Small and Medium Enterprises in Thailand - Essay Example

What is below the surface and what are the underlying success factors for small and medium enterprises in Thailand?

Paper 2: CORE CURRICULUM

Abstract

SMEs enjoy a number of advantages over LEs such as adaptability and community relations although they also have to face a number of difficulties such as access to finance. The main quantitative and qualitative findings of an important study by Vichitdhanabadee et al (2009) are outlined and good management practices highlighted. For example, it is shown that manager and SME characteristics are significantly related to business performance. Another study although not conducted for Thai SMEs points out some underlying success factors that could equally be applied. These are categorized under characteristics of the entrepreneur, SMEs and other contextual variables. A case study emphasizes the need for commitment to quality and customer satisfaction. Good leadership characteristics include a clear vision, working closely with employees and giving importance to the customer. These management characteristics are usually simpler for SMEs but their performance is more greatly affected by the educational background and past experience of the SME owner. The proposed study could help identify particular management skills that can be improved. It is shown that supporting SMEs is important because of the many desirable effects on the development of the economy.

Introduction

This paper seeks to examine and critically analyze the seminal works on leadership and management related to the topic area ‘What is below the surface and underlying success factors for small and medium enterprises in Thailand?’ The contributions, and shortcomings of academic and practitioner research surrounding this topic will be addressed. This will be followed by highlighting particular contributions that this research will address and thus why this research is significant. It considers why this research is being done and what has been found in the literature that leads us to believe that the research is worth pursuing. This will include a discussion of generalizability of the findings to related research contexts and questions.

Possible advantages of SMEs are listed before examining some studies in the field of SME management and leadership highlighting some characteristics and success factors. Underlying success factors related to management of SMEs are then examined in detail. A case study focuses on more critical success factors based on the experience of a particular SME and its consequences for management. With this knowledge in mind, the rationale for the proposed study and the significance of the same are outlined to support the case for conducting a further study in the field.

Advantages of SMEs

Advantages of SMEs over larger enterprises:

• Independent management i.e. owned by their management
• Closer relationships with staff and customers
• They are more adaptable for catering to changes in the business environment
• Low capital requirements and investment
• Usually greater use of local skills and resources
• Can provide uniquely tailored products instead of mass production
• Have closer connection with the local community and environment

The community benefits arise through a range of activities such as manufacturing, construction, transportation, supplies, financing, etc. It is therefore expected that governments are keen to support SMEs because they in turn promote the economic growth of the country (Cheungsuvadee, 2006).

Studies on SME Management and Leadership

Vichitdhanabadee et al (2009) studied performance management practices among manufacturing, trading and service sector SMEs in the Chang Mai province of Thailand. Survey data was gathered in combination with a select number of interviews in this triangulated study. It was found that “SME owners/managers appeared to understand the importance of business performance management in day-to-day business operations but due to time constraints were often not able to give adequate attention to performance management issues”. The survey results were in conformity with those of other studies showing that SME and owner/manager characteristics tend to influence business performance and its management. Business performance was measured in terms of net profit, total sales, turnover of inventories and number of customers. The main quantitative and qualitative findings are listed below. It should be pointed out that as the data was only collected from a particular province, this is a major limitation of the study and this affects the ability of the findings to be generalized. On the other hand, reliability tests were performed on the data so this is a positive aspect of the study. A longitudinal examination from a cross-section of SMEs in different locations besides different types and sizes is really needed to obtain significant findings. Nonetheless, this is still a very useful study in the field.

Main quantitative findings:

• Of the 234 respondents (response rate: 78%), over a half were in the manufacturing sector, less than a third in the service sector, and over an eighth in the trading sector.
• Most business was conducted locally (55%) whereas 28% was with export customers and 17 with tourists.
• Nearly three-quarters of the SMEs were founded by the present owner.
• Most of the businesses (72%) employed less than 30 people while over a half employed less than 16.
• Fewer than three-quarters had assets less than one million Australian dollars (Nb. the choice of currency owes to the fact that this was an Australian study of Thai SMEs).

