Competing against Multinationals in Emerging Markets

Case Studies of SMEs in the Manufacturing Sector

D. Williams

• Publisher: Palgrave Pivot
• Year: 2014
• Print ISBN: 9781137500304
• eBook ISBN: 9781137500328
• Topic: Business
• Subtopic: Business Strategy
• Index: Business

Competing against Multinationals in Emerging Markets provides a comprehensive set of lessons which successful small firms have adopted in order to survive and prosper in an increasingly hostile competitive manufacturing sector where large firms are mostly dominant.

1

Introduction

Abstract: This chapter details an account of the theoretical lenses which are used to guide the development of the arguments in this book. It focuses on efficiency theory, limited portfolio theory and market structure theory in addition to the resource-based view of the firm to explain how small firms can compete against multinational firms in the manufacturing sector in emerging economies and survive. Among other things, the chapter also provides an overview of the manufacturing sector and shows how the cases are developed using the narrative methodology. It provides a good description of narrative as a method that can be used effectively in business research.

Williams, Densil A. Competing against Multinationals in Emerging Markets: Case Studies of SMEs in the Manufacturing Sector. Basingstoke: Palgrave Macmillan, 2015. DOI: 10.1057/9781137500328.0004.

Competing against Multinationals in Emerging Markets: Case Studies of SMEs in the Manufacturing Sector is a collection of case studies of small firms which are independently owned and managed, that have overcome obstacles the highly competitive industry/sectors in which they operate and remain open after initial start-up.¹ The entrepreneurship literature is replete with evidence of small firms starting and operating for only a few years and then disappearing from the market place (GEM 2012). This is even more so for those firms that operate in highly competitive sectors (such as manufacturing) that require scale and scope for survival. The cases presented in this volume provide a comprehensive look at the origins and expansion of small firms to the future of the business among other areas such as customers, their operation in the business environment, and also, their processes and markets. The idea is to provide a first-hand account of how the entrepreneurs have managed and operated their enterprises amidst the turbulent environment in which they operate, and still are able to survive and grow their businesses. The common lessons from these experiences will provide significant insights to both policymakers who are interested in moving the small firms from merely start-ups to established operations, and also to other business owners who need to identify the optimum mix of strategies to move their firms from start-ups to established operations. The lessons are inspirational as well as insightful.

This focus on the small firm is compelling because there is a general bias in the extant literature that manufacturing is the domain of large and well-established firms (Page 2009). It appears that small firms have no place in this area of the economic value chain. Further, academics who pursue this line of work, are normally looked at askance; because, as the argument goes, the lessons from larger firms can be used to inform policy decisions of smaller firms. Hall (1995) pointed out in a very clear and candid way why this thinking is not only wrong but also dangerous. The small firm is not a scaled down version of large firms. In fact, as Hall pointed out, it may even be more useful to study small firms, which are much simpler organisational forms that could provide insights into issues that affect larger firms, which are more complex. This is similar to biological research, where the study of simple organisms helps scientists to draw conclusions about more complex ones. Similarly, the impact of the small firm on the national economies, in terms of employment and output, have given rise to an increased interest from policymakers on issues that affect small firms. It would therefore be unwise for academic disciplines, especially in the field of management and business studies, not to pay particular attention to the issues that have implications for the growth and expansion of these firms. The works covered in this book will make a modest contribution to the understanding of this vital area of survival and growth of small firms.

This chapter among other things will give some insights into the general academic literature on the survival and failure of the firm, provide a general overview of the global manufacturing sector, and locate the Caribbean realities within the wider global context. It will also provide an overview as to the approach that was used to derive the cases.

Survival and failure in the context of entrepreneurship research

While there is unlikely to be a single explanation for the survival or failure of small firms, scholars who are keen on understanding the survival/failure phenomenon from the perspective of the smaller firms, have offered various explanations. One of the major findings in most empirical works on survival and failure suggests that firm size and age are strong explanatory factors. Indeed, early studies on the phenomenon suggest that there is a positive correlation between firm size, age, and survival. The converse is also true, that is, there is a negative relationship between size, age, and firm failure.² While empirically these results have been mixed, theoretically, the explanations are rich.

To explain why size and age are critical to firm survival or failure, Jovanovic (1982) advanced an explanation using the efficiency argument. Jovanovic argued that firms will make output decisions based on their levels of efficiency. As such, if a firm learns to become more efficient over time, it will lead to a reduction in the cost of production, and as such, the firm will produce more outputs. All other things being equal, these firms will survive in the market place. Similarly, firms that have not become more efficient will face a higher cost structure, and as such will cut back on output. Once the cost goes beyond a certain level, the firm will be forced to close its operations. The critical insight from Jovanovic therefore, is that, as the firm grows in size, it will be able to learn to become more efficient and through the learning curve effect, will be able to reduce cost and remain in business.

