1

A Strategic Linkage Model for SME Competitiveness

through Lean: insights from a case study

Erdogan Gulyaz (e.gulyaz@nyenrode.nl)

Center for Marketing & SCM, Nyenrode Business Universiteit, The Netherlands

Jack A.A. van der Veen

Center for Marketing & SCM, Nyenrode Business Universiteit, The Netherlands

Venu Venugopal

Center for Marketing & SCM, Nyenrode Business Universiteit, The Netherlands

Sam Solaimani

Center for Marketing & SCM, Nyenrode Business Universiteit, The Netherlands

Abstract Resource-constrained SMEs face mounting challenges to achieve sustained performance

in today’s highly competitive environment. To remain competitive, many SMEs show

interests in adopting Lean. Unfortunately, the majority of firms pursuing competitiveness

through Lean failed to extract the expected value due to a lack of strategic approach. The

three case studies on SMEs presented in this paper confirm this observation. Hence, there

is a need for creating general awareness among SME Managers on the strategic role of

Lean at its implementation. This paper develops a strategic management tool, the SME

Lean Strategy (SMELS) map, which can help to fulfill this need.

Keywords: Lean, SMEs, competitiveness

Introduction

Small and medium sized enterprises (SMEs) are frequently seen as ‘the life blood’ of the

modern economy, cf. (Ghobadian & Gallear, 1996). Although SMEs do have a major

contribution to the national economy in developed countries – e.g. in the Netherlands,

SMEs count for 66.3% of total employment and 63.8% of total value added to the

economy (SBA Factsheet 2013, EU Commission) – at the same time the individual SMEs

are frequently vulnerable and very susceptible to competition (Gunasekaran et al., 2011).

Resource-constrained small firms might focus on niche markets, where skilled

production provides a competitive advantage and price sensitivity is less of a factor

(Porter, 1980). Therefore, the majority of SMEs usually prefer to differentiate their

offerings from incumbent competitors through customization, offering extra services,

innovative products etc., rather than engaging in price competition (De Jong, 2011;

MacBryde et al. 2013). SMEs struggle to increase their competitiveness in the global

market, due to mounting challenges such as limited access to resources (capital, skilled

labor, knowledge), emerging new technologies, globalization, erratic behavior of the

global market and the credit crunch, cf. Beaver, (2007); Beck & Demirguc-Kunt,

(2006); and Ghobadian & Gallear, (1996).

2

Over the last decades, Lean has drawn considerable attention from different

industries to pursue improved competitiveness. However, according to a large survey, a

majority of the firms (an alarming 74%) failed to extract the expected value from Lean

and are not making good progress (Pay, 2008). Another research survey on

manufacturing firms demonstrated that only around 10% of companies that are

practicing Lean manufacturing have the Lean philosophy properly instituted (Sohal &

Egglestone, 1994). For many companies the major focus of Lean implementation is still

at the shop floor level and lack of strategic approach to Lean led to many unsustainable

Lean transformation programs (Hines et al., 2004). In this paper, strategic approach to

Lean is considered as: (i) understanding customer value (customer-centric thinking)

(Hines et al., 2004); (ii) understanding value creation process from a holistic

perspective, e.g., how improvements in intangible assets affect financial outcomes

through chains of cause-and-effect relationships (Kaplan & Norton, 2004)); and (iii)

having a long-term orientation in Lean adoption and aligning organization toward a

common purpose (Liker, 2004). Similarly, the literature suggests that such

operational/strategic divide, implementing quality/process improvement initiatives

without providing strategic context, brings only limited success (e.g. Andersen et al.,

2004; Tennant & Roberts, 2001). Therefore, building explicit linkages between firm’s

business strategy and Lean appears to be necessary to extract expected results from

Lean adoption and achieve competitiveness.

