Chapter One
The Problem and Its Background
Introduction
SMEs, as being one of the main forces in economic growth & job creation have a special importance, not only in developed countries but also in developing and emerging economies (2000). SMEs in most countries have barriers to access to finance, difficulties in exploiting the technology, insufficient managerial capabilities, low productivity and regulatory burdens in their business environment. According to Cabbar (2000), because of the dynamic and productive characteristics of SMEs, they contribute to the growth of the country’s economy and also very effective in social life, as well. Some international researches and analyses have shown that SMEs need management skills, information access systems, technological base of production system to be upgraded, beside their financial needs to be met (2000).
With this regard, the development of SMEs has been recognised in Malaysia as an integral component in achieving sustainable economic growth. The Malaysian government has launched several initiatives to facilitate and promote expansion of the SMEs. These initiatives aimed to create the institutional and systematic conditions to support upgrading of firm level capabilities, diversification and creation of new firm. This is showing how much emphasis the Malaysian Government has put on the development of the SMEs in Malaysia. Despite the amount of efforts spent by the government, there has been very little study aimed at understanding the factors that have significant impact on SMEs performance in Malaysia and further ensure the survival and sustainability of these SMEs in the long run.
SMEs have been playing roles such as providing job opportunities, income distribution through business opportunities, rural development, increase investments and development of entrepreneurship (1997). At the same time, small firms with limited resources will be expected to perceive its business environment as being different from that of a large firm with more resources and it is also likely to face different environment pressures with regard to market competitiveness (2001). Some writers believe that the performance of SMEs is contributed by many factors such as internal and external to the SMEs themselves (1997;2002). However, there is no comprehensive study on factors that contribute to the development and performance of the SMEs, and in this case, directly relevant to the coatings industry. Researches related to factors contribute toward performance of SMEs are limited.
There is only small number of researches in developing countries (2000). In the last two decades, it seems that researches on SMEs focus on government role and policy in developing SMEs (2001). In year 2000, Hashim (2000) used strategic model approach to explain the factors contribute to the performance of SMEs. According to this model, there are three strategic factors which determine business performance; they are entrepreneurship orientation, organisation structure and external business environment. The integration of three factors mentioned here significantly influent business performance. Craig and King (1988) formulated a model to find out about SME performance. The model explains that financial performance of SMEs is influenced by management practice as internal factor and by market as external factor, both these variables which influent financial performance is also influenced by characteristic of manager as antecedent variable.
With this respect, this dissertation analyses the factors influencing the performance of Malaysian Small and Medium Enterprises (SMEs) in the Coating Industry. The study investigates the factors that constraint business performance of SMEs. Further, the readiness of these SMEs, and issues surrounding business competition, innovation and processes are discussed. To determine the factors influencing the performance of these SMEs, surveys and other research processes are made and evaluated. This chapter starts with the background of the study, a brief review the nature of problems, aims and objectives, scope and limitation of the study, and the significance of the study.
Background of the Study
In Coatings Industry particularly in Malaysian Small and Medium Enterprises, there are several factors that significantly affect their performance. This part of the paper illustrates some factors related to the study. Moreover, the presentation covers the idea of the researcher regarding performance of Malaysian Small and Medium Enterprises.
Entrepreneurship orientation
Entrepreneurship orientation refers more toward attitude. Previous researches show that there are some outstanding attitudes of entrepreneurs. Some of these attitudes are, risk taker, proactive, flexible and innovative (1997;2000;2001).
Strategy
(1980) said that strategy is an action to face environment by empowering coordinated resources in order to reach the goal. Generally, there are three generic strategies at company level which can be used in competition. They are cost leadership, differentiation and focus (1980).
Structure
There are two general organisation structure, mechanic and organic (1961). In mechanic structure, relation pattern is not flexible and formal, there is clear division of work and the decision making is centralised. In organic structure, the relationship pattern is fairly informal, the decision making involve subordinates and relative flexible with regulations. Mechanic structure is suitable for stable environment while organic structure is suitable for dynamic environment (1986).
Business environment
Environment variables consist of psychic and social factors which directly considered in decision making of organisation (1972). In other word, uncertainty is a perception of someone’s inability to predict something appropriately because he or she is unable to differentiate between relevant and irrelevant data (1987). Environment condition directly influents company ability to reach the goal, external environmental change such as government policy, public taste, technology and socio-cultural bring effect toward company performance (2000). (2000) concluded that base on observation in some countries, external condition, especially government policy, significantly influences the performance of SMEs.
As a Business Development Manager in the chemicals industry, this study definitely presents a high level of interest to the author. SMEs contribute significantly to the growth of the chemicals market in South East Asia (e.g. Malaysia). The understanding of the important factors influencing the performance of SMEs will help toward better planning to cater for the needs of the SMEs.
