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Pamantasan ng Cabuyao
Katapatan Subdivision, Banay-banay, Cabuyao, Laguna
Graduate School and Continuing Professional Educ...
Pamantasan ng Cabuyao
Katapatan Subdivision, Banay-banay, Cabuyao, Laguna
Graduate School and Continuing Professional Educ...
Pamantasan ng Cabuyao
Katapatan Subdivision, Banay-banay, Cabuyao, Laguna
Graduate School and Continuing Professional Educ...
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  1. 1. Pamantasan ng Cabuyao Katapatan Subdivision, Banay-banay, Cabuyao, Laguna Graduate School and Continuing Professional Education NERICA BARRIENTOS-MANASAN GS_MBA-01 Dr. Niño J. Viñas Case Study #1 22nd International Conference on Production Research ENVIRONMENTAL SCANNING AND SMES STRATEGIES: A CASE STUDY Abstract ID: OSPF10019 A.C.M. Pimentel, M.M. Spinola, R.O. Moraes Departamento de Engenharia de Produção, Universidade de São Paulo, Av. Prof. Luciano Gualberto, São Paulo, SP, Brasil Abstract Dynamic competitive environment demands a constant adaptation. To prioritize strategic actions, companies must monitor key factors that affect their strategy. However, in SMEs (Small and Medium Enterprises) strategic planning and environment scanning tend to be informal and centralized on the owner. In this situation, these activities might be left aside or not produce information to support strategy formulation. Given the circumstances, it is important to understand the relationship between strategic decisions and scanning activities in SMEs. The relevance of this study lies on the fact that, in Brazil, over 90% of the companies are SMEs, therefore they represent a significant force to the economy. The objective of this research is to identify, from the characteristics of scanning process in SMEs, the relationship between competitive strategies and scanning activities. It was used a unique case study, establishing the proposition that the adoption of a strategy does not consider scanning activities. A framework was elaborated, based in the theory, and it was used as research instrument. The interviews were conducted with the board. The collected information were analyzed and confronted with the results found in theory. It was observed
  2. 2. Pamantasan ng Cabuyao Katapatan Subdivision, Banay-banay, Cabuyao, Laguna Graduate School and Continuing Professional Education an informal and unstructured scanning, and a lack of reliability in the information gathered, what could limit the influence of scanning in strategy. Up to this moment, scanning activities did not influence the strategy in the studied company. This work helps to understand the relationship between scanning activities and strategy in SMEs. The framework developed can be used as reference to other studies. The limitations are the fact that the research only considers the company´s vision about its own environment and the owner’s opinion and the impossibility of results generalization. Future works can reproduce the research in similar companies, to confirm the obtained results. Keywords: SME, environmental scanning, Competitive Intelligence 1 INTRODUCTION In a highly competitive environment, to know external environment and adjust to it is very important. Because of its dynamism, a constant scanning is necessary to conduct correctly strategic actions of the companies. Scanning includes defining information needs, searching and collecting and using them deliberately to set organizational strategy [1]. SMEs have some particularities, as financial restrictions, simple structure, informality, centralization, among others [2]. These particularities can affect scanning process, since the owner, who is the main executive and also perform many operational activities, has few time to plan and scan [2]; [3]. Relationship among scanning activities and strategic process were studied [4];[5]. However, correlation is still in discussion, since factors as cognitive capacity and personality can influence it. In SMEs, this also occurs, maybe more strongly, given the great importance of the owners role, leading the company to be a reflect of his personality [2]. In smaller companies, planning tend to be informal and reactive [3]; [6]. So, scanning activities and strategic actions depend almost exclusively on the skills and posture of this person towards the information received. Smaller companies attend over 90% of all companies in Brazil and are a important force in the economy, generating wealth and jobs [7]. A poor scanning, due resources restrictions