Main qualitative findings:

• Manager and SME characteristics such as educational background and work experience, number of employees, value of capital, are significantly related to business performance.
• Larger SMEs tend to have higher business performance likely due to greater number of workers, larger budgets, greater use of technologies and better management.
• Greater business performance is also associated with greater knowledge and work experience, and higher education of the management. These managers are better and more quickly able to adapt to changes in the business environment. By greater performance is meant achievement of goals and meeting of customer requirements with relatively greater efficiency and effectiveness than competitors (Chen, 1999).
• The majority of SME funding derives from personal savings and family investment rather than from external sources which are difficult to access.
• Most SMEs lack financial and accounting information and have financial statements prepared by external accountants.
• Most SMEs seldom focus on management planning as in larger enterprises. Instead, they are found to plan usually in ‘fire-fighting mode’ (Garengo et al., 2005) and in a highly personalized way, and only for the short term.
• A noticeable improvement in business performance since 2007 is attributed to increased government and international support that commenced with the launch of ‘The Horticultural World’ international project (Vichitdhanabadee et al., 2009).

Performance management involves processes that are consistently repeated so that the organization can meet its goals effectively and efficiently (McNamara, 2007). Gary (2007) defines it as a process in which plans are put into operation and lead to results. If individual, team and organizational goals are aligned, and information and resources are also aligned, performance is enhanced. The issue of satisfactorily measuring performance was considered by Dalrymple (2004). He used the International Business Profile Benchmarking to help identify the strengths and weaknesses of individual SMEs. Although this is an instrument developed in the UK, it has proven useful to diagnose European SMEs. Some of these benchmarks could be used and others modified to use for Asian SMEs.

Thus, good management and leadership are at the heart of successful SME operation as with any size of organization. Performance management in particular, is also important for SMEs because it allows information to be gathered that can be used to aid decision-making and directing the business, enables progress to be evaluated, and organizational strengths and weaknesses to be identified (Ali, 2003). As SMEs are owned by the manager with full responsibility, management issues are more acute in SMEs than in larger organizations with several levels of management and stakeholders. Kotey (2005) noted that management practices in SMEs tend to be “informal, unstructured and seldom focus on strategic planning, procedures and policies”. However, it is usually sufficient for SMEs to implement a simple system of management (Phusavat, 2007) as they usually have limited finance and other resources.

One of the most important concepts in the field of management and international business literature is that of quality management (QM). Chileshe (2007) showed that QM can be applied to areas such as customer, supplier, HRM and process orientation, and that these are interrelated and support one another. Other seminal works on SMEs include Madsen & Servais (1997), which examined the rise of global SMEs, Tiessen et al. (2001), which examined the new challenges posed by globalization and e-commerce, and Li & Tan (2004), which examined the business growth models of SMEs. Other seminal works in the field of international business not specifically concerned with SMEs were McDougall’s (1989) article exploring differences between domestic and international entrepreneurship (in Acs et al., 2003). The Li & Tan (2004) study recognized the failure of SMEs in transforming into larger enterprises. It used three cases of companies that successfully emerged as multinationals, and based on the insight gathered, developed a framework for business growth strategies and discussed its implications for SMEs.

Underlying Success Factors

The Vichitdhanabadee et al. (2009) study mentioned above highlights a number of areas that need attention and support, but it also points out some positive factors for SMEs in Thailand that lead to success for the SME management and consequently also for the SME. These are contained in the diagram (fig.1) below, which although taken from a study focusing on SMEs in Indonesia (Indarti & Langenberg, 2004), is useful in the context of Thailand as well. This lists underlying success factors generally applicable to SMEs under three categories: characteristics of the entrepreneur, characteristics of SMEs, and contextual variables.

