Small and medium size enterprises’ (SME) manufacturing strategy configurations are identified in a small developed economy with the aim to explore how SME manufacturing strategy configurations affect business stability and performance during a period of macroeconomic shock. Drawing on a survey-based dataset, our two-step cluster analysis results suggest that three distinctive manufacturing strategy configurations can be observed among the SMEs of the Finnish manufacturing sector, namely: Responsive niche-innovators, Subcontractors, and Engineer-servers. Furthermore, we are able to establish a link between the strategy configurations and business stability and performance. The results support conclusions that the nature of manufacturing strategy taxonomies are driven by the business context, and that volume flexibility, design flexibility and service provision capabilities enable better business outcomes during macroeconomic shocks, in comparison to the more easily achievable conformance quality as well as delivery speed and dependability. In light of this research, best performing cluster under the macroeconomic shock is the Engineer-servers, emphasizing flexibility-oriented broad product line and after sales service, while having less priority concerning low price and volume flexibility. The results offer important insights for managers, but also for other stakeholders in the form of for example expert systems development for SME funding decisions.
A severe recessionary period affected many developed economies in the late 2000s, hastening industrial restructuring. These adverse conditions threatened the survival of many small and medium sized firms (SME) in the manufacturing sector (defined as firms with a turnover of less than 50 MEUR and personnel headcount less than 250 according to the European Commission), as they often suffer, for example from, vulnerability (Smallbone, Deakins, Battisti, & Kitching, 2012), e.g. due to the ‘liability of smallness’ (Aldrich & Auster, 1986; Flatten, Greve, & Brettel, 2011). Such characterization suggests little or no diversification and considerable resource constraints (Pearce & Michael, 1997). At the same time, manufacturing firms, one may argue, remain the backbone of developed economies (Pitelis & Antonakis, 2003), and thus their prospects for survival are also of interest to policy makers, but also to creditors and society at large.
Recent research in the SME field on expert and intelligent systems has concentrated on credit ratings (Derelioglu & Gürgen, 2011; Li, Niskanen, Kolehmainen, & Niskanen, 2016), bankruptcy prediction models (Gordini, 2014) and fund investment policies (Sohn, Kim, & Moon, 2007). Such efforts would benefit from understanding the nature of SME manufacturing strategies and their implications to business stability and performance in uncertain environments.
Importantly, evidence suggests that appropriate manufacturing strategies and capabilities related to them have a key role in supporting competitive strategies for high business performance (e.g. Ward & Duray, 2000). Whereas the recession resistance of marketing and business strategies has been investigated in several studies (see Bamiatzi & Kirchmaier, 2014; Ho, Choy, Chung, & Lam, 2010; Köksal & Özgül, 2007; Pearce & Michael, 1997 and 2006), which generally suggests that a recession should not be just weathered with “cutbacks and retrenchment” (e.g. Pearce & Michael, 1997, 302), there appears to be a research gap in terms of understanding the nature of manufacturing strategies that may be advantageous under the specific conditions encountered during macroeconomic shocks. Therefore, in order to investigate whether empirically observed manufacturing strategies differentiate in terms of firm performance in such adverse conditions, we pose the following research question: What are the implications of different SME manufacturing strategies on business outcomes during macroeconomic shocks?
In accordance with the research question, we empirically identify a taxonomy of typical manufacturing strategies among SME manufacturers in Finland, which is a small developed economy, and explore the implications that the macroeconomic shock of the late 2000s—and its aftermath in the early 2010s—had for the firms employing the identified manufacturing strategies. Finland is chosen as the context of research due to the severity of the macroeconomic shock and the subsequent industrial restructuring.
In essence, we subject the identified strategies to a critical test, allowing us to observe their stability and performance during a macroeconomic contraction shock, and their ability to recover during a macroeconomic expansion shock (Amann & Jaussaud, 2012; Kesavan & Kushwaha, 2014). Similarly to Kesavan and Kushwaha (2014), we define a macroeconomic shock as an unexpected change in macroeconomic conditions, i.e. a financial-economic crisis that has a negative effect on the demand for the products of manufacturing firms. Such sudden changes in demand have an effect on business outcomes, such as profitability and employment.
Theoretically, we base our research on the resource-based view (RBV) of the firm (Barney, 1996; Wernerfelt, 1984), and concur with the literature which suggests that the value and optimality of a firm’s resources and capabilities depend as much on the context as on the properties of the asset (Miller & Shamsie, 1996; Priem & Butler, 2001; Wan, 2005), such as various manufacturing strategies. Through our research, we are able to contribute to the theoretical discussion on the appropriateness of the manufacturing strategies, and the underlying capabilities, used during macroeconomic shocks, such as recessions. Additionally, we contribute to the methodological discussion about the appropriateness of the measurements and data analysis for determining manufacturing strategy taxonomies.
In the following section, we consider the linkage between manufacturing strategy and performance, particularly in the context of macroeconomic shocks. We also develop a framework for the research. In section three, the macroeconomic shock that faced Finnish manufacturing SMEs is described. The research methodology is described in section four, while section five elaborates on the results of the data analysis and our cluster solution is linked to business stability and performance. The research results are discussed in section six, and section seven concludes our research but also proposes further research.
2. Theoretical foundation
2.1. Performance implications of a manufacturing strategy
The practical design and implementation of a manufacturing strategy that supports overall business aims is a complex task, involving dozens of variables. Configuration models, defined as “multidimensional profiles used to describe organizational, strategy, or process types” have been suggested as a useful approach for addressing the requirements of contextual and internal fit with a manufacturing strategy (Bozarth & McDermott, 1998). Configuration models are typically divided into taxonomies and typologies, each representing unique combinations of manufacturing strategy dimensions. However, research often addresses only single dimensions of manufacturing strategy as predictors of firm performance, while also considering the possible mechanisms required for such effects to take place (e.g. Anand & Ward, 2004). Usefully, this literature describes the decisions that are made about forming capability bundles which combine several dimensions of manufacturing strategy, such as low price, design flexibility, a broad product line, volume flexibility, conformance quality, performance quality, delivery speed, delivery dependability, after sales service, and broad distribution and advertising (e.g. Miller & Roth, 1994). In the following, we discuss the possible connections these individual dimensions have to firm performance and, in particular, to firm performance during recession and macroeconomic shocks.