Eustathios Sainidis, Raj Gill, Anthony White

Engineering Systems Group, Middlesex University

Bounds Green Road, London, N11 2NQ, United Kingdom.

Tel: + 44 (0)20 8411 5297. Fax: + 44 (0)20 8411 5210.

E-mail: e.sainidis@mdx.ac.uk

The present paper illustrates an in-depth review and critique of the theory of strategy in relation to management practices in small and medium sized manufacturing companies. The paper will present the historical course of the concept starting from the 1960s when the term manufacturing strategy first appeared in the writings of Wickham Skinner and finishing with the latest developments and views of the role of strategic manufacturing management in the corporate strategy of organisations. The text will contrast the concept of strategy and the theories of management in small-medium enterprises (SMEs). Limitations and obstacles of researching strategy will be reviewed with a closer look at the methodologies for obtaining and analysing data, offered by the social and business sciences. The question that the paper will try to answer is whether the nature of manufacturing strategy in the SMEs has the same characteristics and methodological approaches as currently viewed by analysts, which mainly focus on large organisations. The intended outcome will try to match manufacturing strategy and SMEs and create a theoretical basis of strategic manufacturing fit in the small-medium sized manufacturing sector.

KEYWORDS: SMEs, strategy, strategic planning, strategic thinking, research methods, adaptive strategy.

Strategic management has been one of the growing subjects of business management science that evolved in the 1960s with the writings of Peter Drucker, Igor Ansoff, and Kenneth Andrews. Strategic management took a new turn in the 1980s when Michael Porter and Henry Mintzberg developed two opposite school of thoughts. Porter’s school was promoting a mechanical, rational, analytical approach towards the formulation and implementation of strategy, with Mintzberg on the other side arguing for a more theoretical view on strategy formation, formulation, implementation, and review. Porter and the likes developed numerous strategy processes based on tools and methodologies that would require substantial amounts of accurate quantitative and qualitative business-environment data which would undergo analysis and plot the company’s strategy map. Mintzberg disagreed on the importance of such strategy processes highlighting the emergent dynamic of the business environment. He refers to the unpredictability of the market, and unstructured strategic vision of managers, which form the strategic actions of companies. Mintzberg’s ideas would best be described by the words of Sir Winston Churchill on defining political strategy:

Strategic planning was strongly linked to a rational approach of forming, formulating and implementing a long-term action map for an organisation. Academics and consultants developed methodologies and tools that would serve this rational approach, tools that would analyse various data and would offer a clear picture of where the company is at present and where the company should be heading. Although these tools became widely acceptable and companies were enthusiastic on using them, they also became the anathema of strategic management. Vast amount of quantitative and qualitative data is required by such tools together with exceptional analytical skills that many, especially SMEs, are weak at. In many cases, managers involved in such planning techniques spent countless hours and recourses collecting historical data, trying to analyse them, and endlessly debating on them. The drawback was that somewhere in the process the ‘strategic thinking’ was lost, leaving the management team with analysed data plotted on strategy process tools and methodologies that could not be translated into a usable strategic plan.

By the end of the 1970s strategic planning lost a considerable number of fans in industry. Also academics started to have serious doubts about the value of having a formal approach when forming, formulating and implementing strategy. Henry Mintzberg strongly criticised the rational approach of strategic management. During the 1990s strategic planning gained its popularity back. Performance measurement systems were strongly linked to strategic planning and made part of the strategy philosophy. Performance measurements use a variety of tools and systematic procedures and are heavily bureaucratic. On the other hand, empirical research shows that strategic planning does not always follow a well-formatted pattern⁷. If strategy formulation is not well-formatted and documented, performance systems will not function as desired, simply because of the lack of data they heavily rely on. SMEs think of performance measurement systems only in financial terms, but as Bracker and Pearson³ would note financial data is something that SMEs have problems collecting.

Today’s strategic management theories try to blend the above schools, forming the concept of strategic thinking. Strategic thinking can be seen as a two-way relationship between strategic planning and emergent planning. This approach follows Argyris’¹ view on double-loop learning where "the correction of mismatches" (between planning and the emergent dynamics of the market and strategic visions) is done by "examining and altering the governing variables for actions and the actions themselves". We are therefore referring to an adaptive planning process that companies follow when it comes to strategy.

