Essay: Small and medium-sized enterprises

CHAPTER 1

INTRODUCTION

1.1 Introduction

This chapter provides an overview of the study background, problem statement, objectives of the study, research questions and definition of the key terms used in this study. These are followed with discussion on the contribution of this study. Finally, this chapter ends with a discussion on the organization of remaining chapters.

1.2 Background of the studies

Small and medium-sized enterprises (SMEs) represent an important part of the economies of both developed and developing countries. Wolff and Pett (2006) contended that SMEs and entrepreneurial firms are a key segment and driver for most national economies. More specifically, in Malaysia, currently SMEs made up of more than 90 percent of the total number of firms and at the same time, export about 20 percent of their total output.

According to Bank Negara Malaysia SME annual report (2007), 96% of establishments in the manufacturing sector were SMEs, contributing 30.7% of total manufacturing output and 26.3% of total value added. In addition, more than 400,000 or 31.6% of the total workforce was employed in this sector. Malaysia’s SMEs contributes up to 37% to the national Gross Domestic Product (GDP). Malaysia SMEs are defines based on their Annual Sales Turnover or Number of Full-Time Employees in each of their respective sector as shown in table below;

Table 1: Definition of Malaysian SME

Source SMECorp

In Malaysia, Small Medium Enterprise ( SME) companies are recognized to offer new job opportunities, initiate innovations, encourage competition, and support bigger companies (Hashim and Wafa, 2002). SMEs primarily owe their business success and growth to the development of innovations, which gradually effect their transformation into large enterprises ( Bozic and Radas, 2005). In addition, a business can achieve market orientation’s full potential when driven by an entrepreneurial proclivity (Slater and Narver 1995).

Entrepreneurship has been a significant research area among economists and scholars globally for some time. For developed economies, entrepreneurial activity is a means of revitalizing stagnated economies and of coping with unemployment problems by providing new job opportunities. Henderson (2002) contends that entrepreneurs create new jobs, increase local incomes and wealth, and connect the community to the larger, global economy.

Entrepreneurial proclivity or entrepreneurial orientation is characterised as top managers, disposition to accept entrepreneurial processes, practices, and decision making by adopting innovativeness, risk taking, proactiveness, autonomy, and aggressiveness behaviours (Matsuno et al., 2002). Entrialgo et al. (2000) suggested innovativeness as a behavior that characterises entrepreneurship and entrepreneurial orientation. According to Marcati, Guido and Peluso, (2008) entrepreneurs’ innovativeness and personality play a key role in the adoption of innovations in Small and medium-sized enterprises (SMEs).

Innovation is defined as a systematic search for the changes as opportunities for new markets, products, or ideas (Cromie, 2000; Utsch and Rauch, 2000). Stewart et al. (2003) argue that innovation is inherent in the role of entrepreneurship and it can separate “entrepreneurs” from “managers”. SMEs give a strong boost to employment and economic growth precisely due to their innovation activities (Keizer et al., 2002).

Many good companies are market-driven, that is they listen to what their customers are telling them and continually respond to perceived shifting market needs. Market-oriented firms are argued to be those which collect information about their customers and competitors, disseminate this information to appropriate decision makers within the organisation, and then take appropriate actions to meet better the needs and wants of their customers and stakeholders (Cadogan et al. 2002).

By embarking on market intelligence, they should be better able to understand the needs and wants in the marketplace. Such understanding should assist in delivering superior value to customers, compared to what their competitors are able to do. This in turn will enhance the business performance. Market orientation and organisational innovation are recognised as the engine to drive international competitiveness among SME’s. In short, market orientation strategy and innovation as discussed here, primarily is about making traditional business relationships and processes, such as recruitment, procurement, administration, marketing/selling and customer support more efficient through innovative applications, technologies and processes.

.Despite the significant role of SMEs in the Malaysian economy, research involving small businesses still appears to be not only neglected, but also limited in their scope (Hashim, 2003). Given the importance of SMEs and the limited scope of past studies, more focused research is needed in this field of study

1.3 Problem Statement

The problem that this study dealt with is on the extent of entrepreneurial proclivity, market orientation strategy and organisational innovation contribution towards Malaysian SME business performance; which market orientation and innovation related issues they should concentrate on in order to maximise their companies’ long-term financial performance in Malaysia and in foreign countries.

Most world economies are expected to grow at slower rate compare to year 2007 due to financial crisis in some of the more advanced countries. The rising price of fuel and other raw materials are the keys economic trend impacting Malaysian SMEs (BNM 2007). Demand for Malaysia’s products and services will be affected. The report further stated that SMEs that are able to enhance productivity and competitiveness as well as develop new products and services will be better able to weather this trend of rising prices. It is also important to raise the innovative and creative capacity of small and medium-sized enterprises to be more business resilient and market driven.

Regardless in which countries, SMEs globally facing same problem which impair their performance with their survival rate. According to Reiss (2006) some statistics even suggest that the failure rate of small businesses in their first five years is more than 50% .Previous research finding stated that there are two most significant reasons for failures among SMEs one is lack entrepreneurial competencies among the main founder-owners (Kiggundu, 2002); and another one is the lack of abilities and skills of those who hold key positions (Longenecker, Simonetti, &Sharkey, 1999).