Lean is popular in Large Enterprises (LEs) but has very limited penetration in the SME

world due to the limited resources (Shah & Ward, 2003) and lack of knowledge of Lean

(Achanga et al., 2006). As efficiency is becoming a necessary order qualifier (MacBryde

et al., 2013), SMEs might be tempted to consider adopting Lean mainly to avoid

competitive disadvantage. Similar to the popularity of Lean in LEs, a formal strategy-

making process is more prevalent in LEs than with SMEs. Among others, this might be

due to the fact that SMEs are more occupied with the challenge of survival on a day-to-

day basis and hence strategic thinking & long-term goals take a backseat (Sharma, 2011).

The above review suggests that, among many other possible reasons, a lack of strategic

approach may inhibit firms, both LEs and SMEs, from extracting more value from their

Lean adoption. Hence, this study intends to uncover two relationships in the context of

SMEs: (i) Lean and Competitiveness: does Lean improve competitiveness of SMEs?; and

(ii) Strategic Approach and Lean: do SMEs approach Lean strategically?

This paper is a part of a larger effort to understand the support that Lean offers to

improve the competitiveness of SMEs. There is limited literature on the strategic aspect

of Lean adoption in SMEs. Hence, the main objectives of this paper are to: (1) to gain

in-depth understanding on how SMEs seek competitiveness through Lean and to

identify the practices that prevents them in extracting expected benefits from Lean -

using the case study methodology; and (2) to develop a tool called SME Lean Strategy

(SMELS) map, that can be used by SMEs to ensure strategic approach to Lean

adoption, which may ultimately enhance their competitiveness.

This research consists of three building blocks: (i) identifying the challenges faced by

SMEs through a systematic literature review and performing a SWOT analysis to determine

their major weaknesses; (ii) assessing from a strategic perspective how Lean is adopted

within SMEs through three in-depth case studies; and (iii) development of the SMELS map.

The remainder of this paper is structured as follows. First, the literature review on

SMEs’ challenges and the resulting SWOT analysis are presented. Next, the case study

research and key findings are provided. Finally, building upon these analyses, and based

on the Balanced Scorecard (BSC) methodology (Kaplan & Norton, 1996), the SMELS

map is introduced. The paper closes with conclusions and pointer for future research.

3

Does Lean Improve Competitiveness of SMEs? -Literature Review & Analysis

The objective of the literature review and subsequent SWOT analysis is to: (a)

understand the major challenges (both internal and external) of SMEs; (b) identify the

main weaknesses that are highly vulnerable to external threats; and (c) investigate how

Lean can address these weaknesses, which ultimately enhance their competitiveness.

In order to identify SMEs’ internal and external challenges, a comprehensive

literature review has been done in the SME literature as well as in the Operations

Management literature. After the preliminary scanning, 110 articles have been selected

for the review. The success of Lean in delivering sustainable competitive advantage is

contingent upon the external context as well as internal context (Lewis, 2000).

Therefore, in this paper, a SWOT strategic framework, which points to the importance

of both external and internal phenomena in understanding the sources of competitive

advantage of firms (Barney, 1995), is selected. Full details on the literature review and

the analysis of the results are beyond the scope of this paper. Some highlights are

presented in Table 1.

Table 1-SWOT Analysis of SMEs

S1

S2

S3

S4

S5

S6

S7

S8

S9

W1

W2

W3

W4

W5

W6

W7

W8

W9

W1

0

W1

1

W1

2

W1

3

W1

4

W1

5

Ca

n r

ea

ct

qu

ickly

to

ch

an

gin

g e

nvir

on

me

nt

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n b

uild

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tim

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latio

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no

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d f

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ncia

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ete

ncy

O1 Dynamic environment requires

flexibility

O2 Networking and resource sharing

intra-firms are easier for SMEs

O3 Mass customization trend

O4 Shorter product life cycle,

increasing rate of innovation

O5 Interest of banks in commercial

lending to healthy SMEs

O6 Low/none regulation for financial

reporting

T1 Erratic behavior of the global

market+ + + +

T2 Powerful suppliers and customers+ + + + + +

T3 Narrower customer base to spread

risk+ + + +

T4 Rising R&D Costs+ + + + + +

T5 Emerging new technologies+ +

T6 Increasing disruption in Global

Supply Chain+ + +

T7 High employee turnover in SMEs+ + + + + + +

T8 Limited access to finance + + + + + + + + +

T9 High loan rates+ + + + + +

Internal Factors

External Factors

4

The SWOT analysis reveals that SMEs have more weaknesses than strengths, and

more threats than opportunities, which was a motivation to address the field WT

(Weaknesses and Threats), i.e., to focus on the question: How to improve SMEs’