Concluding, the history of the strategy phenomenon can be drawn under five periods:

1. 1960s-end of 1970s: strategic planning was at its peak. Every company was having a strategy plan. Tools such as SWOT analysis emerged and became fashionable. Excessive financial data was collected, analysed and put under forecasting techniques to predict future market environments and position the company within the future markets.
2. Early 1980s saw the decline of strategic planning due to failed strategic methodologies and tools promising success and expansion and also because of the economic recession. Forecasting techniques seemed not to work anymore and failed to predict economic instabilities and slowdowns. Managers lost confidence in strategic planning and started to have a closer look of the insights of their company: human resources, organisational culture, tangible assets, and their relation to corporate performance.
3. Mid- to late-1980s: the comeback of strategic planning as strategic management. Focused on the implementation of strategic plans of the middle management, i.e. those who would implement strategic actions. The management structure of companies was coming under review and communication networks had to be clearly defined and work under maximum efficiency. Performance measurement at its best.
4. Early 1990s: moving away from long-term strategy plans and introducing the brake-down of functions by reengineering and restructuring. The norm was to decentralise planning into business units and have a clear agenda of strategy processes and managers involved in the strategy development. 1994 saw Mintzberg’s ‘The Rise and Fall of Strategic Planning’. This was a strong critique of the context, tools and values of strategic planning arguing for a more responsive approach to environmental changes instead of trying to forecast these changes.
5. Late 1990s saw the rise of strategic ‘vision’. Strategic vision is a blend of strategic planning and strategic thinking. Strategy processes should be used to examine external and internal environment together with a proactive strategy philosophy. Adapting strategic plans to changes are essential in a rapidly changing environment.

Despite the tremendous amount of writings on strategic management, little has been done on focusing on the requirements of formulating, implementing and reviewing strategy in the SMEs sector. The majority of analysts examine the implications of strategic issues on large organisations with employee size of 250 and above, neglecting research on the visions, activities, and strategic decision making of the main engine of employment and economic growth of the nation, that is small-medium companies. SMEs have a particularly interesting nature as research elements because of their dual top-management nature: the SME that is managed by the owner-managing director, and the SME that is managed by the appointed-managing director. The two groups differ in depth when it comes to strategic planning and strategic thinking. On one side we have the short-term, centralised strategy approach, as opposed to the second group of the appointed top-management which tends to have the same strategy behaviour as larger organisations. A further important difference between SMEs and large organisations is their ability, expertise, and intelligence to collect, interpret, and present accurate and valuable data of internal competitive recourses, market characteristics and competitors’ performance.

Researchers focusing on SMEs’ strategy making face the difficulty of where to identify strategy: Where can we see the strategy of an SME? Large organisations have strategy plans documented and published in annual reports that the researcher can refer to. Such strategy reports include strategy historical background, present strategy, and three to five years strategic visions. They include tools used during the strategy process, analysed data and strategy maps. They clearly define strategic objectives as statements. On the other hand SMEs operate on a different level. Strategy reports are rare and not in-depth. The majority of strategic debates, decisions, and actions are kept on a verbal level because of the less restricted information flow; thus the majority of the employees in an SME ‘know what is going on’. For the researcher the lack of formality means the need of more refined instruments to capture strategic discussions that lead to a strategic awareness and sense of direction rather than specific plans and commitments. It is also the short-term and more emergent nature of strategic thinking of SME managers that do not offer enough pieces to the researcher to complete the strategy picture of the company under investigation. We therefore need a much deeper understanding of the thinking and behaviour in SMEs.

Johnson and Scholes⁵ argue that large companies tend to include within their corporate objectives not only financial terms but also a wider group of objectives such as stakeholders, customers, suppliers, employees and the community at large. They see these objectives as equally important. On the other hand SMEs see financial objectives as more important. However, financial performance measurements have been criticised by analysts as narrow-focused lacking the ability to give an overall picture of the company. Company performance should reflect organisational goals that do not only include revenue and profit data.

SMEs tend to see strategic planning as a once-a-decade consulting project. Strategic planning is an on-going, long-term involvement and commitment. Switching strategic planning on and off will look like a motorway with bumpy sections. The methodologies that are available for strategy formulation are plentiful and would suit most of the needs of SMEs. Choosing simple strategy processes that require minimum data and recourses but will give a clear picture of the strengths, weaknesses, opportunities, and threats of the company are of great use for this type of companies. There are many SMEs managers that get frustrated by strategy processes requiring skills and data that are not accessible to their companies and as a result see strategic planning with uncertainty. Choosing the appropriate strategy process suitable to the recourses and culture of the organisation is the right thing to do. We should not forget though that strategy processes are only temporary and are constantly being replaced by new ones. They also do not form the strategy making. They are only part of that strategy phenomenon and do not replace strategic thinking. They only provide ‘strategy numbers’ i.e. analysed data gathered from the internal and external environment.