Figure 1: Business success factors for SMEs

Source: Indarti & Langenberg, 2004

The aforementioned study (Indarti & Langenberg, 2004) examined the success factors among SMEs in Indonesia through a survey of 100 SMEs. Some of these points could equally apply to Thai SMEs as well, and it should be pointed out that both countries are in the same geographical region and both are developing countries and share some socio-cultural and economic characteristics. Based on this survey, it was revealed, “marketing, technology and capital access affect the business success in a positive way, while legality does so in a negative direction”. To be successful therefore, the authors suggested:

“The owners of SMEs should pay more attention to improve marketing strategy, to advance technology, and to get capital access. Other interested parties with development of SMEs such as government agencies, universities, and business service development (BDS) should also be prepared for giving assistances in those fields… Simplification of bureaucracy and deregulation of legal aspects are also recommended to foster the development of the SMEs…”

In the case of Thailand, the country already enjoys substantial support from the government and other interested agencies including a bank specifically for SMEs. NGOs are also active in supporting Thai SMEs and this is surveyed below. Of the first three points mentioned in the above quote, marketing strategy and the adoption of technology are two things that can be handled at management level and which are therefore to be highlighted in this focus on management practices. Apart from this, we could emphasize the importance of education and experience from the list of entrepreneurial characteristics.

One NGO that supports SMEs worldwide, directly and indirectly, is the Global Reporting Initiative (GRI). The GRI focuses on providing specialized support and resources for supply chains through first identifying the needs of SMEs. They assist in preparing sustainability reports. As an example, the Sustainability Report of Art on Stitch Co., Ltd. (2007) prepared for a medium sized Thai business in the knitwear industry mentions the importance of creating “a harmonized working environment” and corporate social responsibility. Other success factors mentioned include production planning and quality control, leadership training, increasing revenue “by offering more value added products to our customers”, and its participation in the Thai government sponsored Productivity Improvement Program.

Another NGO that specifically works to support SMEs in Asia is KIAsia (Kenan Institute of Asia). It believes that “providing low-income individuals with the skills necessary to succeed as entrepreneurs is one of the best proven means of raising incomes and bringing people out of poverty” and therefore assists SMEs to be successful. It arranges training and project management programs for example, in order to improve their competitiveness. Its latest engagement related to Thailand is the Thailand-EU SME FTA Enhancement Program in which it is assessing the ASEAN-EU free trade agreement’s impact on Thailand (KIAsia, 2009).

On the problem of SMEs gaining access to sources of finance, venture (or private equity) capital is one possibility for long-term capital (Atrill, 2006, p.277). Venture capitalists are often willing to lend to SMEs despite their perceived risk because of the potential high returns. However, it remains to be seen what the scope is for venture capital in Thailand. The businesses would typically need to demonstrate solid growth potential and the ability to realize it. Other sources of safer finance as opposed to short-term loan sharks are government loan schemes

The ability to innovate is important for every company especially in today’s highly competitive and fast-paced world. Smaller enterprises however, can take advantage of innovation to get an edge over larger enterprises because they are inherently more flexible and able to implement changes much quicker (Lynch, 2009, p. 186). This would require strong leadership with good imagination and ideas, and knowledge of latest information, technologies and market opportunities that can be exploited.

As for coping with globalization, SMEs have a number of options even if they are faced with limited finances and other resources. These include forming strategic alliances, franchising, licensing to firms in other countries, and establishing joint ventures with other SMEs (Worthington & Britton, 2009, p.48).

Case Study: Critical Success Factors of SMEs

This case study is focused on an SME that was awarded two consecutive awards in 1998-1999 viz. ABC Furniture Company Limited. The company was studied by Apibunyopas and Songmuang (2007) for an international conference on business and information. This company is committed to quality and customer satisfaction as enshrined in its vision. The study identified three areas of company focus and five critical success factors listed in the table below. The customer relationship is so strong that the study points out there is trust between the company and its customers.

