January 10th, 2018
Strategies for SMEs to Survive through the Duration of Economic Crises
A factor that has widely been attributed to providing an entity with sustainable competitive advantage is innovation. In a survey by the American Management Association, 90 percent of the respondents for instance identified innovation to be a key to ensuring long-term survival of their firms (Jamrog as cited in Fortuin and Omta 839). Gurteen defines innovation as the process of sifting, refining and implementing ideas generated through creativity sessions such as brainstorming (5). Accordingly, innovation provides an entity with the means for transforming the opportunities developed through creativity into sources of competitive advantage for the firm. Accordingly, Drucker refers to innovation “the specific tool [for] entrepreneurs” (as cited in McAdam, McConvery and Amstrong 206). Such perspectives indicate that innovation would be core for SMEs to survive during economic crises. The following section discusses areas of innovation that could help startup and SMEs to survive during economic adversity.
One of the aspects where SMEs could use innovation to ensure their survival regards their marketing activities. Naidoo for instance argues that SMEs could enhance their market innovation potential by pursuing an appropriate marketing orientation strategy (1312 – 1313). This implies that such SMEs need to define their market appropriately to develop products that meet the needs of their target market and establish market communication approaches that create a better awareness of their products within the target market. By understanding their target market, SMEs can capitalize on low-cost media such as social media forums to target their communications to such a market. For instance, such SMEs can use the social media to offer their customers coupons, which they can redeem on purchase of the entity’s products. Accordingly, the market orientation helps the entity to adopt an external focus, which facilitates its commitment to innovation to foster its capacity to meet its target customers’ needs constantly (Naidoo 1313).
Marketing innovation drives an entity’s ability to survive in the harsh economic environment by creating a sustainable competitive advantage. According to Naidoo, this arises since innovation endows an entity’s strategic assets with attributes that competitors find difficult to imitate (1313). When sustained, innovation ultimately results in a new valuable resource that the entity can use to further its advantage over other competitors. The continuous innovation process thus creates an element of time, which implies that other organizations that try to imitate the founder will have to come in as followers rather than leaders of the market trends (Naidoo 1313). Such focus on marketing innovation would thus offer a startup or SME to survive even in difficult economic conditions, since the established competitive advantage would enable it to retain more customers relative to the competitors (Naidoo 1313 – 1314). Such a process of innovation is highlighted in the figure below.
Using Marketing Innovation to Drive Firm Performance During Economic Crisis
Adopted from: Naidoo, Vikash. “Firm survival through a Crisis: The Influence of Market Orientation, Marketing Innovation and Business Strategy.” Industrial Marketing Management 39.8 (2010): 1313. Web. 28th April 2012.
Another aspect of innovation with regard to SMEs and startups that would help in survival during economic adversity is with regard to the business model. Business-model innovation is argued to provide firms with a longer lasting advantage compared to process innovation and product innovation (Ucaktürk, Bekmezci and Ucaktürk 91). By definition, Ucaktürk, Bekmezci and Ucaktürk refer a business model to be a structure that defines the entity’s customers, what such customers value and how the business can transfer such a value to the customers at affordable cost (90). This implies that the model aims at converging business processes and resources in a harmonious manner that helps the company to convey value to the customer in the best possible manner (Ucaktürk, Bekmezci and Ucaktürk 90). Business model innovation thus seeks to modify the business model to provide a better way of conveying such a superior value to the customers.
A commonly cited model of business model innovation is the direct-to-customer model that Dell introduced in selling its computers (Kumar 20 – 21). Such a strategy helped the entity to develop a strong supply chain model that enabled the entity to meet the needs of its customers by incorporating their feedback in the product development (Kumar 20 – 21). For a SME, such a model innovation could for instance involve loading its products with value-added activities that offer a premium value for the customer. For instance, SMEs offering products in their enterprises can offer customers home delivery services and website ordering services within a particular region. On the other hand, SMEs offering services as their core product can develop a tangible product (e.g. a DVD) that for instance offers the client a means to access additional services (e.g. training) that the SME did not provide during the their interactions. To reap such benefits of innovation, SMEs must however overcome various barriers to innovation.