One of the important if not the most significant characteristic in the small-medium sized companies is the role of the entrepreneur-manager in the strategy development. The view of the entrepreneur-manager towards strategy processes and strategic thinking is crucial and will form the cultural approach of the company towards the strategy phenomenon. This statement is supported by Carland et al⁴:

Research undertaken by Middlesex University during the winter 2000 targeting a small number of SMEs in the United Kingdom showed a strong correlation between the size of the SME and its formal/informal approach toward the strategy formulation and implementation. The findings are supported by previous research² and show that strategic planning becomes more formal and explicit as the company grows in employee size. This suggests that the management and control of the increased competence resources and communication network due to organisation’s expansion require a more sophisticated approach when put under strategic review. In the case of expansion either because of attacking new markets or developing new products, the formality and in-depth strategic analysis is even more necessary and intense. This is the point where strategic planning, actions and reviews become documented allowing the building of a strategy histogram. This particular point in the life of the company requires further investigation. One thing that can be said with confidence and as research shows us is that it is certainly related to the increase of the employee size and therefore growth of sales and turnover. On the other hand, the author would like to see a strong relationship between the start of building strategic histograms and the changes in the management structure and cultural characteristics of the SMEs.

One of the characteristics of SMEs is their strategic ‘vulnerability’ to decisions taken by their large-sized customers. Porter⁶ defines this situation as "power" over the company. Porter does not distinguish between large and small companies when he explains his argument of external influential forces on decision making. We can add to his thesis that SMEs are more likely to adjust their strategic direction to the strategy plans of their large-sized customer. This situation is more likely to happen when the SME has only a handful of customers and as such it is largely dependent upon them for survival. Having more customers adds greater flexibility when it comes to developing a strategic plan. Due to this characteristic of some SMEs the researcher is faced with another group of small-medium type of companies, the strategy supporters of large organisations. Strategy supporters follow strategic decisions and actions introduced by large first-tier companies and are required to support such decisions and actions. Our research at Middlesex University on the strategy formulation and implementation approach of 3^rd-tier SMEs suggests a formal and documented system of making strategy as being an obligation introduced and asked by their higher-tier customer.

Developing strategy in an SME environment is a dynamic but also sensitive process. It is difficult to generate a generic methodology that would offer strategic directions and lead to strategic actions. The difficulty lies in the diversity of the top- and functional-management nature and culture of such organisations. The proposed theoretical basis of developing strategy that will fit the requirements of manufacturing SMEs can be summarised into the following four steps:

1. Investigate the supply chain relationship between the SME and its customers. Supply chain relationships refer to 2^nd- and 3^rd-tier supply chain levels. Depending on which level the SME is positioned in relation to each customer, review the product families that are sold at each level. Product families should be examined according to manufacturing bottlenecks, financial rewards, product mix, and delivery times. The aim is to build a product-customer relationship tree.
2. Analyse the dynamics of each level: influence and flexibility of each customer-supplier relationship to strategic plans and actions.
3. The above two stages will give a picture of how the SME functions within its present supply chain levels. There must be room left for adaptive strategic movements. Such adaptive movements could be forced into action by a number of emergent factors: changes in the market, changes in customer requirements, changes in technology, changes in competitors.
4. The position and dynamics of the supply-chain level will determine changes in the manufacturing function of the SME in terms of lead-times, process, product mix, and quality.

The above model is still under development and subject to further refinements at Middlesex University. It is focused on the manufacturing-supply chain functional level of the organisation, moving away from the traditional manufacturing-marketing functional focus that previous manufacturing strategy processes are based on. Further research is required on management implications of SMEs, the validity of the analysed data, and the convertibility and adaptability of the process in respect to emergent strategy factors.

1. Argyris A (1977). Double-loop learning in Organisations. Harvard Business Review. Sept-Oct, pp. 115-125.
2. Berry M (1998). Strategic Planning in Small High Tech Companies. Long Range Planning. Vol. 31, No. 3, pp. 455-466.
3. Bracker J and Pearson J (1986). Planning and Financial Performance of Small Mature Firms. Strategic Management Journal. 7(6), pp. 503-522.
4. Carland W J et al (1989). An Assessment of the Physiological Determinants of Planning in Small Business. International Small Business Journal. 7(4), Jul-Sept, pp. 23-34.
5. Johnson G and Scholes K (1993). Exploring Corporate Strategy - Text and Cases. Cambridge: Prentice Hall.
6. Porter E M (1980). Competitive Strategy: Techniques for Analysing Industries and Competitors. New York: Free Press.
7. Sainidis E, Gill R, White A (2001). Emergent Strategies in SMEs. The 4^th SMESME International Conference. Aalborg University, Denmark, 14-16 May.