  3. 3. Pamantasan ng Cabuyao Katapatan Subdivision, Banay-banay, Cabuyao, Laguna Graduate School and Continuing Professional Education or lack of time, can lead to bad actions and, in the limit, put the business in risk. Given the context, a important question is how relationship between strategic decisions and scanning activities develops in Brazilian SMEs. The objective of this work is to identify, from characteristics of scanning process in a SME, the relationship between competitive strategy and scanning activities. As results, it was expected that smaller companies had few knowledge on the external environment, with an informal and unstructured scanning, with use of personal sources, given the tendency of these companies to informality. Other variables of environment would receive little attention of the owner, and would be obtained by chance. 2 THEORETICAL REVIEWS 2.1. SMEs environment To characterize a SME, there are many of criteria, such as number of employees and annual incomes. A small company can be defined as having between 20 and 99 employees, and a medium company has between 100 and 499 [7]; or as having between 10 to 49 employees, with a annual income from US$ 400 thousand to US$ 3,5 millions [8]; or even as having a annual income until US$ 2 millions, and a medium company until US$ 7,5 millions [9]. In this study, a company will be considered as medium if it fits at least in one of these criteria. Smaller companies have specificities and tend not to follow academic models towards their administration and operation [10], [2].In SMEs, adaptation and optimization were more important than strategic thinking. There are important features that differentiate a SME from a big company, and it is necessary to use different approaches to study these kind of company [11], [2], [10]. Since they are so heterogeneous, it is difficult to propose theories, but there are similar features among them, as exposed in table 1 [2]. Organizational aspects Table 1: SME characteristics Heading 1
  4. 4. Pamantasan ng Cabuyao Katapatan Subdivision, Banay-banay, Cabuyao, Laguna Graduate School and Continuing Professional Education Centralization; simple and small structure; non-existence of intermediary hierarchical levels; direct contact with employees, easing informality and flexibility; little control over external environment; owner prefers to use sensibility rather than administrative techniques; low maturity; planning and control little formalized; strategy little formalized and very intuitive; reactive management. Decisional aspects Decision making lead by owner´s beliefs and based in a short-term logic and experience; owner does not have time to perform strategic analysis; centralization and personification of decisions; short decision circuits and often taken without having all necessary information. Direct contact and simple structure facilitates understanding about what happens within the company, increasing responsiveness. Individual aspects Predominance of an individual, who influences strategy, structure and performance; company is affected by owner´s personal course; propriety determines status and roles in the organization; owner has paternalist attitudes towards employees. They have little technical knowledge, poor formal knowledge, generally based in everyday practices, limited human resources and technical skills. 2.2. Competitive strategies A strategy must consider three factors: objective, scope and advantage, which defines its purpose. The objective defines also the time gap to achieve it; scope defines the boundaries into which this strategy will be used. The essence is to define what the company will do differently from its competitors, therefore, its competitive advantage [12]. Strategy concepts points to the importance of establishing differentiation towards competitors, creating more value to the customers, or the same value at lower cost, or even doing both. The way in which activities are performed in the company are the basic units of its competitive advantage. In other words, strategic positioning means to perform activities in a different way of the rivals [13]. Generic competitive strategies can be: leading by cost, by differentiation or by focus, and it must consider which activities the company performs and how they are done, besides the industry context [14].
