Diversification in Small and Medium Enterprises
Adjustment and Renewal in the Aftermath of the Iraq War: A Case Study of Strategic and Functional Orientation for Diversification in a SME
In this chapter, discussion will further explore how National United Group’s (NUG) location decisions and its position in an industrial cluster are critical to understanding its strategic orientation, and also the design, implementation, and outcome of its diversification strategies in the post Iraqi war period. The results of the study are discussed as they relate to the theoretical models and framework examined in the literature review. This section addresses the findings related to the fundamental questions asked of study participants, NUG managers and NUG employees, and the findings related to the examination of archival information.
The chapter discussion is organized according to the frameworks and theoretical models that were introduced in the literature review, and discussion explicitly refers to the questions asked of NUG managers and employees.
Renewal and Adjustment in Industrial Clusters.
This section examines the impact of strategic orientation and diversification strategies on the firm, as part of an industrial cluster, in relation to its economic and socio-political context. The term industrial cluster refers to a concept in economic geography, which consists of and includes all the features in the Iraqi environment, for purposes of this study, in which SMEs operate. Together with the political and social contexts, these economic scenarios are believed to substantively influence the diversification strategies and strategic performance of SMEs in the post 2003 Iraqi war period.
The industrial cluster framework applies to the SMEs in post-war period that is the time basis of this study. The industrial framework aptly fits the situation of National United Group (NUG) as a member of a “concentration of interconnected companies, specialized suppliers, service providers, firms in related industries, and associated institutions” (Porter, 5). As an amalgamation of two formerly independent enterprises, here referred to as KAPICO and the Jaffar Group, NUG operates as a hub for various marketing and distributorships associated with the auto parts industry in Iraq. NGO distributes a minimum of 13 separate auto parts brands, and has simultaneously operated four distinct lines of business: Spare parts, tires and batteries, lubricants, and a service station.
Multidimensional environments contribute a range of pressures and — as in situations during and after periods of war — economic shocks, sociopolitical forces, and any number of factors that contribute to a climate of “ambiguity and uncertainty” (Carter, 2). Firms can be thought of as responding to these dynamic multidimensional environments in one of two ways: Adjustment or renewal. As it applies to SMEs in this study, adjustment refers to the “extension of established trends which lead to stagnation and gradual decline in the medium to long-term” (Chapman, et al., 3). The research findings from the archival data indicate that, in terms of costs and profits, the strategic orientation and diversification strategies adopted by NUG were highly successful. Thus NUG did not enter a phase that was wholly one of adjustment.
However, adjustment can be attributed to managers and employees of NUG whose responses to the surveys, questionnaires, and interviews indicated a desire to maintain the status quo, even in the face of a drastically changed business environment. That some components of NUG operations were functioning in an adjustment mode is illustrated by the disconnect between local sales forecasts, orders placed with international suppliers, and actual sales. A desire to maintain relationships with the network of international distributors meant that a great many resources were committed to inventory and a build-up of NUG’s extensive distribution network. Not only was NUG’s business stagnating, but the firm was tipping the balance with regard to prospects for a profitable and sustainable business.
Renewal occurs when there is “a significant / radical change of an existing development path through diversification, enabling a cluster to sustain its prosperity” (Chapman, et al., 3). NUG clearly engaged in the process of renewal through its diversification into several lines of business, and through expansion into new free markets in parts of Iraq outside of their operating base in Baghdad.
Diversification and Renewal.
One apparent strategic response that NUG implemented was diversification. The range of support for diversification as a strategic response was largely upheld by managers and employees of NUG. In response to survey questions asking whether diversification is an important firm level strategy for supporting renewal in the 2003 post-war period, and whether it is important for the firm to respond to changes in the environment factors by changing its strategic orientation, a majority of managers agreed that both were important if a firm is to succeed.
Geographic and sectoral diversification. When the company first established, NUG’s core business was spare auto parts distribution. But before too long, NUG agreed to establish distributorship arrangements for a number of other product lines in various segments of the auto care market, thereby employing sectoral diversification. But in response to an increasingly difficult business climate in the wake of the war, NUG also forged ahead through geographic diversification. According to a review of NUG’s financial statements, this renewal strategy proved to be financially beneficial and, in 2009, net profits company-wide increased to nearly double what they had been in 2005. The renewal strategy to move to healthier markets paid off enormously.
Responses to the question about it being essential to diversity the majority of business activities to international market for effectively dealing with such changing business environments were widely varied. Many employees indicated that successfully reaching international markets could help ameliorate poor performance in some of a firm’s business units. Other employees interviewed were completely opposed to a move to internationalization, arguing that it was better for a firm to focus on its core business — the value proposition of its brand — in order to strengthen that brand within the market where it already had a presence. These employees were of the opinion that this brand-strengthening strategy would lead to improved business operations performance even in an uncertain business environment.
NUG appears poised to address barriers to internationalization (Quinn et al., 6) in several ways. One example is that NGU’s niche marketing for the lubricants line of business proved to be quite profitable, and if an international market exists for the high grade, inexpensive ENOC lubricant, it seems that the product could be taken to international markets.
NGU employees expressed concern that the firm was unable to meet customer demands and expectations in the changed marketplace of the post-war period. When asked about the major challenges to be faced by NUG from changing business environments, employees responded that the employees of the organization would have to improve their skills for meeting the changing needs of the customers. Employees of NGU experienced a diminished ability to meet the demands of customers because of the uncertainties of the business environment. When asked what major changes were essential to be implemented in order to effectively cope with the changing business environment, the employees of NGU expressed a belief that diversification of business activities into areas which are not affected by the war was essential. Most employees said that they understood the need for NGU to reframe existing strategies as per the changing needs and demands of final consumers.
Structure, Conduct, and Performance (SCP)
The structure / conduct / performance, or SCP, theory suggests that there are three basic antecedents of business (specifically, exporting) performance (Morgan, et al., 4). They are cost advantage, product advantage, and service advantage. Depending on the line of business examined, NGU possessed several of these advantages, but they were significantly eroded during the war years. The SCP theory further suggests that a firm’s ability to sustain positional advantage is strongly related to the structural characteristics of the firm’s markets, which are dynamically related to the competition, and the efficient and effective execution of planned competitive strategies (Morgan, et al., 4). These competitive strategies include the firm’s capabilities, resources, and deployments that support choices about how the firm will compete effectively for customers and how it will achieve its desire goals (Morgan, et al., 4).
Resource-Based View (RBV)
The research findings indicate that NGU was strongest with regard to “resources and capabilities in the area of relationship building capabilities which create relationship based advantages and & #8230;market knowledge, which when combined with product development capabilities, result in superior value offering for that market” (Morgan, et la., 4). NUG’s extensive network of distributors provided a resource that could be tapped in the post-war years, even though the dynamics of doing business were markedly changed by the unstable marketplace.
NUG sought to establish business in new locations north and south of Baghdad, in much the same way that a global firm might extend into other countries. Managers interviewed for the study, when asked if they thought that multi-location strategy along with NGU’s diversification strategies support the renewal of the industrial cluster to which the firm belongs, agreed that the new outlets were a good strategy. These managers have…