While the efficiency argument had some merit, other scholars have also proffered different rationale for the survival/failure of small firms. Using insights from economics on economies of scale and scope, Hall (1995) argued that high failure rates among small firms generally result from the low level of opportunities available to these firms mainly because of what he called, limited portfolio. Small firms he argued are limited in terms of the products they offer, and also the markets in which they operate. Because of these limitations, the small firm is unable to benefit from economies of scale, which could bring greater efficiency and reduce cost; and also, economies of scope, which would diversify their cost across a wider range of products and markets thus reducing the risk of over dependence on a singular product or market. It would suggest therefore that small firms that are not able to benefit from these advantages will see a higher level of failure than larger firms, which have a more expansive portfolio and can generate scale and scope, thus surviving longer.

Market structure is also another explanation put forward as to why small firms generally have a higher failure rate than larger firms. Simply put, the markets and more precisely, the market segments in which small firms operate generally have low barriers to entry. If these market segments are deemed lucrative, then others can easily set up operations as well (Hall 1995). The market segment can easily become overcrowded and as such, the level of demand that each firm receives also reduces. This may lead to cost of operations outstripping demand with the firm ending up in financial difficulties and having to close its doors. So, once the barriers to entry and exit are not particularly high, the smaller firms may not have much option when markets are highly concentrated with a large number of players, than to exit the segment if their demand is too low to meet the requirements of their cost structure.

Resources and survival/failure

A significant body of work exists on the factors that lead to survival (and by inference, failure) of small firms. Several researchers used the resource-based view of the firm as the theoretical lens through which to understand the research problem (Williams 2014; Ahmad & Seet 2009; Semrau & Werner 2012; Watson 2007; Campbell et al. 2012). Similar to the limited portfolio argument espoused by Hall (1995), this body of work argues that small firms that normally fail, have a limited amount of resources, and therefore, cannot enjoy the benefits of economies of scale and gain lower cost. So the corollary is also true; the argument suggests that when these firms have a large stock of resources, they are more than likely to benefit from economies of scale, which will lead to lower cost of doing business, and so, they can produce more output. This resource-based argument is also similar to Jovanovic’s (1982) work, which showed that size and survival of the firm are positively correlated. Theoretically, the literature is almost at one in terms of explaining survival/failure of the firm using the resource-based argument as first espoused by Penrose (1959) and further articulated by Barney (1991).

Despite the near theoretical consensus on the role of resources in explaining business survival/failure, the empirical results tend to have different outcomes. When modelling the impact of resources on the failure or survival of a firm, in some cases, the model shows different relationships among variables. For example, some models reveal that there is a positive relationship between age and survival (using profitability as a measure) of a firm, while similar studies have shown a negative relationship (Watson 2007). A closer reading of the works in this area however, revealed that the way in which different authors measure resources can have an impact on the outcome that is derived from various studies. In spite of the controversies surrounding the relationship of surrogates of resources and business survival, there are still a number of proxy variables that are used to capture resources, for which there appears to be general consensus on the relationship with survival.

One of the critical proxy variables that is used to capture resources in the firm, and for which there is almost general consensus that it enhances business survival, is networks (Watson 2007; Semrau & Werner 2012; Lee et al. 2012; Aldrich & Reese 1993). A network, which is generally defined as inter-firm relationships (firm to firm or even in the owners own social connections), is quite a useful asset that small firms can leverage to overcome their limited portfolio of resources. The network can be used to help the small firm to overcome resource limitations; as it can allow the firms to gain valuable and necessary resources such as market knowledge, financial support, or human resources support to build its competitive advantage (Liao & Welsh 2005; Kiss et al. 2012). In addition, other researchers have also noted that networks can provide critical information, which is important for decision making but is costly to obtain (Coleman 1988). Attaining these resources through a firm’s network relationship can prove to be a considerable benefit to small firms, which under normal circumstances would not have the financial capital to acquire them in the first place. Gaining proprietary information from one’s network can help to make the difference between firms that survive and those that fail (Lee et al. 2012; Watson 2007). Indeed, the size of the network can greatly impact on the level of competitive advantage, which the firm will gain from this interaction. For example, firms that have very small networks with only a few friends and maybe family members will find that their access to information may not be as rich as those firms and owners with a wider network of friends, family members, business associates, and advisors (Watson 2007; Granovetter 1983).