  5. 5. Pamantasan ng Cabuyao Katapatan Subdivision, Banay-banay, Cabuyao, Laguna Graduate School and Continuing Professional Education Another typology, and define three types of strategy, taking as key-dimension the changes regarding products or market. None of the strategies are superior to the others, but each type has its risks, as showed in table 2 [15]. In SMEs, the strategic process, when existent, is incomplete, unstructured and irregular. Generally, It works reactively, it is defensive and informal, since owners do not strive to have a structured planning. Strategy development occurs as the company needs, trying to increase its survival chances. High resources restrictions make theses companies very vulnerable to management errors and financial hazards, what would influence the strategy process [3]. Besides that, SME owners fell that strategic planning is too complex and sophisticated. Existing overload on SME owners, low professionalization and resource restrictions would inhibit planning process. This context contributes to the little interest in strategic planning of SMEs [3]. There is a positive correlation between company size and sophistication level in planning process, thus, as a SME grows, the company would need to do a formal and structured planning [16]. However, most important strategic decisions are taken outside formal planning, and this would be stronger in smaller companies [17]. Other strategic planning schools, such as learning, are more adequate to SMEs, since they have a more open process, and people outside and inside the company can contribute, Table 2: Strategy typology Miles Type Characteristics Risk Focus Defenders Offer a stable set of products and Obsolescence Process efficiency, compete by price, quality, service and delivery manufacture or delivery rationalization Prospectors Pioneers in developing products or services, changes product lines frequently and compete by seeking new market opportunities Over extension To select and to adjust domain, observing trends in product and market Analyzers Intermediary – change products slower than prospectors and areless compromised wit stability
  6. 6. Pamantasan ng Cabuyao Katapatan Subdivision, Banay-banay, Cabuyao, Laguna Graduate School and Continuing Professional Education allowing creativity. Owners could take advantage from learning since they have difficulties to understand a complex ad dynamic environment [3]. 2.3. Scanning competitive environment Companies must adapt to the environment to survive. Scanning is a first step in this process of adaptation, because competitors with different information show differences in skills to formulate responses, and survival depends on understanding external influences [4], [18], [19]. Scanning to competitive intelligence can be defined as the main tool to obtain important information. Competitive advantage would come from organizational ability to scan proactively and have more efficient responses [5]. Scanning is the search and collect of information about events, tendencies and changes beyond organizational boundaries to guide strategic management [20]. Definitions Organizational decisions and actions come from information processing arising from external environment. Changes, events and tendencies create signs and messages, and organizations use these clues to adapt to new conditions. Besides that, external environment influences internal structure: if it is more stable, structure would be more rigid, if it is more dynamic, companies would be more flexible [21]. So, environmental scanning is the internal communication of external information that might influence in decision making, and involves identifying these factors, collecting information, that are passed to managers to guide future actions [18] Executives use these information to maintain or change structures. So, scanning´s purpose can be environment surveillance rather then problem solving. Scanning does not enable the company to adapt to the market, instead helps to construct perceptions and strategic answers by executives from obtained information [21]; [5]. There are different approaches of scanning [4], [21], [5], [18]. It is hard to establish scanning measures, since executives scan in a fragmental, informal and random way. Measured variables were frequency (what were the frequency in which executive knew about tendencies and events), interest (extension in which executives detained in a subject)
  7. 7. Pamantasan ng Cabuyao Katapatan Subdivision, Banay-banay, Cabuyao, Laguna Graduate School and Continuing Professional Education and hours (what percentage of scanning time was directed to each department) ([4], [19]) Other factors measured could be frequency and scope (which sectors are scanned). Also, to perform a formal scanning, some steps can be followed. First it is necessary to identify scanning needs. Next, to collect information and analyze them. Finally, the results must be communicated and a decision must be made based on the information (informed decision) [18], [1] It is possible to define "monitoring modes" [1]. In "undirected vision", the individual is exposed to information without a specific goal, trying to detect early signs of changes in the environment. In "Guests vision", the individual sees information about selected topics in an attempt to assess the impact on the company. In "informal search" the individual seeks information actively, but not so structured. Finally, in the "formal search" there is a formal and deliberate planning for specific information. The role of the managers and strategy The role of entrepreneurs is important in searching and processing information, and it is even more critical for smaller companies, since they are more dependent on individuals as information providers. Difference in the patterns of information seeking is influenced by a set of psychological factors and factors