Aims and Objectives
Base on the information above, this study aims to find out on the influence of entrepreneurship of the owners of SMEs, their strategy, company structure and the business environment conditions to the performance of Malaysian SMEs in the coatings industry. This research is trying to answer three questions:
1. Identify which of the factors (entrepreneur orientation, strategy, structure and business environment) are perceived to shape SME performance in Malaysia's coating industry.
2. Evaluate the relative significance of each factor in shaping SME performance in Malaysia's coating industry.
3. Examine the relationship between the relative factors and organisational performance in Malaysia's coating industry.
Research Questions
From the given objectives, this dissertation attempts to answer the following queries:
1. What are the factors that significantly affect the performance of Malaysian Small and Medium Enterprises in Coatings Industry?
2. What are the levels of relationships of these factors in accordance to the performance of Malaysian Small and Medium Enterprises in Coatings Industry?
3. What are effects of these factors in regards to the performance of Malaysian Small and Medium Enterprises in Coatings Industry?
Scope and Limitation
This dissertation only covers the factors affecting the performance of Malaysian Small and Medium Enterprises in Coating Industry. The outcome of this study is limited only to the data gathered from books and journals about business development and from the primary data gathered from the result of the questionnaire survey and interview that will be conducted by the researcher.
Moreover, there are inherent problems in the data due to the small time frame to conduct the study. Also, the survey process itself could have hindered the collection of results, particularly with firms that have previously been so inundated with requests for information from other researchers that they have adopted a policy not to answer questions related to the company development. Although inconclusive, the results of this survey should be viewed as indicative of the status of the SME’s at the time of the survey.
Similarly, the sources from which SME’s are gathering information regarding business performance need to be identified and measured in terms of their accuracy and effectiveness. Additional surveys of SME’s across other industry sectors also would be valuable.
Chapter Two
Review of Related Literature
The choice of literature for this study is limited only to those that have a vital contribution about the factors influencing the performance of small and medium industries in Malaysia. This chapter reviews articles from books and journals on SMEs in Coatings Industry. Specifically, this chapter discusses the nature of the SMEs, their performance and some issues about the topic.
Malaysian SMEs in Coatings Industry
According to European definition of SME’s, it was believed that some of the SME’s in United Kingdom, implies ample recognition as it is appropriate in determining the weight as well as size of SME employees as it is common to measure size according to numbers of employees respectively. Moreover, just last February of 1996, the European Commission adopted a communication setting out a single definition of SMEs as it applies as the process of communication explains that existing SME definition that could be: Quantitative which is based upon criteria such as employment, asset size and varies through the industry and the nation but the Qualitative for example, the ownership as well as organising the flow of business. Thus, small firms were independent and not being owned and not being openly restricted by large organisations as there are other forms of such qualitative approach in terms of describing small firms that tries to capture SME images, viewpoint and behaviour facets like for instance, possible issues and challenges facing the managers of the SME’s that will be able to differentiate small business sectors from large companies.
As stated, Small and Medium-sized Enterprises or SMEs are significant contributors to economic wealth. Unfortunately, the needs of these organisations in terms of operations and strategies have been greatly overlooked. Most SMEs belong in the manufacturers and/or service providers sectors. The definition of what exactly comprises SMEs varies from one country to another. SMEs are integral in job production.
In Malaysia, SMEs, as being one of the main forces in economic growth and job creation have a special importance, not only in developed countries but also in developing and emerging economies (2000). According to (2000), there are some statistics that shows SMEs with more than 95% of the total employment, in most countries are the main source of newly created jobs, especially in advanced technology sectors and also, function as the engine of economic growth and performance.
SMEs in most countries have barriers to access to finance, difficulties in exploiting the technology, insufficient managerial capabilities, low productivity and regulatory burdens in their business environment. According to (2000), because of the dynamic and productive characteristics of SMEs, they contribute to the growth of the Malaysian economy and also very effective in social life, as well. Some international researches & analyses have shown that SMEs need management skills, information access systems, technological base of production system to be upgraded, beside their financial needs to be met (2000).
Thus, in describing the productivity comparison among SME’s and large firms in the Malaysia, it is indicated that the level of production presents the findings from a series of studies that use large sets of data to evaluate the sources of productivity growth at the industry level. In addition, it discusses these findings to link them with theories about how and why firms perform in a different way. There have been increases in Malaysia on the past years but with limit. Furthermore, incomes of Malaysians depend on productivity and adhere amid SME firms within same industry as smaller firms can be found covering behind of its productivity in the UK but it does not mean that small and medium enterprises do not contribute to the Malaysian’s productivity growth. Henceforth, SMEs may possibly have few capital assets as compared to larger firms as the SMEs pay subordinate earnings than larger firms and reflects that, smaller firms may be late in line for well accomplished work and the SMEs may discover process towards the low end of productivity scale.
