The Effect of the Strategic Management Tools on SMES’ Firm Performance

Abstract

Growing importance of notions of productivity and efficiency which generates basic focus and domain of firms the attention for strategic management have been increasing. This increasing attention is also resulting in increasing competition and changes in its formation. Markets have switched into regional or international rather than local and national. Firms need to have a strategic point of view and use strategic management tools. The above-mentioned concepts are generally used in big firms. However, small and medium-sized enterprises (SME) have an important role in countries’ economies thanks to their contribution to social development and employment. In Turkey, 99% of firms are SME. Regarding the importance of SMEs in the country’s economy, this study aims to reveal if owners/managers of SMEs know about strategic management tools, if they know which tools they use, levels of satisfaction with these tools and which tools they plan to use in the future. Additionally, the study seeks priorities of owners/managers when choosing a strategic management tool and effect of level of using these tools on firm performance.

Keywords: SMEsStrategic Management ToolsFirm Performance

Introduction

Firms have to stay alive to make a profit or serve to the public. This is possible only if they adopt a management mentality which suits dynamics of today’s world of management.

Both actors of management world, which switches to global from local with an increase in speed and their roles are changing. They should become aware of the fact that they should acquire a new point of views to keep standing. Today for firms competing by using traditional management mentalities and tools is impossible and those which insist on such mentalities and tools fail inevitably.

Above mentioned mentalities care useless to manage the growing uncertainty in markets and the rise of awareness and expectation in actors of markets. Available tools also have proven useless. While firms have difficulties, SMEs suffer from bigger ones. SMEs do not know how to make decisions and what to use to do so (Knight, 2000: 13). Strategic management, which supports big firms to be ready for changes and reach their goals, is vital for SMEs (Kraus and Kauranen, 2009: 13).

Despite their importance, strategic management applications are not common in SMEs. This deficiency is one of the biggest obstacles for SMEs to make more profit and keep standing longer. Literature review reveals that only a few studies were done on effects of strategic management in SMEs and none of those were on effects of strategic management in SMEs performance. Thus this study aims to reveal if owners/managers of SMEs know about strategic management tools, if they know which tools they use, levels of satisfaction with these tools and which tools they plan to use in the future.

Additionally, the study seeks priorities of owners/managers when choosing a strategic management tool and effect of level of using these tools on firm performance. Additionally, the study seeks priorities of owners/managers when choosing a strategic management tool and effect of level of using these tools on firm performance.

Literature Review and Theoretical Framework

Strategic Management on SMEs

Strategic management is defined as the total for gathering information, analyzing, choosing, making a decision and applying to keep standing long term and acquire a sustainable advantage of competition for a firm (Ülgen and Mirze, 2013: 33).

Today’s competitive world, managers have to adopt changing conditions. This obligation brings along strategic management. The real purpose of strategic management is to determine and apply strategies and evaluate the results. For good results, a couple of questions must be answered well: What is a strategy? Why when and how it should be created? Who should do this? (Aktan, 1998: 335-342).

In business world in which ICT and production technologies keep developing, uncertainty rules, managers have to accomplish a strategic management to and strategic point of view and use strategic management tools to keep standing long term and acquire a sustainable advantage of competition (Pearce and Robinson, 2007: 3). Thus, strategic management should be considered as a continuously updated dynamic process but not a single use plan or action.

Strategic management is into nature and route of the firm. On one side, it underlines evaluating inside and outside of the firm by defining, managing and solving problems. On the other side, it seeks for the right vision and the ways how to accomplish it. A successful strategic planning should include making hard decisions, arrange the priorities which are valid for the whole firm, foresee the future of the firm and develop strategies to reach this future (Howe and Bratkovich,1995: 3). Small enterprises do not give the required importance to planning even though they need as much as big firms do (Özgür, 2007: 69). SMEs encounter problems of growing as they keep growing which makes it more important to make strategic planning (Koçyiğit, 2006: 51).

Considering today’s competitive markets and its changing conditions, it is widely accepted that choosing the suitable competition strategies, strategic management, and its tools and applying them will boost SMEs for adopting changes, growing and acquiring the chance of competition (Sucu, 2010: 119).