related to personality, which will be addressed later on [6]. Managers have the role of interpreting the external uncertainties and decide on how the internal structure should work for better fit [21]. In SMEs, there are difficulties in understanding the external environment, and therefore qualitative aspects related to the understanding and interpretation, and the cognitive capacity of the leader become very important [3]. In addition, variables such as strategic strengths and weaknesses would be subjective representations made by the directors, and this depends on their characteristics. There are three factors orientated to entrepreneurship that affect competitive scanning. First, "need for achievement" refers to the desire of the manager to be successful. These people would have a moderate propensity to take risks, and prefer to take responsibility for their own decisions. The second factor, "locus of control" refers to managerial perception of how their personal control affect the results. This factor has two dimensions: internal, where the manager believes that their actions and behaviors interfere with the search result
  8. 8. Pamantasan ng Cabuyao Katapatan Subdivision, Banay-banay, Cabuyao, Laguna Graduate School and Continuing Professional Education and thus control over the environment, and external, where he believes the situations are unpredictable and results derive from luck or chance, what leads to a passive attitude. The last factor, "innovation" refers to the tendency of the leader in supporting and engaging in new and creative ideas and experimentation, exploring new and unique ways to solve problems within the organization [5]. Furthermore, market-oriented firms were more proactive in scanning because their culture favors support for this activity. Proactive scanning is driven more strongly by innovative managers, with a strong desire to succeed. Therefore, scanning efforts could be maximized in companies that value competitive intelligence over competitors and consumers. Knowledge of consumers and competitors' actions allowed a better evaluation of the strengths and weaknesses of the company, and therefore a better representation of their competitive advantage. The competitive scanning should be done to understand the impact of market forces [5]. There is a common body of knowledge in industry, and executives tend to see common sources of information. Entrepreneurs only scan beyond these limits if their strategy asks for a particular type of information or if the information was very abundant [4], [20]. In SMEs the preparation of formal strategic alternative scenarios is not developed - the executive collects information in the day- to-day to develop a strategy. Search for information would tend to drive up to what is familiar, convenient and less costly [11]. The choice and use of sources of information also depends on cognitive ability and values and beliefs of the executive. Organizations can be seen as rational systems for decision making, but there is a limitation that is the individual's cognitive capacity [21]. Information would serve to reduce the uncertainty of the process. There is distinction in the choice of sources of information according to personal characteristics [6]. There is a increased importance of non- personal sources in leaders with internal locus of control and high self- esteem. Leaders with a propensity to take risks tend to seek personal sources, while leaders with personality stiffer seek professional sources. Given the diverse influences on scanning activity and strategy, some subjective, the relationship between these two aspects is object of study, without a definitive conclusion.
  9. 9. Pamantasan ng Cabuyao Katapatan Subdivision, Banay-banay, Cabuyao, Laguna Graduate School and Continuing Professional Education Companies that tend to adopt the strategy of "defenders" would have a more limited scanning, and companies that tend to be "prospectors" are more aggressive and wide in this activity [15]. Other studies [4], showed inconsistency because defenders are not necessarily passive, but tend to more aggressively competing for efficiency. Likewise, prospector, though innovative, are primitive in the approach of production or operation. The link between strategy and scanning was not strong. Instead, prospectors and defenders had the same information, but used it differently, and these choices are linked to their distinctive competencies and managerial values. The scanning itself would not be used to reinforce their strategies and would be restricted to a functional role. Executives scan according to the perceived need for information, and this can be considered a function of the organization's strategy. Executives scan to enhance their competitive strategies. This behavior can perpetuate strategies, limiting its responsiveness to environmental signals [22]. However, other researchs ([4]) reached different results, where executives rarely discussed ways of monitoring in terms of contribution to strategy, but in terms of functional and personal interest. Scanning in SMEs In the SME environment scanning occurs in a situational and reactive way, and the leaders have little control or influence over the external environment and little awareness about the need for pro-active scanning [10]. Customers aspects were most monitored by SMEs, followed to information about suppliers, industry regulations and general economic conditions [23]. Even so, the factors that received more attention still lacked information, which to the authors can be explained by an inefficient and unstructured scanning, because even with high frequency search, was not suitable. It was also found infrequently scanning of competitors, and the factor "price by the competitor" as the one highlighted. Other sectors few scanned were linked to demographic, socio- cultural and "practices of banks and lenders."
