Strategy and Small Firm Performance

04 februari 2003

In this report, the relationship between strategy and firm performance of SMEs is studied.
There are different ways to look at strategy and the position strategy takes in an organisation and the management process. For instance, strategy can be studied from a process perspective. This perspective investigates the process of strategy making in an organisation. Questions such as 'Is strategy seen as a constant process or an ad hoc activity?' and 'Does the organisation make a formal plan or is strategy more an implicit way of doing business?' are dealt with in this perspective.

Four distinct groups of companies

Another important perspective is the content perspective. Based on the activities a company does, the company is said to pursue a certain strategy. The Miles and Snow typology and the generic strategies of Porter are two dominant typologies in this perspective. In the Miles and Snow typologies four distinct groups of companies are identified: prospectors, analysers, defenders and reactors. In the Porter typology three generic strategies are identified, cost leadership, differentiation strategy and focus strategy. If a company does not pursue one of these strategies, it is said that the company is 'stuck-in-the-middle'.
In general, strategy is claimed to be positively related with the performance of a com-pany. However, empirical studies show mixed results on this claim. Furthermore, this claim is mostly based on a sample with large companies. In this study, we focus on SMEs and the way they deal with strategy and the effect of strategy on firm performance. The research questions are:

  • Can different strategic groups of SMEs be identified?
  • To what extent does the selected strategy influence the firm performance of SMEs?

In this report, (empirical) studies on strategy of SMEs are reviewed and presented. For the Miles and Snow typology the results indicate that prospectors, defenders and analysers outperform reactors. Sometimes additional indicators are taken into account such as the pro-activeness of the management or environmental conditions.
For the Porter typology the results are more mixed for SMEs. First of all, the three generic strategies are further developed. Especially differentiation is further divided into smaller categories such as quality differentiation, marketing differentiation, etc. Second, several studies indicate that there is a positive relationship between strategy and performance, whereas other studies indicate that there is no relationship. Third, also here extra indicators are introduced such as the environment and the fit between the strategy and the available resources to explain the strategy-performance relationship.

In this study, the Porter typology of the content perspective is combined with the process perspective on strategy. To identify if there are different strategic groups and the effect of strategy on firm performance, data is used from the 'EIM SME panel'.

Five distinct strategies

The analysis shows that five distinct strategies can be identified, cost leadership and four distinct differentiation strategies (innovation, marketing, service and process). Using cluster analysis, four different groups of companies are identified: service differentiators, innovation and marketing differentiator, process differentiators and stuck-in-the-middle. The groups differ from each other on the variables that are related to the process perspective of strategy. Process differentiators and innovation and marketing differentiators are relatively close to each other. They are relatively large companies and deal with strategy more professional. They also perform better (although this effect disappears if size is taken into account). Service differentiators and stuck-in-the-middle companies are relatively small and deal with strategy more on an ad hoc basis. This results in lower performance (if size is taken into account, this effect disappears). To a certain extent the findings confirm the claim of Porter that companies with a distinct strategy (service differentiators to a lesser extent) outperform 'stuck-in-the-middle' companies.

Regression analysis

Based on a regression analysis, it is studied to what extent the selected strategy influences firm performance of SMEs. The performance of three years is measured by means of the number of employees, total sales and profit. Furthermore, performance is measured by growth in the afore-mentioned variables and a perceptual measure of performance compared to competitors.
The results of the regression show that the selected strategy does not influence performance. The number of employees is only influenced by process variables such as a written down strategy, plan of growth, export, co-operation with other firms, the influence of family members on strategy and the influence of the external environment, this last variable with a negative sign. Sales are influenced by a plan of growth, export and the number of employees. Profit and growth (number of employees, sales and profit) are not influenced by the strategy variables. The perceptual measure of performance is positively influenced by a marketing differentiation and a process differentiation strategy.

Overall, the conclusion is that there are different strategic groups within the group of SMEs. However, the selected strategy does not influence the performance of SMEs.

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Strategy and small firm performance

03 februari 2003

The objective of this study is to contribute to the debate on the relationship between strategy and firm performance, especially for SMEs. The research questions are: Can different strategic groups of SMEs be identified and to what extent does the selected strategy influence the firm performance of SMEs?
For the empirical analysis, data from the SME panel of EIM is used. The analysis shows that four distinct groups of companies can be identified: service differentiators, stuck-in-the-middle companies, innovation and marketing differentiators and process differentiators. Companies in the first two groups are relatively small and are less active with strategic issues like planning etc. Companies in the last two groups are relatively large and deal with strategy in a more professional way (written-down strategy, regular updates et cetera). If controlled for size, there are no significant differences in terms of turnover and profit.
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Auteur(s): dr. R.G.M. Kemp, drs. P. Gibcus


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