weaknesses to make them less susceptible to external threats? Using the approach

suggested by Weihrich, (1982), a ‘WT confrontation matrix’ is created to identify which

external threats have impact on weaknesses by indicating with a ‘+’. This exercise,

identifying combinations of relationships, may become the basis of strategic choices of

firms (Weihrich, 1982). Based on this analysis, four major weaknesses (the ones that

appear most frequently with a ‘+’ in the WT field in Table 1, are identified, namely

Poor cash flow, Low profitability, Short-term orientation and Resource poverty.

Next it can be observed that the Lean philosophy addresses these four major

weaknesses as follows:

(i) Poor cash flow: Lean continuously strive for reducing the time line from receiving

the customer order to collecting the cash (Ohno, 1988). Through maintaining less

work-in-process (WIP) in the system, on which Lean has strong focus, the lead time

can be shortened as well as inventory investment can be reduced (Spearman &

Zazanis, 1992), and thereby, more cash flow can be achieved;

(ii) Low profitability: Through eliminating non-value-added activities in the flow, Lean

can reduce cost. Secondly, high quality, short lead time and lower cost (all part of the

waste elimination concept of Lean philosophy) should increase customer value,

which can be defined as “the consumer's overall assessment of the utility of a product

based on perceptions of what is received” (Zeithaml,1988). Increased customer

value, and thereby, customer satisfaction provides support for the revenue expansion

(Rust et al., 2002). Finally, the literature provides empirical evidence that the degree

of Lean adoption is linked to profitability (e.g. Claycomb et al., 1999; Fullerton &

McWatters, 2001);

(iii) Short-term orientation: Liker (2004) describes long-term philosophy as the first of

the 14 principles of The Toyota Way, and suggests that the whole organization

should be aligned toward a common purpose that overrules any short-term decision

making;

(iv) Resource poverty: One of the main goals of Lean is eliminating non-value added

activities (waste). By eliminating waste, resources can be liberated for a better use

(value-adding activities).

It can be concluded that Lean can indeed improve the competitiveness of SMEs as it

addresses (finds remedies for) their four main weaknesses identified in the SWOT

analysis. On the other hand, it can also be observed that these weaknesses can potentially

drive SMEs away from strategic approach to Lean at the expense of short-term financial

goals. For instance, cash flow and profitability are particularly important for SMEs in the

context of survival (Maes et al., 2005), which might make them fall into short-term trap –

e.g. instead of pursuing long-term inventory reduction strategy, many SMEs delay their

payments to the creditors to improve their working capital, which is an inefficient and

ultimately damaging practice (Rafuse, 1996). Therefore, it seems a strategic approach is

imperative especially for SMEs pursuing long term competitiveness through Lean.

Do SMEs Approach Lean Strategically?– Case Study Research

The focus of this study is the Dutch manufacturing SMEs that have an established

quality management system and have some experience in Lean. In this subset of Dutch

Manufacturing SMEs, this paper selected ‘low volume, high product variety’ category

firms in order to compare similar instances. Three SMEs were selected for this study:

5

Company A: A hinge manufacturer with annual turnover of €4 million. There are 30

employees of which 20 are blue-collared workers. The company is more than 80

years old and has been engaged in Lean manufacturing since 2004 with the aim of

“reducing waste and therefore reducing cost”.

Company B: An electronic equipment manufacturer with annual turnover of €8.5

million. There are 87 employees of which 25 are blue-collared workers. The

company started its Lean journey around 2007/08 following a customer’s

challenging demand to “dramatically shortening the response time from 6 to 2

weeks”.