Strategic Management Tools

There are several strategic management strategies and tools that can be used by firms to acquire competitive superiority by using strategic management. Firms can find an opportunity to get scientific information and course of action thanks to those strategies and techniques while they are defining and solving their internal or external matters. Some of those strategies and techniques are as below:

Balanced Scorecard, Benchmarking, Big Data Analytics, Reengineering, Change Management Programs, Collaborative Innovation, Consumer Ethnography, Core Competencies, Complexity, Customer Relationship, Corporate Blogs, Customer Segmentation, Decision Rights Tools, Disruptive Innovation Labs, Digital Transformation, Downsizing, Enterprise Risk Management, Employee Engagement Surveys, Growth Strategy Tools, Knowledge Management, Lean Six Sigma, Satisfaction and Loyalty Management, Mergers and Acquisitions, Mission and Vision Statements, Social Media Programs, Offshoring, Organizational Time Management, Outsourcing, Price Optimization Models, Scenario and Contingency Planning, Shared Service Centers, Strategic Alliances, Strategic Planning, Supply Chain Management, Total Quality Management, Zero-Based Budgeting.

Firm Performance

Performance can be defined as the ability of an organization to reach its goals by using its resources effectively and productively (Daft, 2000: 12). As a multi-dimensional and complex concept, the meaning of performance varies according to the paradigm of observing, a period of observation and criterion used in the observation. On the other hand, it is obvious that all behaviors are directed to a satisfying level of performance in an organization (Snow and Lawrence, 1980: 318-319).

The above-mentioned level of performance is a sign of an organization’s power of competition. In another term, performance is the determiner of where the firms are, to what extent priorly decided goals are achieved and most importantly how the abilities can be used to get performance grow as a result of a comparison with the rivals.

In organizations, all sort of investment and management actions are for performance growth. Thus, evaluating performance according to certain criterion in organizations is vital for monitoring firm’s growing process. The performance of a firm is generally measured according to concrete criteria such as profit, market share and sale rates (Türkyılmaz et al., 2012: 32). These measurements are important indicators showing firm success (Agarwal, 1997: 45).

Review of Empirical Studies

Focusing on strategic management and firm performance, some studies have identified that there are some relationships between strategy activities and performance and many of them revealed that strategic management applications have positive effect on firm performance (Martínez-Costa, Martínez-Lorente and Choi, 2008; Prajogo and Sohal, 2006; Kannan and Tan, 2005; Rahman and Bullock, 2005; Chong and Rundus, 2004; Fuentes-Fuentes, Albacete-Sáez and Lloréns-Montes, 2004; Kaynak, 2003; Hendricks and Singhal, 1996, 2001a, b; Hua et al., 2000; Zhang, 2000; Terziovski and Samson, 1999; Adams, McQueen and Seawright, 1999; Dow, Samson and Ford, 1999; Choi and Eboch, 1998; Easton and Jarrell, 1998; Forker, Mendez and Hershauer, 1997; Elmuti and AlDiab, 1995; Mohrman et al., 1995; Powell, 1995).

Strategic Management tools are associated with market share increases by retaining existing customers and attracting new ones (Robinson et al. 1998). High-performing firms are using strategic management tools to deal with competitors (Vickery et al., 2003). On the other hand, the firms have low performance ignore these strategic management activities because of that they are too busy dealing with operational problems (Hanlon and Scott, 1993) and the owners/managers of SME’s don’t pay attention formal planning, strategic thinking and long-term vision (Pelham, 1999).

From these point of view, The Hypothesis of this study are;

H1: There is a relationship between the level of use of strategic management tools and firm performance

H2: As the size of the firm increases, the level of usage of the enterprise's strategic management practices increases.

Research Method

Within the scope of the aims and limitations of the study, the universe of the study is determined as SMEs operating in the manufacturing sector in Amasya and Sivas cities. Convenience sampling method is used for choosing the sample from the universe. Mainly, the survey is applied to the SMEs in Industrial Organised Sites and it is filled by the firm owner/partners or top managers. At the end of the collecting period, 71 firms are included in the study. General characteristics of the samples and the participators are summarized in Table 1 .

The data of this study which is performed in organization level gathered with survey method. In the first part of the survey, there is personal information of the participators like their age, sex, position and basic firm information. To measure the level of the firms’ satisfaction and the usage of strategic management tools, a survey is created by using the reports between the years 2001-2015 named as “Management Tools and Trends” created by Rigby and Bilodeau (2015). In this context, for determining which strategic management tools should be asked in the survey, the reports published in different years is considered and totally 36 Strategic Management Tools is decided to add to the survey. To measure firms’ performance 5 questions which are generated by Demir and Okan (2009) is used.

To test the validity of the performance scale orthogonal factor rotation with Varimax Method is used. It is proofed that the KMO Measure of sampling adequacy (,875) and Bartlett’s test of sphericity (x2=268,854; P<,000) shows the data is suitable for factor analyses. It is seen that as a result of factor analyze, questions formed as one-factor structure. The factor load of the questions is changing between 0,744 (minimum) and 0,937 (maximum) and obtained factor load is explaining %76,21 of the total variance. To measure the reliability of the performance scale Cronbach’s Alpha method is used. Reliability factor (α=,918) can be regarded that internal consistency of the scale is reliable.

