur virtually anywhere in world (Moncrief and Cravens, 1999; Buss and Strauss 2009)
A body of literature examining the adoption of internet in SMEs reveal that firms adopt the internet for different purposes, ranging from simple internet presence (e.g. e-mail) to using the internet as strategic approach in transforming the business towards the enhancement of growth, performance, and sustainability. While exploring the growth strategic use of internet in SMEs, Levy and Powell (2002) and Teo and Pian (2003) argue that the level of internet adoption determines the rate at which SMEs benefit in terms of growth and sustainability. Thus, in this section we examine two internet strategy models by Teo and Pian (2003) and Afuah and Tucci (2003). These two models compliment each others weakness when developing a framework that encompasses the level of internet adoption, business model, growth, and competitive environment. For instance, while Teo and Pian model emphasises the level of internet adoption as a determining factor for firm growth, Afuah and Tucci stresses that the impact of internet on business model and competitive environment lead to firm growth
A conceptual model adopted by Teo and Pian (2003) emphasises that benefits achieved by SMEs internet adoption can be determined by five levels, level 0 - e-mail, level 1 - internet presence, level 2- prospecting level 3 - business integration, and level 4 - business transformation. These levels are influenced by business technology strategy which subsequently leads to a positive impact on firm’s growth. Thus, Teo and Pian’s model of internet adoption has three parts, level of internet adoption, business technology strategy, and growth.
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