Company C: A window and door manufacturer in the construction sector with annual

turnover of €12 million. There are 95 employees of which 50 are blue-collared

workers. Following the poor financial performance for the last three years, the firm

started Lean in 2012 with the aim of “increasing output”. After one year of

implementing Lean, they have not reported any change in the financial performance.

The main data sources for the case study were the following: (1) Questionnaire:

Gathering information before the visits about the companies and their Lean practices;

(2) Semi-structured Interviews: In-depth interview from 90 minutes to 120 minutes with

each of the Owner-Directors (OD) of selected SMEs; and (3) Plant tours: After each

interview, a 30 to 60 minutes long plant tour was conducted. In the interview, the first

part was about understanding the firm’s internal and external operating conditions as

well as their understanding about the market while the second part focused on their

adoption of Lean including their motives and the extent of Lean integration. The

purpose of the plant tours was to collect data based on observations to enhance

confidence in findings (Eisenhardt, 1989).

Discussing the full details of the analysis of the cases data is beyond the scope of this

paper. The key findings from the exploratory case studies were:

1. Misalignment between goals and strategies/practice: There is a mismatch between

SMEs’ intention behind Lean adoption and the actual Lean practices. For instance,

Company C states that “people are the most important asset and besides increasing

outputs, the main reason of implementing Lean is changing the people’s way of

thinking”. But in practice, workers can only “bring the ideas to the manager”; the

decision maker is not the team but the manager.

2. Strong internal process focus: Company B’s main expectation from Lean is

“shortening the lead time and increasing productivity”. Also, companies A and C

focus on their productivity index as the key measure of performance.

3. Short-term focus: While all three companies have clear short-term objectives such as

improving quality and reducing lead time, only Company B stated explicitly that its

long-term strategy is product innovation.

4. Lack of a holistic perspective: Companies A and B select Lean projects based on the

direct impact on the productivity index (their single most important measure). They

seem to overlook the possible indirect impacts such as employee training and

personnel engagement.

5. Limited (and sole process focused) performance measurement capability: Companies

A and B measure their Lean performance by a so-called productivity index, which is

basically formulated as gross margin per employee. Company C does not have any

Lean performance measure.

It can be concluded that these three SMEs had a fragmented (non-holistic) approach

to Lean; they viewed the value of Lean predominantly from process improvement

6

perspective such as shortening the lead time and increasing productivity. In other words,

according to the definition of ‘strategic approach’ described previously, the empirical

evidence from the cases indicates that a strategic approach on Lean appeared to be

absent. The case analysis ultimately led to the following conclusion. In order to derive

long-term benefits from Lean, SMEs should adopt Lean at a strategic level by: (1)

aligning between goals and strategies/practices; (2) gaining a holistic perspective (i.e.,

viewing business challenges as parts of an overall system); (3) developing long-term

orientation; and (4) developing performance measurement capabilities. Note that these

four attributes correspond to the features of the BSC framework proposed by Kaplan &

Norton (1992), which thereby has the potential to provide the missing strategic

approach to Lean adoption in SMEs.

SMELS Map-Model building

In this paper, a SMELS map, which can be described as a visual presentation of an SME’s

Lean strategy, is developed based on the Balanced Scorecard (BSC) tool by Kaplan &

Norton (1992). BSC is a very popular strategy performance management tool, which aims

to deploy strategic management by using balanced measures based on four perspectives,

namely financial, customer, internal process and learning. Over the years the tool has

evolved to incorporate causality, i.e., how objectives in each perspective are connected to

form firm’s strategy (Kaplan & Norton, 1996), which is now known as ‘strategic linkage

models’ or ‘strategy maps’. The advantage of a strategy map compared to traditional BSC

is that it describes the logic of the strategy by illustrating clearly how customer value is

created through internal processes and how intangible assets are required to support them

(Kaplan & Norton, 2004). As these translate strategy to operational terms and align the

organization to the strategy (Kaplan & Norton, 2004), strategy maps can actually provide

the strategic approach needed for Lean adoption in SMEs. Therefore, in this paper, the

BSC framework, and specifically the strategy map, can act as a tool to ensure strategic

approach to Lean.