Table 1 -
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Findings

Frequency distribution of the answers of the participators to the questions about the level of the firms’ satisfaction and the usage of strategic management tools as percentage summarized in Table 2 .

In Table 2 , it is shown that which of the 36 strategic management tools are known by participators of 71 firms. Accordingly, the tools which have awareness more than %50 is determined in order of priority as Social Media Programs, Outsourcing, Mission, and Vision Statements, Total Quality Management, Supply Chain Management, Customer Relationship Management, Strategic Planning, Scenario, and Contingency Planning. The 10 tools which are less have awareness listed as Disruptive Innovation Labs, Balanced Scorecard, Zero-Based Budgeting, Offshoring, Change Management Programs, Corporate Blogs, Shared Service Centres, Consumer Ethnography, Decision Rights Tools, Big Data Analytics.

Besides, in Table 2 , with making a consideration about the satisfaction level of the usage of the tools, it is shown that the participators have satisfied at the rate of %80 on almost all tools. Only 3 of the tools have less percentage than 80 which are Downsizing (%67), Lean Six Sigma (%75) and Employee Engagement (%79).

Table 2 -
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Within the frame of the Hypothesis, to test is there any differences between weather using the tools or not on firm performance, Independent Sample T-test implied. The results are shown in Table 3 . While interpreting the results, there are significant difference on firm performance between weather using the tools or not for Balanced Scorecard (t=-2,056; P<,05), Customer Segmentation (t=-2,472; P<,05), Mergers and Acquisitions (t=-2,445; P<,05) and Strategic Alliances (t=-1,727; P<,10) tools. Average scores shown that firm performance is higher for the firms are using these tools. For the other tools there no significant difference in performance between the usage average scores (P>,10).

Table 3 -
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To test the second hypothesis of the study which is defined as “the size of the firm increases, the level of use of the enterprise's strategic management practices increases” simple linear regression analyze is used. In the analyze the level of the usage of the strategic management tools is used as depended variable and this variable is calculated as a total number of the tools is using by the firms. As a result of the regression analyze, there is the significant and positive effect of the size of the firm on the number of strategic management tools (β=4,668; P<,01). The explanatory power of the regression model is calculated as 0,209.

Table 4 -
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Conclusion and Discussions

It is thought that this study aims to reveal the relationship between the levels of use of strategic management practices by firms and the relation between their performance and the level of the usage of strategic management tools. It is thought that this study can provide important contributions in terms of increasing strategic awareness of SMEs operating in Turkey and their awareness on strategic management.

The findings indicate that when assessed in general terms, the levels of knowledge and use of strategic management tools of enterprises included in sampling are very low.

In addition to these, especially performances of the firms using Balanced Scorecard, Customer Segmentation, Mergers and Acquisitions and Strategic Alliances tools are high. In the context of SMEs in Turkey, it is seen that the tools other than these applications are not very known and the implementation rates are low. On the other hand, as firms grew, the rate of use of strategic management tools increased and large enterprises reached the result of using more strategic management tools. However, when the whole sample is evaluated, it can be said that some management practices have little or no awareness of SMEs in Turkey context.

When the results of the satisfaction levels are examined, it can be said that the satisfaction level of the strategic management tools used is high. Although many strategic management tools are not known by business owners or managers, it is seen that the utilization rate in enterprises is very low. It can be argued that the overall outcome of these findings can be beneficial for their success in increasing the diversity of strategic management tools and encouraging the use of awareness-raising practices. Supporting projects and university-industry cooperation in this context is vital for regional development.

In this study, environmental differences can’t be controlled. The appropriate strategy and strategy-performance relationship may differ cause of the market Structure, growth, uncertainty etc. For further research, this issue may be studied.

Findings in the study may also refer to the existence of constraints that may prevent the making of more comprehensive interpretations and suggestions, as well as presenting important perspectives. It is one of these constraints that the scale used does not allow sufficiently advanced analyses to be made. In this new study, it is advisable to adapt the scale to better suit the purpose of the research or to use it in other scales. Limiting the sample to a specific region is another constraint. It is thought that the results will be useful for generalization when working with larger samples that are included in the enterprises from different regions in future studies.

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20 December 2017

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Bingöl, D., Filizöz, B., Koparan, E., Okan, T., & Çapkulaç, O. (2017). The Effect of the Strategic Management Tools on SMES’ Firm Performance. In M. Özşahin (Ed.), Strategic Management of Corporate Sustainability, Social Responsibility and Innovativeness, vol 34. European Proceedings of Social and Behavioural Sciences (pp. 352-362). Future Academy. https://doi.org/10.15405/epsbs.2017.12.02.30