SMEs’ Environmental Forces
It has been a common belief that the limited scale of SME operations means they have a relatively low impact on their surroundings and have a limited power to influence environmental forces in their favour. This will include both their suppliers and customers. However, their weakness in these areas can be countered by their ability to react quickly to environmental change. Fundamental shifts in social values, consumer tastes, technological developments, managerial techniques, financial markets and so on, have brought about more complex and dynamic commercial environments. For the SME, their less bureaucratic structural arrangements, together with concentration in the power of the owner, allows growth-orientated small ventures to capitalise on opportunities that emerge from such environmental changes.
Small organisations usually thrive in a changing environment, although it must not be unduly complex in terms of the number of variables involved or the speed of their change (1979). It is further suggested by (1982) that the SME's capability in response to change is due in part to the fact that senior managers or owners formulate strategies that are closely connected with the work of the organisation and with other workers and managers. Control and tactical decision making is not separated and distanced from ownership or senior management. In other words, such firms tend to be task continuous; there is a close link between management, planning and the work activity. Larger firms on the other hand are task discontinuous; there tends to be a separate and discrete planning and management structure (1976).
SMEs’ Managers
Given the limits imposed by small scale operations, evidence suggests that growth-orientated managers and owners pursue opportunities vigorously, flexibly and with innovation. They will pursue a number of opportunities and often refuse to be constrained by the assets currently under their control. They make tentative investigations of promising projects and frequently assume that the techniques and technologies not currently available can be developed in the near future. In this way riskier opportunities are explored, despite not immediately having sufficient resources to underwrite their opportunities. Managers and owners are prepared to pursue, evaluate and resource new opportunities in the full confidence of their ability to make things happen ( 1991).
In addition, in turbulent conditions the variation in demand for final products and services will be reflected in intermittent demands by the SME for resources - the alternative being to hold high levels of inventory. Thus, difficulties in procuring resources will result from (a) changeable demand and (b) lack of power or leverage. SMEs tend to avoid permanent or binding linkages with suppliers and other network contacts. Their flexibility relies upon the transient nature of their relationships with other organisations using short-term, entrepreneurial contracts an ability to utilise resources carried by others (1991).
In seeking new opportunities and being nimble and fast they need instrumental relationships; in managing their current business they need strong, more permanent relationships. The two are to a degree exclusive. One solution seems to be the development of new ventures alongside existing ones. The flexibility of the SME often allows this type of project management operation, with resources being switched between current and new activities (1998). Small and medium-sized firms also suffer a power imbalance when dealing with larger suppliers and customers, with both sides regarding the relationship as somewhat temporary. This arrangement certainly offers greater degrees of flexibility, but is also highly speculative and makes operations planning very problematical.
Another fundamental element in realising the requisite levels of flexibility lies in the reduction of uncertainty. Traditional methods of operation rely heavily upon sales forecasting systems which drive all activity. This leads to large amounts of uncertainty and consequent holdings of buffer stocks in order to combat unknown demand. Fast and flexible response, however, reduces forecast reliance and removes uncertainty by applying different operational practices to individual product groups, distribution channels, retailers, etc. Hence, true demand patterns become evident and easier to satisfy.
Management in SMEs
Specialisation also requires a degree of stability so that the same task can be performed repeatedly and skills can be perfected. However, the strength of the SME is in seeking new opportunities, as such specialist skills can quickly become redundant and the more flexible and adaptive generalist becomes more valuable. The SME resides in a changeable environment, has a small output and is a flexible and responsive generalist organisation. These firms are ideally suited to providing a variety of customised product and service combinations in response to constantly changing customer needs (Lowson, 1998). Small firms have less sophisticated, flexible and organic structures. They tend to adopt what (1984) describe as ‘flexible specialisation’.
In general, the volume of the products or services produced tended to dictate the size of operational scale. Small-scale operations tended to be less specialised, had fewer levels of management authority and a small span of control for supervisors and managers. This type of firm tended to utilise flexible teams with a range of roles, and there was no large gap in status and authority between those doing the work and those managing or supervising. The SMEs functioned around the skills and expertise of the employees, with harmonious relations and high levels of verbal communication being used to coordinate activity far less of the ‘brainwork’ of operations had been separated out and delegated to staff experts. Workers were given more autonomy and responsibility for organising work procedures, processes and systems.
SMEs although greatly varying in size, growth rates and activities, due to its inherent uniqueness (as they are directly reflective of the ideas and personalities of the owners and not through managers) are all united in their goal towards profitability and efficient asset management. Small to Medium Firms necessitate mastery in accounting in order to manage and control its assets. SMEs don't pay much attention to Fixed Asset Management though due to the foreseen added expenditures of Research and Development among other backdoor office functions. SMEs are limited in funds in nature due to their small size and as such they are compelled to employ traditional spreadsheets than software that will cost them more.