While the literature in general supports the notion of a positive role for networks in enhancing business survival, there is still caution as to the extent to which firms should seek out networks. In an insightful study carried out by Semrau and Werner (2012), they argued that while networks provide significant benefits for venture creation, there is an opportunity cost that comes with getting involved in networks. Importantly, in trying to build a network, owners of firms have to invest a significant amount of time to both establish the network and also maintain it. Therefore, if the network is not properly conceptualised, the payoff of this investment may not always be positive for the firm, as the time could be used to do other higher value activities. It is for this reason, Semrau and Werner (2012) argued, that the relationship between networks and firm performance, specifically the founding of new ventures may not be a linear one but an inverted U-shape. The interpretation of this U-shaped relationship is that at some point, the time and energy invested in building and maintaining network relationships leads to a negative rate on investment. Therefore, it is not always true that extensive networks and intense network relationships will generally lead to strong firm performance (Davidsson & Honig 2003). This is indeed an important observation to note as most persons will also think that all collaborations are good for businesses, especially small businesses.

Other researchers have also found similar results that networks are not always good for businesses if they are not constructed well (Watson 2007). In a very thorough study of the role of networks in helping businesses to survive, Watson (2007) highlighted the role of networks in determining firm performance for established enterprises. The findings suggest that there might be some optimum level of resources that an owner should devote to networking. In trying to quantify the optimal level, Watson (2007) noted that accessing more than six networks during a year is likely to be counter-productive. Additionally, he went on to look at the networks of the owners of these firms as well, and suggested that accessing any individual network on more than three occasions during a year is also likely to be counter-productive. The results from his detailed investigation show that both formal and informal networks are associated with firm survival. Further, as it relates to individual networks, it was found that accessing advice from external accountants was the only network source positively associated with firm survival and growth. Indeed, similar to other researchers, Watson (2007) found that network intensity was more critical to firm survival than network range, and the opposite was true for firm growth. In line with the discourse on firm age and survival of the firm as espoused in Hall (1995), Watson also found that networking was equally important to both young and old firms. Overall, similar to Semrau and Werner (2012), Watson (2007) argued that given that business failure generally results in heavy personal loss, owners need to seriously consider the range and intensity with which they access various potential networks, whether formal or informal.

Similar to Watson’s (2007) detailed work on the role of networks and their impact on firm performance, a number of other empirical works have also highlighted the relationship between firm performance and networks, with performance generally being measured as survival/failure. Professional advice as a proxy for networks was found to have a positive relationship with performance (Duchesneau & Gartner 1990). Also, other works have argued that successful companies relied on accountants’ information and advice compared to unsuccessful companies (Watson 2007). Some studies have also found that the financial performance of firms is positively related to using external management advisory services. Researchers have also shown that network development, particularly at the national and international levels, was positively associated with firm growth (Donckels & Lambrecht 1995). In addition, Lerner et al. (1997) argued that network affiliation was significantly related to profitability, and that the use of outside advisors was related to revenue. Also, Larsson et al. (2003) found that a lack of contacts with outside expert advisors hindered small business expansion. In their very insightful work, Carter et al. (1996) found that the wider the networks consultations, especially professional advisors, the more likely the owner of the firm is to succeed in securing equity financing.

The relationship between networks and firm performance is not always positive however. A number of studies have identified deviations from the conventional wisdom that networks are always positive for firm survival. Aldrich and Reese (1993) and Cooper et al. (1994) did not find a positive relationship between networking and firm performance. Again, their work showed that measurement of the two important constructs (networks and performance) are critical to the outcome of any research in this area of work.

Despite the opposite findings by a handful of authors on the role of networks and firm performance especially when performance is measured as survival/failure, the majority of the arguments seem to be more compelling in the direction of a positive relationship between networks and business success, in the form of external advice from accountants, the embedded relationships that the firm has with other firms, the informal ties that the owner has with professional groups, and a positive relationship with the performance of the firm. The interpretation therefore, is that, all other things being equal, small firms that have fewer networks and network contacts should see a higher failure rate t...

Table of contents

• Cover
• Title
• 1  Introduction
• 2  Spur Tree Spices
• 3  Yono Industries
• 4  Island Moldings
• 5  Hot Mamas
• 6  Perishables Jamaica Ltd
• 7  Caribbean Flavours and Fragrances
• 8  Conclusions and Lessons Learnt
• Bibliography
• Index