Communications of the ACM

Virtual extension

SME Strategies: An Assessment of High vs. Low Performers

By DaeSoo Kim, Terence T. Ow, Minjoon Jun
Communications of the ACM, November 2008, Vol. 51 No. 11, Pages 113-117
10.1145/1400214.1400237
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According to the U.S. department of commerce, manufacturing led all industry sectors with e-commerce shipments that accounted for 19.6 percent ($752 billion) of the total value of manufacturing shipments. Merchant wholesalers ranked second with e-commerce sales that represented 11.7% ($320 billion) of their total sales (See U.S. Census 2004 for full report).

With the advancement of the Internet and interorganization information systems, new business models such as e-business and integrated supply chain activities enabled firms to reduce logistics and administrative costs. As a result, rules of competition and business paradigms have shifted from products to customers, business transactions to business relationships, information to knowledge, enterprise to extended enterprise and network focus amongst others. In this new e-economy, the dynamics of competition does not exist simply in "company vs. company" but rather in "supply chain vs. supply chain."⁴ The entire value chain makes better decisions collaboratively with the end performance result being vastly improved throughout the entire chain.

Yet little has been known about how and to what extent small-medium sized enterprises (SMEs) are implementing supply chain management (SCM) initiatives and e-business practices. This article presents some preliminary survey results of relationships between environment, firm strategy and performance. It also discusses the comparative characteristics of strategies and practices between high and low performance SMEs.

In order to gain valuable insights into SCM and e-business strategy and best practice implementation in SMEs, a preliminary survey instrument was developed on the basis of the well-known environment-strategy-performance (ESP) construct in strategic management and organization theory¹ along with a modified balanced score-card perspective⁶ and the Supply-Chain Operations Reference (SCOR) model in practice.⁹ The survey was conducted in collaboration with an SCM consulting firm in Milwaukee in 2002. After several rounds of refinement and discussion with practitioners and feedbacks from mock survey, the refined survey was then sent out to 431 SMEs with annual sales revenues of $500 million or less in the states of Wisconsin and Illinois. These firms were selected randomly from a consulting firm's corporate database. Out of 75 responses we received, only 45 were usable for complete data analysis. Although the response rate is low (11.2%), it is comparable to other studies whose response rates are typically between 10—15%. The majority of the responses were from senior executives that include CEO, CIO, COO, President and VP of their firms. On average the firms had 228 employees, annual sales revenue of $76.9 million and SCM and e-business investment spending of $1.0 million, as shown in Table 1.

Respondents were asked to evaluate on their past efforts concentration on the five distinct SCM processes (plan, source, make, deliver and return) of the well-known SCOR (Supply-Chain Operations Reference) model, an SCM and e-business best practices model suggested by Supply-Chain Council.⁹ While simple, the model has proven to be a powerful tool set for describing, analyzing and improving supply chain practices.¹²

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Performance Characteristics of High vs. Low Performance SMEs

To better understand comparative performance characteristics, we divided the responses from the SMEs into high and low performers in terms of a composite financial performance. This procedure is based on the suggestions of separating the sample into high and low performance firms.¹¹ The composite score was calculated by averaging the performance of improvement or deterioration scores of return on investment, cash flow, net profit and return on asset. Of the 45 SMEs, 22 were categorized and grouped as high performers. The average scores ranged from 1 (highly deteriorated) to 5 (highly improved) for the firm's perceptions in terms of performance over the last three years prior to the survey conducted. The following chart in Figure 1 shows the comparative performance characteristics of the high and low performance SMEs.

The high performers exceeded the low performers in every performance dimension from a modified balanced scorecard model.⁶ Their supply chain performance was better in terms of both external customer-facing (such as delivery, responsiveness/flexibility) and internal facing (such as cost reduction, asset utilization and quality) measures. Their market performance was also better in terms of customer value perceptions, new customer gains, market share, customer retention and product availability. This in turn led to exceedingly better financial performance related to firm profitability and liquidity such as return on investment, cash flow, net profit and return on asset. A further closer examination of the low performers revealed that there was no statistically significant impact of their supply chain or market performance on financial performance. Therefore, it can be noticed that only those firms with better supply chain and market performance have higher financial performance improvement. In another word, it can be inferred that the improvement of supply chain / operations and market / customer performance is essential for the improvement of financial performance.