  10. 10. Pamantasan ng Cabuyao Katapatan Subdivision, Banay-banay, Cabuyao, Laguna Graduate School and Continuing Professional Education The authors also analyzed the influence of the size (number of employees and annual revenue) and the age of the company in scanning activities. In general, since environmental influence increased, aspect of bank practices received the more attention. As for age, the authors found that younger firms seemed more concerned with competition. Scanning competitive environment proves to be an important part in the process of strategic planning, since the information obtained, if used properly, can lead to good decisions on the establishment or continuation of a competitive advantage. Many factors influence this activity, and in SMEs it tends to be centralized in the leader / owner, who for lack of time or resources, can neglect it. The relationship between scanning and strategy is still controversial in the literature. 3. METHODOLOGY The methodology used was a single case study, where the object of study was a medium size industry in the state of to the framework below. The interview followed, to the extent possible, this sequence of items São Paulo. The company has a diverse product line, serving industries such as: stationery (predominant), "Home Centers", furniture and toys. Its sale is concentrated in the domestic market, serving all states of Brazil. It is a family business, with 20 years of existence; In the last 5 years, it underwent on a process of rapid growth in its manufacturing plant as well as in sales. After a period of turmoil and disorganization, the company began to restructure its internal environment, at first, establishing rules and operating procedures. With this consolidated for about 3 years now, its concerns are about the strategic process and gathering information from the external environment. Despite the lean management structure and few hierarchical levels, it has formed, since 2009, formalized directory board and important issues are always discussed and decided together by these people, who have family ties. No member of the group is considered the company's president. The most important decisions involving investments, strategic actions one new changes in previous decisions are made jointly by the group. In case of discrepancies, the general consensus of the majority prevails. Over time, there has been a maturation in relation to the frequency and format of meetings and decisions. Each member of this group is responsible for an area of the company: sales and commercial; production and product design; purchase; and
  11. 11. Pamantasan ng Cabuyao Katapatan Subdivision, Banay-banay, Cabuyao, Laguna Graduate School and Continuing Professional Education "back-office" (IT, accounting, tax, human resources and finance). Given these characteristics of the object of study, observation and understanding of the scanning processes and strategy planning can be clearer, as the company has gone through several cycles of learning. The company's generic strategy is differentiation in products and service. However, its products are considered of low turnover and commodities - price factor often ends up being predominant in trade negotiations. Using the five forces model of Porter, it can be noted that the industry has tougher competition and low financial return. Compared to competitors, there is a great rivalry and "price war" strategy is a constant. About new entrants, there is an imminent threat, coming from imported products brought by new distributors, which eventually compete with industry. There is little bargaining power with suppliers, which are composed mostly of multinational or large businesses. Regarding buyers, the bargaining power of them is great, due to the characteristics of the product itself and increased competition. About substitutes, there is a possibility of moderate occurrence. To form the interview script , it were used several of the studies discussed in the theoretical foundation, according to figure 1: Figure 1: Proposed Framework
  12. 12. Pamantasan ng Cabuyao Katapatan Subdivision, Banay-banay, Cabuyao, Laguna Graduate School and Continuing Professional Education To help in the investigation of the research question, it were formulated two propositions. SMEs have little visibility of its external environment. Increased competition is a major concern for these companies as well as financial performance variables. Thus, loss of market share and revenues are sensitive issues [10]. Factors related to market are the most monitored [23]. Given the constraints of resources and human capital to smaller companies, and their reactivity characteristics in the strategy ([2]; [3], [10]), the first proposition of the study is: P1. In an SME environmental monitoring will be limited to matters related to clients with personal sources. Considering the points raised in the first proposition, and yet the fact that strategic processes are poorly structured and formalized in SMEs, and that there is dynamism and speed in decision making of SMEs due to centralization and hierarchical structure centered in leader ([11]; [2]), and the fact that in these companies scanning is situational and reactive [10], the second proposition of the study is: P2. In an SME, only information about competitors, characterizing a threat to the company, will cause a change in strategic actions in order to minimize the financial impact of this new situation. 4. RESULTS The interviews were conducted during a week with members of the directory board. Then, the information obtained were summarized in Table 3, following items proposed in the framework, to facilitate understanding and analysis. The results obtained in the case study are consistent with the theoretical aspects, regarding the particularities of SMEs in shaping strategy and environmental scanning. It was also observed that there is a strong motivation of the members of the company to make it successful, which is the main driver of decisions. Although there is a small structure in scanning, the company often feels "lost" and unsure about whether or not to take actions based on the information obtained, since it considers these personal sources not totally