This will results in poor decision and action taken by the firm resulting from ‘non-relational’ behavior of management of the firm (Beaver & Jennings, 2005). Under The Third Industrial Masterplan (IMP3) Malaysian Government outlines five strategies to strengthen the economic foundation of SMEs in various sectors. These are:

• Enhancing Competitiveness
• Capitalising on Outward Investment Opportunities
• Focus on Technology and Innovation
• Providing a Cohesive and Supportive Regulatory and Institutional Framework
• Nurturing the Services Sector

(BNM 2007)

With IMP3 strategies as their guideline, Malaysia’s SMEs will be able to compete in current robust competitive market and adapt to changes taking place in the world economy. Malaysia’s SMEs need to be innovative, proactive and creative, this is in-line with market orientation philosophy of Kohli and Jaworski (1990) a successful company is conditioned not only by the organisation’s capacity to determine market needs, the firm must also find the best way of satisfying customers through competitive viable offer. Christensen (1997) argues that well-managed companies often fail to innovate because they are preoccupied with the market.

The argument is an intimidating one for managers who believe in a market orientation: Know the market, share the market information, and act on it (Jaworski and Kohli 1993; Kohli and Jaworski 1990). It is worrying because the argument suggests that being market oriented could be harmful for a firm that is also trying to be entrepreneurial. This potential conflict between market orientation and entrepreneurial proclivity deserves serious attention because convincing evidence exists that market orientation leads to positive business performance (e.g., Baker and Sinkula 1999; Green-ley 1995; Han, Kim, and Srivastava 1998; Jaworski and Kohli 1993; Matsuno and Mentzer 2000; Narver and Slater 1990; Selnes, Jaworski, and Kohli 1996), and entrepreneurial proclivity is also argued to contribute to superior firm performance (Barringer and Bluedorn 1999; Covin and Slevin 1989; Drucker 1998; Lumpkin and Dess 1996; Miller 1983).

Lall (1999) observed that the bulk of the Malaysian industry sector “consists of small traditional firms using low-technology and low-skill technologies.” this is consistent with Bank Negara Malaysia’s SME Survey year 2001 that revealed “Malaysian SMEs are still mostly inward-looking and are faced with constraints in management and technological capabilities, limiting their ability to compete and to add value effectively”.

The performance impact of market orientation and that of entrepreneurial proclivity have been studied in two separate bodies of literature, but few studies join the two (Matsuno et al. 2002). This gap in the literature leads to an unresolved issue: a potential conflict between the effect of market orientation and entrepreneurial proclivity on the business performance. It is well argued that fundamental functions of businesses are the creation of both satisfied customers (i.e., marketing) and entrepreneurial proclivity (Deshpand�, Farley, and Webster 1993; Drucker 1954), however, companies cannot have both.

While much has been researched about high growth SMEs, their roles and importance in the economy, what has been lacking in many of the studies in this stream is the important role that innovation plays in fueling such growth in the SMEs (Oke, Burke and Myers, 2007). In addition, not much is known about how innovativeness influences performance (Hult, Hurley and Knight, 2004). A number of studies have dealt with innovation in SMEs, however, few have examined results of innovation development (Bo�ic and Radas, 2005).

Previous works have investigated the importance of SMEs as drivers of economic growth and policy issues in national economies (Henderson, 2002; Fisher and Reuber, 2003). Therefore, considering the gaps in the previous research and literature, this paper goal is to explore the SMEs business performances association with the entrepreneurial proclivity, innovation results and market orientation strategy.

1.4 Research Objectives

he objectives of this research are:

1. To determine whether entrepreneurial proclivity has any influence on the market orientation and SME business performance
2. To establish whether market orientation can improve the organisational innovations and SMEs business performance.
3. To investigate the relationship between the organisational innovations and SMEs business performance. .

1.5 Research Questions

On the basis of the research background, this study will be guided by the following major research questions:

1. Does entrepreneurial proclivity play a role in improving organisational innovations and SME business performance?
2. Does market orientation have any influence on the organisational innovations and SMEs performance?
3. What is the association between organisational innovations and SMEs business performance.

1.6 Research Significance

The present study aims to contribute to the existing knowledge base by addressing important research issues that have received relatively little empirical attention. Although SMEs has significant role in the Malaysian economy, research involving small businesses still appears to be neglected and also limited in their scope. According to Hashim, (2003), the review of the small business literature in Malaysia reveals that SMEs have received limited empirical attention as a field of study. Hashim (2003) examined the moderating effect of technology on the relationship between business strategy and performance of 100 SMEs in the Malaysian manufacturing sector. Hilmi and Ramayah (2008) examined the relationship of market innovativeness to performance of 39 SMEs in Malaysia. This paper aims to contribute to the extant literature by analysing the effects of innovation activities on the SME business performance together with other factors i.e. entrepreneurial proclivity and market orientation. According to McAdam (2001), relatively there is lack of in-depth studies on innovation implementation in SMEs although there are few researches on SMEs continuous improvement (Gunasekaran et al., 1996) The performance of small and medium-sized enterprises is an important indicator for an individual firms’ success, whilst it’s aggregate performance to economic growth for policy makers. The findings of this study will provide some information to the owners or managers of Malaysian SMEs on whether entrepreneurial proclivity, market orientation strategy and organisational innovation have a significant impact to the business performance. This study aims to generate new knowledge and to give guidance to Malaysian SME’s management on whether market orientation strategy could enhance their corporate performance thru organisational innovation. If market innovation is important for organisational performance, this study will motivate the SME management in designing and implement an organisational culture that embodies organisational innovation. This study also contributes by highlighting which market orientation and innovation related issues they should concentrate on in order to maximize the SMEs long-term financial performance in Malaysia and in foreign countries.