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Relationship between Environment, Strategy and Performance

We set to explore the reasons behind the difference between high and low performers. We attempt to understand the interplay between environment, strategy and performance based on the well-known ESP construct¹ using path analysis.³ The measurement items and number of survey questions used for each construct are provided with descriptions in Table 2. Results of the analysis are presented in Figure 2 with path coefficients and their significance indicated on each path.

The model fits the data well with significant results for the key performance indicators (KPIs). From examining the various relationships in the path model, the more competitive the industry characteristics are for a firm, the higher its competitive priority is (R²=18.3%). The industry characteristics are measured by a composite score of hostility, dynamism and uncertainty as suggested by Ward and Duray¹¹ and Supply Chain Council.⁹ That is, as the industry (e.g. electric equipment, machinery, printing and transportation equipment manufacturing in this study) is highly hostile in competition with dynamic technology changes and uncertain demands, the firm needs to adopt and dedicate its resources to each of the five competitive priorities or strategic goals (i.e. delivery, responsiveness and flexibility, cost reduction, asset utilization and quality). On all the dimensions except asset turnover, when comparing the high vs. low performers, the high performers were able to put higher priorities on these strategic initiatives.

A firm's competitive action priorities are affected significantly (R²=26.0%) by its competitive priorities, while there was no direct significant effect from the competitive characteristics of the industry. Further analysis shows that the high performers placed fairly high emphasis on customer relationship management (CRM) and operations (4.3 and 4.0 out of 5.0) as compared with the other dimensions (3.5, 3.4, 3.4, 3.1, and 2.7, respectively).

The supply chain performance is affected indirectly by a firm's competitive priority through its mediating effects from its competitive action priority efforts and directly by its best practices implementation focus (R²=35.1%). This led to higher market performance (R²=27.9%) and eventually financial performance (R²=16.6%). It is noted that a firm's best practices implementation focus includes its improvement efforts on five distinct supply chain management processes as described in the previous section. SMEs that are higher financial performers have higher overall aggregate scores and specifically have higher ratings in plan and return best practices implementation when compared to the low performers.

In examining the supply chain performance dimensions, the high performers do particularly better in cost reduction and asset utilization. They also show higher improvement in customer's overall competitive value perceptions and market share. These results are consistent with those of Ward and Duray" which investigated the alignment among environment, competitive strategy, manufacturing strategy and performance.

It is interesting to note other attention-grabbing issues related to e-business and SCM best practices implementation from the survey. First, in supply chain planning practices, even though the high performers consider streamlining information flows as one of the top priorities, similar to the findings in Kemppainen and Vepsäläinen,⁷ they still find substantial difficulties in gathering and analyzing cross-industry benchmarking data for performance improvement and put relatively low efforts in collaborative planning and data sharing across the firm for visibility. However, it should be noted that SCM masters like GE, Toyota, Procter & Gamble, Seven Eleven Japan and Zara (Spanish fashion manufacturer and merchandiser) place top priorities on supply chain collaboration and visibility.

Second, in sourcing practices, the high performers focus less on collecting and analyzing supplier performance data and reporting to suppliers online in real-time, and using e-sourcing and negotiation systems. This discloses the SMEs' lack of capabilities in utilizing electronic communication and information technologies real-time. Third, in operations practices, while the high performers emphasize providing real-time production feedback internally, they lack in establishing external collaborative capabilities for visibility through state-of-the-art on-demand access to available-to-promise, production schedules and inventory status, for example used by SCM masters like GE Healthcare Technologies and Procter & Gamble. Fourth, in delivery practices, they show only moderate focus on integrating order, warehouse and transportation management; and moderately low emphasis on those industry initiatives of reducing variability and lead time such as real-time order, package and shipment tracking, rapid and continuous replenishment, vendor managed inventory (VMI), and electronic data interchange (EDI) linkages, Internet ordering, efficient consumer response (ECR) and quick response (QR) logistics programs, and performing an integrated operations and distribution or transportation network analysis. These findings exhibit a considerable lack of concern in implementing e-technology based delivery best practices. And fifth, in return practices, while the high performers concentrate high implementation efforts in establishing internal product specs and quality test procedures, they have again low interest in building a Web-based return handling capability.