Third-generation BSC consists of two main dimensions: ‘outcome’ dimension

including financial and customer perspectives; and ‘activity’ dimension including

learning & growth and internal business process perspectives (Lawrie & Cobbold, 2004).

In the SMELS map, while the perspectives in Outcome dimension are unchanged (only

customer perspective is changed as customer value perspective), the perspectives in

Activity dimension are reconceptualized based on Lean practices, which are , in this

paper, considered from two perspectives: Technical and Social. While the Technical

aspect of Lean, named as operations perspective in the map, is referred to as the

collection of the routines related the two main criteria of Lean production, namely Just-in-

Time (JIT) and Jidoka / autonomation / in station quality (Ohno, 1988), the Social aspect,

named as organizational learning perspective, is essentially about people and learning.

The detailed discussion about creating these dimensions and corresponding subcategories

(objectives) are beyond the scope of this paper. In the graphical illustration of the SMELS

map, the objectives in each perspective are illustrated with rectangles in the map and are

linked with cause-and-effect relationship represented by arrows.

After this brief introduction to the SMELS map, it is useful to investigate the

implementation issues of the BSC type of tools, also known as performance management

systems, within SMEs. Small companies are focused more on financial and operational

performances, and have rarely a ‘holistic approach’ to use balanced models (Garengo et

al., 2005). This behavior is also observed in our case study research. A number of

researchers have been concerned about viability of performance management systems in

the world of SMEs (cf. Garengo et al., 2005; Rompho, 2011; Tennant & Roberts, 2001).

7

Some factors that constrain SMEs to implement performance management systems such

as the BSC are given in Table 2.

Table 2-Barriers to implement performance management systems in SMEs

In order to successfully implement any strategic management model in SMEs,

obviously the challenges listed in Table 2 have to be addressed. Therefore, the design

requirements for the SMELS map are identified as follows:

(i) Simple design: it must be resource effective, consider breadth not depth and

must be easy to manage (Garengo et al., 2005);

(ii) Effective design: in addition to four perspectives of BSC, it must also include the

strategy management process as a component for a speedier and more effective

design (Lawrie & Cobbold, 2004);

(iii) Flexibility: it must be flexible to accommodate strategic changes (Garengo et al.,

2005; Hudson, Smart, & Bourne, 2001); and

(iv) Effective deployment: in order to successfully execute the strategy, it must

actively involve employees (Tennant & Roberts, 2001), which is the core of Lean

philosophy.

These design requirements are implemented in the SMELS map as follows:

(i) Simple Design: To be able to manage and monitor numerous goals, SMEs can

bundle many performance measures (Rickards, 2007). Key Performance Indicators

(KPIs), i.e., the performance measures that make a profound difference (Parmenter,

2010), can be combined to form so-called composite KPIs. The composite KPIs can help

SMEs focus on the high impact measures that would give clear idea about how the

organization is progressing in their Lean journey and, thereby, avoid overloading limited

resources with unnecessary measurements. In this regard, for instance, throughput time

efficiency (which is value-added time divided by lead time) can be selected as an

effective and easy to understand KPI of how good the flow is from “Speed” perspective.

(ii) Effective Design: In order to demonstrate the critical role of strategy, ‘Strategic

management perspective’ as a fifth perspective (foundation) is added explicitly in the

SMELS map.