Barriers to Innovation. Various barriers to innovation exist that could discourage SMEs from using innovation as a way of ensuring their survival during economic adversity. One of these barriers is the fear of the risk associated with innovation. When managers perceive innovation as an inherently risky undertaking with uncertain returns, they might fail to develop systems that act as incubators for innovation within the entity (Loewe and Dominiquini 24 – 26). Accordingly, such hesitance in implementing innovative ideas could result into the entity foregoing an idea that would have served as its source of competitive advantage during periods of economic adversity.
Another barrier to innovation is the lack of finances for implementing the ideas identified through the creativity process (Loewe and Dominiquini 24 – 26). Such inadequacy of financing could for instance result into abandonment of programs after being initiated thus resulting into loss of resources. To avoid such a scenario, the SMEs need to have a system for determining the application of scarce resources when faced with alternative options. For instance, the entity could allocate the resources to programs with the shortest implementation timelines, such that successes in such programs can be used to attract further financing from venture capitalists (Schwienbancher 760).
For SMEs that have achieved initial success in some of their programs, a barrier to innovation would be resistance to further changes to such programs. In this respect, the modes of thinking and working, which served as the forces behind the initial success, become core barriers to change – a phenomenon referred to as Icarus Paradox (Amason and Mooney 408 – 410). In such a case, the failure of such modes in periods of economic adversity could read to the acceptance of the need to change thus lead to implementation of new ways of doing business. For instance, entities having a favorable customer patronage even with poor service could be forced to enhance their service as customers search for a better value for their money during periods of economic adversity (Hampson and McGoldrick 1 – 8).
Cooperation and Strategic Alliances
Apart from innovation, SMEs can overcome the challenges posed by economic adversity through cooperation and forming strategic alliances. For instance, cooperation with entities that use similar inputs to form sourcing networks could better such firms bargaining power thus reducing the costs of their supplies (Papaoikonomou, Segarra and Li 113). By increasing their bargaining power, SMEs will avoid a case where suppliers increase their prices arbitrary thus rendering their business model unsustainable (Porter 4 – 5). Partnership with other SMEs could also be used to enhance the distribution capabilities of individual SMEs (Papaoikonomou, Segarra and Li 113). Such partnership, reduce the resource limitations of individual SMEs in establishing a strong distribution presence thus alleviating the effects of lack of access to external debt during periods of economic crises.
Another benefit of establishing avenues of cooperation with other SMEs would be in lobbying the government for concessions during periods of economic adversity (Papaoikonomou, Segarra and Li 113). For instance, a SMEs’ union could help members in lobbying for tax reliefs in exchange of a sustained employment level during periods of economic downturns. In this way, such SMEs would have tax savings that would enable them to continue offering their products at competitive prices while not having to result into retrenchment of the core staff that they have developed over their period of existence.
SMEs could also overcome the challenges presented by economic crises by forming strategic alliances with other entities thus allowing them to focus more on the business areas where they can perform to their best (Papaoikonomou, Segarra and Li 113). Accordingly, SMEs would be left with processes that they can support with the available resources while outsourcing the other processes to better suited entities. This would allow the SMEs to access quality inputs even when they have a limited capacity to produce such inputs in-house. For instance, a SME trading in tangible products could outsource delivery services to an entity that specializes in such services thus increasing the geographical region to which the entity can offer its delivery services.
Although academic crises present significant challenges to the success of the firm, such crises may also offer opportunities for new ventures and SMEs to grow. Economic crises for instance present challenges such as reducing access to finances, reducing the effect of marketing strategies and reducing a firm’s capability to build its resources to become its source of competitive advantage. Despite such challenges, economic crises present opportunities for innovation in marketing processes and in business models. Such for instance arises since the economic crisis spur entrepreneurs into evaluating alternative opportunities for cost savings thus developing cost-effective processes in the process. Additionally, the economic crises could prevent entrepreneurs from developing complacency thus ensuring they remain in search of innovative opportunities throughout the duration of the crisis. This would in turn help the entity to develop a sustainable competitive advantage thus ensuring its success. Apart from spurring innovation, economic crises could also drive the formation of strategic alliances that turn out into sources of long-term survival for the entity. Accordingly, launching a SME during a period of poor economic conditions need not be a futile activity; it could become a sound foundation to entrench an innovation culture in the entity and establish long-lasting beneficial alliances.