Summarizing overall e-business and supply chain best practices implementation, it is interesting to note that even the high performers not only pay limited attention to the use of e-technologies but also show lack of capabilities in implementing best-in-class collaborative best practices in supply chain planning and execution, although they indicated in the study that they would focus more on building those capabilities in the future. Further, we can discover another interesting finding that there is a further room for performance improvement, since the best practices implementation focus by even the high performers is not fully consistent with their competitive priorities and competitive action priorities on value chain activities that we examined previously

With regards to supply chain and e-business integration efforts as shown in Figure 3, most of the SMEs are currently focused on internal functional integration (34.1%), internal business process integration (36.3%) and external integration (18.2%); and a few on entire supply chain integration (6.8%) and nonlinear supply chain network or e-hub (e-marketplace) based integration (4.6%) beyond the linear vertical supply chain integration. On examining the firm's future plans for e-business integration, most of the efforts are planned for internal, external business integration and entire supply chain (total of 88.5%). This similar and familiar trend toward an increasing level of supply chain integration maturity was discovered in Kemppainen and Vepsäläinen.⁷ Yet still, there is very little focus to be given even in the future to establishing more dynamic and adaptive presence on e-marketplace/e-hub.

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Conclusion

By examining the responses from the SMEs, we found out that little progress is made in integrating business processes across the supply chain and utilizing the benefits of e-technology based information networks among its supply chain partners for both low and high performers. Consequently there is an excellent opportunity for SMEs to tap into the lack of exploitations of IT to improve their performance. Perhaps, there are challenges and obstacles that hinder the adoption of e-business and SCM practices and strategies. These challenges are summarized in Figure 4, using the average scores ranging from 1 (very low) to 5 (very high) in the degree of significant obstacles encountered in implementing SCM initiatives to the full extent. As noted, overall there is a slightly higher challenge for the low performers in almost every aspect.

With respect to top implementation impediments, the high performers encounter critical challenges directly related to systems and technologies, including investment costs, business needs, process logic building and expertise. The low performers, however, also show lack of organizational readiness for e-business and integrated SCM implementation such as change management, initiative ownership and cultural barriers in addition to those of the high performers. Thus, the low performers need to build both human resources and organizational capabilities that enable them to successfully implement e-business and SCM integration initiatives. These results are similar to those from a study conducted in Canada where they found that Internet based supply chain applications adoption across all industry sectors is still considerably at its infancy stage.⁸ Very few firms have yet embraced related technology such as applications that graphically illustrate the supply chain activities.

From our study, we can extract several significant managerial guidelines as to implementing future e-business and integrated SCM strategies and practices. First, in strategic pursuit of competitive priorities, SMEs need to carefully understand their industry characteristics. When the industry exhibits highly competitive, dynamic and uncertain nature, the firms should focus more on external customer-facing strategic goals. Second, in order to enhance supply chain performance, SMEs need to develop their competitive action priorities on value chain activities consistently with their competitive priorities. Third, in implementing supply chain best practices in planning, sourcing, operations, delivery and return processes, SMEs need to focus more on building supply chain execution capabilities as well as supply chain planning in order to quickly respond to rapidly changing business environments today. This requires not only trust-based supply chain collaboration with key supply chain members but also seamless supply chain process synchronization. Fourth, in order to increase integration with supply chain partners, more needs to be done in adopting and utilizing mature e-business technologies. In this case, SMEs need to develop a sound business case by aligning strategic business needs with technological issues. This requires analyzing key strategic, operational, technological and organizational issues along with financial investment justification by considering all the available options of building, buying and renting the systems. Finally, it is crucial for SMEs to embrace the whole picture of synchronized SCM but start small in execution from an orchestrated balanced scorecard perspective by aligning strategies to environment and linking strategies to actionable and controllable KPIs.

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The Digital Library is published by the Association for Computing Machinery. Copyright © 2008 ACM, Inc.

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