  13. 13. Pamantasan ng Cabuyao Katapatan Subdivision, Banay-banay, Cabuyao, Laguna Graduate School and Continuing Professional Education reliable. Even information coming directly from external customers and staff are seen as biased, particularly with regard to price and activity of competitors
  14. 14. Pamantasan ng Cabuyao Katapatan Subdivision, Banay-banay, Cabuyao, Laguna Graduate School and Continuing Professional Education DIGESTED CASE STUDY: TITLE OF THE STUDY: ENVIRONMENTAL SCANNING AND SMES STRATEGIES: A CASE STUDY By: A.C.M. Pimentel, M.M. Spinola, R.O. Moraes FACTS OF THE STUDY: Events, trends, issues, and expectations are the four most important factors in environmental scanning. Events are occurrences that occur in various environmental sectors of a business. These occurrences sometimes follow a pattern and tend to move in a specific direction. In this case study, it was determined that in a highly competitive environment, knowing the external environment and adapting to it is critical. Because of its dynamism, it necessitates constant scanning in order for companies to carry out their strategic actions correctly. Scanning entails defining information needs, searching for and collecting information, and then using it purposefully to set organizational strategy. Companies must monitor key factors affecting their strategy in order to prioritize strategic actions. However, in SMEs (Small and Medium Enterprises), strategic planning and environment scanning are typically informal and centered on the owner. In this situation, these activities may be neglected or fail to generate information to support strategy formulation. Given the circumstances, it is critical to comprehend the relationship between strategic decisions and scanning activities in SMEs. The importance of this study stems from the fact that SMEs account for more than 90% of all businesses in Brazil, making them a significant economic force. The goal of this study is to identify, based on the characteristics of the scanning process in SMEs, the relationship between competitive strategies and scanning activities. A unique case study was used to establish the proposition that the adoption of a strategy does not take scanning activities into account. Based on the theory, a framework was developed and used as a research tool.
  15. 15. Pamantasan ng Cabuyao Katapatan Subdivision, Banay-banay, Cabuyao, Laguna Graduate School and Continuing Professional Education ISSUES: There are three entrepreneurship-related factors that influence competitive scanning. First, "need for achievement" refers to the manager's desire to be successful. These individuals would have a moderate proclivity to take risks and prefer to be accountable for their own actions. The second factor, "locus of control," refers to managers' perceptions of how their personal control affects the outcomes. This factor has two dimensions: internal, where the manager believes their actions and behaviors interfere with the search result and thus control over the environment, and external, where he believes situations are unpredictable and results are determined by luck or chance, resulting in a passive attitude. The final factor, "innovation," refers to the leader's proclivity to support and engage in new and creative ideas and experimentation, as well as to explore new and unique ways to solve problems within the organization. An informal and unstructured scanning was observed, as well as a lack of reliability in the information gathered, which could limit the influence of scanning in strategy. Scanning activities had no effect on the company's strategy up to this point. This work contributes to a better understanding of the relationship between scanning activities and strategy in SMEs. The framework created can be used as a model for future research. The research's limitations include the fact that it only considers the company's vision of its own environment and the owner's opinion, as well as the impossibility of generalizing results. Future research can be replicated in similar companies to confirm the obtained results. RESOLUTIONS: The case study fallouts are consistent with the theoretical aspects, such as the particularities of SMEs in shaping strategy and environmental scanning. It was also discovered that the members of the company have a strong desire to see the company succeed, which is the primary driver of decisions. Despite the fact that scanning has a small structure, the company frequently feels "lost" and unsure about whether or not to take actions based on the information obtained, because it considers these personal sources to be untrustworthy. Even information obtained directly from external customers and employees is viewed as biased, particularly in terms of price and competitor activity.
  16. 16. Pamantasan ng Cabuyao Katapatan Subdivision, Banay-banay, Cabuyao, Laguna Graduate School and Continuing Professional Education Scanning the competitive environment within the context of dynamic changes is a critical tool for supporting strategic actions. Due to their unique characteristics, SMEs face numerous challenges in carrying out this activity in a structured manner. In these companies, strategy formation is also informal and reactive. Studies attempting to establish a link between these two processes are still contentious. Scanning had a limited impact on strategy in the case studied, particularly when the impact of environmental changes implied a loss of customers, revenue, or profitability. Other external factors could also have an impact on strategy. However, the strategy had no effect on scanning activity.

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