Chapter Summary
This chapter meanwhile focused on the related literatures and studies done that have almost the same theme as this research, or else studies that discussed factors that have affected this study. Although there have been several studies that focused on the performance of SMEs, the chapter focused primarily on the different aspects and elements that are included in this study. Basically, this part contains information regarding SMEs in Malaysia, which may include a short history and its direction for future use. In addition the discussion regarding management regarding business techniques and strategies that SMEs and accounting firms use was facilitated. Thus, these discussions will help the readers in knowing how the findings of the literatures have contributed to the current situation of the method.
Chapter Three
Methodology
This chapter illustrates the methods used for this research. This details the steps and procedures made in order to accomplish the study. The said steps are then includes the collection procedure of the data that is required in the delivery and completion of the research.
This chapter justifies the means in which the study is performed. It also emphasised its credibility by making mention of widely accepted scientific methodologies. Through the methods mentioned in this chapter, a plausible conclusion may be obtained.
Research Model
From previous discussion, this research follows the following research model.
The model above shows that the performance of a SME is a function of internal and external factors. Success in improving performance depends on some factors such as the entrepreneurship orientation, the strategy, and structure and the business environment.
For primary data collection from the coatings industry, two common approaches are incorporated – a structured quantitative questionnaire is framed, qualitative interviews are conducted with some of the Senior Managers in the coatings industry, and last but not least documents search to supplement the information obtained via questionnaire and interviews.
Samples
About 100 companies in the coatings industry in Malaysia was contacted with questionnaires for collecting responses. All these companies are mainly base in the major cities of Peninsular Malaysia, namely Penang, Kuala Lumpur and Johor Bahru.
Measurement
Instead of using a five-response scale, the respondents will grade each statement in the survey-questionnaire using a Likert scale with a seven-response scale wherein respondents would be given seven response choices.
The equivalent weights for the answers will be:
Value Interpretation
7 - Strongly Agree
6 - Agree
5 - Slightly Agree
4 - Uncertain
3 - Slightly Disagree
2 - Disagree
1 - Strongly Disagree
The scores need to be weighted as such in order to be informed on the degree of response given by the respondents. Thus, a more credible and specified interpretation may be given.
Entrepreneurship Orientation
Measurement developed by (1982) is used with some modifications and adaptations. The entrepreneurship orientation covers attitude toward risk, innovativeness, flexibility and proactive ness. There are sixteen items measured using Likert scale from 1 to 7 (1 highly agree to 7 highly disagree).
Strategy
Measurement for strategy is adapted and modified from (1984) and (1989). There are 12 items measured base on priority of generic strategy by the SMEs using Likert scle from 1 to 7 (1 highly prioritised to 7 unprioritised).
Organisation structure
This variable is measured by using questionnaire developed by Miller and Friesen (1982) with modification and adaptation accordingly. 15 items measured using Likert scale from 1 to 7 (1 highly agree to 7 highly disagree).
Environmental uncertainty
Environmental uncertainty is measured by using questionnaire developed by (1978) with modification and adaptation. The measurement uses some questions related to environment dimension such as marketing condition, government finance policy, labor and competition. Again, Likert scale from 1 to 7 is used (1 very predictable to 7 very unpredictable). The objective is to acquire some values which describe the perception of the SME owners toward environment uncertainty, the higher the value, the more uncertain it is.
Statistical Treatment
The statistical treatment used in processing the data gathered is as follows:1. Percentage. Percentage is used as descriptive statistics, which is relating a part to the whole. This is used in describing some personal characteristics of the respondents of the study such as age, gender and others. The formula in computing percentage is as follows:
n
% = -------- x 100 ;
N
n – number of responses
N – total number of respondents
2. Weighted Mean. This is commonly used to find the average of the response; to determine the level of response of the respondents on the different statement prepared by the researcher.
Where: f – weight given to each response
x – number of responses
xt – total number of responses
Basically, the data acquired from the survey was analysed using Pearson Correlation and Regression Analysis to find out the significant impacts and relationships.
Interviews
About 10 interviews will be conducted at the same time with some of the industry veterans. The interviews will focus on how these veterans perceive the influence of all the factors mentioned above on overall performance for small and medium enterprises (SMEs) in Malaysian coatings industry. It will be interesting to find out how difference the perceptions can be because most of the SMEs are family own. Thus, it is important to mention that the findings from these interviews will help in the understanding of, especially the influence of organisation structure on the performance of the SMEs.
Performance
Financial performance is measured by using average return on equity (ROE) and sales growth in the last five years. The questionnaire used was developed by Sulaiman (1989) with modification and adaptation.
Chapter Four
Presentation, Interpretation and Analysis of Data
Chapter Five
Summary, Conclusions and Recommendations
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