(iii) Flexibility: Mintzberg (1978) pointed out that a firm’s realized strategy is

combination of (i) deliberate and (ii) emergent strategy. The main engine in SMEs’

strategy management is the one that emerges from the bottom, from the set of

innovation and changes in daily activities (Garengo & Biazzo, 2012). SMEs that operate

in highly dynamic environment, change their strategy frequently, which might cause the

BSC implementation to fail (Rompho, 2011). Therefore, in our model, this problem is

addressed by including a so-called ‘forming competitive scope routine’. The routine is a

Sources

SMEs' barriers to implement performance management systems 1 2 3 4

Requiring substantial amount of time and resources (human, capital) X X X

Lack of management expertise X X

Reactive management style X X

Lack of active employee involvement X X

Tacit knowledge and little attention is given to the formalization processes X

Increasing formality and bureaucracy X

High number of measures that have to be monitored X

Unstable environment: staff turnover, re-allocation of managers X

Too strategically oriented, does not address daily activities X

Misconception of performance measurement X

Frequent changes in company’s strategy X

(1) Garengo et al., 2005; (2) Hudson, Smart, & Bourne, 2001; (3) Rompho, 2011; (4) Tennant & Tanoren, 2005

8

periodic evaluation of the company’s strategic focus on its operational capabilities –

cost, quality, delivery and flexibility (Hayes & Wheelwright, 1984) – based on the

internal and external inputs.

(iv) Effective Deployment: As extensively covered in the literature, employee engagement

is one of the critical successful factors of Lean management. Hoshin Kanri, specifically the

‘catchball’ process is a consensus-building process on the deployment of strategic

objectives and measures, in a team environment (Tennant & Roberts, 2001) by encouraging

dialogue between all levels of an organization (Jolayemi, 2008). As small businesses should

minimize total number of performance measures, Catchball could be particularly effective

in SMEs (Tennant & Tanoren, 2005). Therefore, Catchball is integrated in the SMELS map

to ensure employee engagement in strategy deployment process.

Figure 1 illustrates the proposed SMELS map. The four design features- (i), (ii), (iii)

and (iv) –are indicated in the map.

Figure 1- SMELS map

Conclusions

A SWOT analysis based on SME literature reveals that SMEs have more weaknesses

than strengths. Through providing evidences from the literature, it is shown that the four

main weaknesses, which were identified through WT confrontational matrix, can be

addressed by Lean. It is also argued that the very same weaknesses can potentially drive

SMEs away from strategic approach to Lean.

The results from the case studies suggest that SMEs adopt Lean as a way of reacting

to internal stimuli such as financial loss in previous year (Company A) or external

stimuli such as customer complaint about long lead time (Company B). The case study

organizations (SMEs), generally, view Lean as a set of tools to improve processes to

react to the environment and pursue short-term operational gains rather than giving a

strategic approach to Lean to gain competitive advantage.

9

This paper developed the SMELS map that can be a strategic management tool of

Lean adoption in SMEs. In order to provide a strategic perspective in Lean adoption, the

proposed SMELS map suggests that SMEs should start with a clear purpose and long-

term strategic planning followed by employee development and engagement, and

operational objectives, which are not directly yet through chains of cause-and-effect

relationships linked to financial objectives. In reality however, as it is observed in the

cases, SMEs frequently follow the ‘wrong’ path by starting from operational objectives

and by focusing on the day-to-day operations. The implementation challenges of the

BSC in SMEs are addressed in the proposed SMELS map by simplifying the measures,

integrating the Catchball process and adding routinized competitive scope reviews. In

this paper, the analysis of the design requirements of the SMELS map are indicative

(not exhaustive). More in-depth analysis is planned for the future research.

Relevance/Contribution

The contribution of this paper is threefold:

1. Literature review and subsequent analysis revealed that Lean can indeed improve

competitiveness of SMEs by addressing their four major weaknesses.

2. The case studies provided empirical evidence that SMEs do not always have a

strategic approach to Lean.

3. The SMELS map developed in this paper can be used as a general strategic

management tool within SMEs adopting Lean for increasing their competitiveness.

This tool can help to create general awareness among SME managers on the strategic

role of Lean and ensure strategic approach to Lean.

Limitations and Future Research

The major limitation of this study is that the proposed SMELS map has not been tested.

Testing the map will be extremely useful in advancing the knowledge of the Lean

adoption in SMEs. Therefore, future research is planned to be an action research to

implement and test the effectiveness of the SMELS map in an SME, and build the

academic knowledge base on strategic Lean adoption.

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