Table 3: Areas of focus and critical success factors of ABC Company Limited

Areas of focus

Critical success factors

• Knowledge of customer and market
• Building customer relationship
• Building customer satisfaction

• Leadership
• Cooperation between marketing and production
• Modern production technology
• Employee training program
• Employee morale and incentive program

As far as leadership and management is concerned including management practices, the critical success factors identified all revolve around these. Leadership itself is the topmost critical factor, ensuring cooperation between marketing and production is the responsibility of the management as is adopting modern production technology. In addition, employee morale and training is seen as necessary and again the management can give the right priority to these considerations for the sake of organizational success. In regard to the company in focus, the successful leadership at the company is described in the following words:

“Managing director of the company has clear vision and possesses good leadership. He works with his employee and shows them how serious he is with regards to service to the customers. He will repeatedly act and stress during the meeting to let everyone know that the customer is important.”

Rationale of the Study

The brief literature review showed that management characteristics in SMEs are usually simpler as compared to larger enterprises because there are limited personnel, finances and resources. In addition, they tend to have a more centralized structure because the owner is usually a single manager or a partnership. It was also shown above that performance in SMEs is greatly affected by characteristics of the manager and SME. For example, Garengo & Bernardi (2007) identified such characteristics as capital value and size for the SME, and education and past experience of the manager. To this we could add SME location, technology use, knowledge of owner and access to information, contacts and resources. Indeed, the success of SMEs is almost entirely dependent on the manager and for this reason; a focus on the manager and management practices in SMEs is essential in order to understand the underlying success factors of the SMEs. Moreover, the large proportion and significance of SMEs in Thailand makes this country an ideal location for studying SMEs. Furthermore, the study has the potential for improving the foundations of SMEs through identifying management skills that can be improved, which would also indirectly impact upon Thailand’s economic development.

Significance of the Study

That this study is important is also closely related to the consideration of whether or not it is necessary to support SMEs. This was the subject of a study by Huang (2003), in particular whether there is “an enhancement of equity at the cost of efficiency” and the advantages of SMEs compared with larger enterprises (LEs). “SMEs were found to possess many desirable characteristics, including the high usage of labor, the economic use of capital, and the high relation towards more equitable distribution of income and rural development” (Huang, 2003). On the other hand, SMEs have relatively lower productivity than LEs in many industries. This suggests that there could be a risk of reduction in efficiency by promoting SMEs. Consequently, the study recommends “attention should be placed on balancing policies between industrial sizes and implementing more suitable policies and support for potential SMEs that enhance growth in Thailand’s industrial sector” (ibid).

In fact, SMEs in all economies are important because they are a major driver of business and trade and therefore contribute towards the development of a country’s economy. The situation in Thailand though is that although the number of SMEs is a significant proportion of all enterprises, they are also faced with numerous problems such as lack of business knowledge, difficulty of access to funding, and inability to utilize efficient managerial practices as found in LEs. The findings of this proposed study could be a source of valuable information for SME managers on good business practices and available sources of funding. By knowing more about the success factors, SMEs can emulate some of these as appropriate, or otherwise modify them to their advantage or at least seek the kind of support they really need.

Conclusions

The study by Vichitdhanabadee et al. (2009) provided good information on management practices conducive to making SMEs succeed while highlighting typical problems that they also have to face. Although most SMEs cater to local markets, a significant number are shown to be involved in exports and catering to tourists. The importance of knowledge, education and experience of the manager cannot be understated because the manager is clearly at the centre of the organization and occupies are far more pivotal role than in larger enterprises. Equally unsurprising was the finding that SMEs have problems with access to external financing and managers have to rely largely on personal savings. This is most likely because SMEs are perceived as a greater risk than larger established enterprises due to poor record keeping of accounting information that makes financial institutions unwilling to lend to them (Sarapaivanich, 2003). It is true that the first few years are often turbulent for a SME, but it is challenging for the owner to steer the enterprise towards success, and in doing so, s(he) has the privilege of being independent and at the helm of his/her own business affairs. The critical success factors pointed out by the case study are also predictable in that customer relations and satisfaction are of central importance, the need for employee training and so on. The proposed study has the potential to further point out desirable management and leadership characteristics in particular.