Amason, Allen C. and Ann C. Mooney. “The Icarus Paradox Revisited: How Strong Performance Sows the Seeds of Dysfunction in Future Strategic Decision-making.” Strategic Organization 6.4 (2008): 407-434. Web. 28th April 2012.
Barriers to Innovation: The Right Attitudes and Metrics. Strategic Direction 23. 4 (2007): 33 -45, Web. 28th April 2012.
Case, Karl E., Ray C. Fair and Sharon Oster. Principles of Microeconomics. 9th ed. Upper Saddle River, NJ: Prentice Hall, 2010. Print.
Cassar, Gavin. “The Financing of Business Start-ups.” Journal of Business Venturing 19.2 (2004): 261 – 283. Web. 28th April 2012.
Davila, Antonio, George Foster and Mehendra Gupta. “Venture Capital Financing and the Growth of Startup Firms.” Journal of Business Venturing 18.6 (2003): 689 – 789. Web. 28th April 2012.
European Commission. Economic Crisis in Europe: Causes, Consequences and Responses. Luxembourg: Office for Official Publications of the European Communities, 2009. Web. 28th April 2012.
Fisher, Tia. “ROI in Social Media: A Look at the Arguments.” Journal of Database Marketing & Customer Strategy Management 16 (2009): 189 – 195. Web. 28th April 2012.
Fortuin, Frances T. J. M. and S. W. F. (Onno) Omta. “Innovation Drivers and Barriers in Food Processing.” British Food Journal 111.8 (2009): 839-851. Web. 28th April 2012.
Gurteen, David. “Knowledge, Creativity and Innovation.” Journal of Knowledge Management 2.1 (1998): 5-13. Web. 28th April 2012.
Hampson, Daniel P. and Peter J. McGoldrick. “A Typology of Adaptive Shopping Patterns in Recession.” Journal of Business Research. Article in Press. (2010): 1 – 8. Web. 28th April 2012.
Hoffman, Donna L. and Marek Fodor. “Can You Measure The ROI of Your Social Media Marketing?” MIT Sloan Management Review 52.1 (2010): 41-49. Web. 28th April 2012.
Keyness, John Maynard. The General Theory of Employment, Interest and Money, Gutenberg of Australia eBook, 2003. Web. 28th April 2012.
Klapper, Leora and Inessa Love. “The Impact of the Financial Crisis on New Firm Registration.” Economic Letters 113.1 (2011): 1 – 4. Web. 28th April 2012.
Kumar, Sameer. “An Exploratory Analysis of Competing Supply Chains in the Personal Computer Industry.” Supply Chain Forum: An International Journal, 6.1 (2005): 16-31. Web. 28th April 2012.
Loewe, Pierre and Jennifer Dominiquini. “Overcoming the Barriers to Effective Innovation.” Strategy & Leadership 34.1 (2006): 24-31. Web. 28th April 2012.
McAdam, Rodney, Thomas McConvery and Gren Armstrong. “Barriers to Innovation within Small Firms in a Peripheral Location.” International Journal of Entrepreneurial Behaviour & Research 10.3 (2004): 206-221. Web. 28th April 2012.
Naidoo, Vikash. “Firm survival through a Crisis: The Influence of Market Orientation, Marketing Innovation and Business Strategy.” Industrial Marketing Management 39.8 (2010): 1311 – 1320. Web. 28th April 2012.
Papaoikonomou, Eleni, Pere Segarra and Xiaoni Li. “Entrepreneurship in the Context of Crisis: Identifying Barriers and Proposing Strategies.” Int. Adv. Econ. Res. 18 (2012): 111 – 119. Web. 28th April 2012.
Porter, Michael E. Competitive Advantage: Creating and Sustaining Superior Performance. New York, NY: The Free Press, 1985. Print
Schweinbacher, Armin. “A Theoretical Analysis of Optimal Financing Strategies for Different Types of Capital-constrained Entrepreneurs.” Journal of Business Venturing 22.6 (2007): 753 – 781. Web. 28th April 2012.
Ucaktürk, Ahmet, Mustafa Bekmezci and Tülay Ucaktürk. “Prevailing During the Periods of Economic Crisis and Recession through Business Model Innovation.” Procedia Social and Behavioral Sciences 24 (2011): 89 – 100. Web. 28th April 2012.