SME Marketing: Implication of small scale of operations for marketing strategy

Abstract
Small and Medium Enterprises (SMEs) are characterized by limited resources in terms of manpower, finance and infrastructure as compared to large enterprises.  They are often owner driven with little or no formal organizational structures.  Often they are over dependent on few large customers and vulnerable to environmental changes.  SMEs however have some inherent advantages as compared to large enterprises.  Their smaller scale allows for greater flexibility in operations in order to respond to changing customer needs.  SMEs are competing with large enterprises in several product markets.  The challenge for them is to remain competitive and consistently deliver value to customers given their limited resources.  This  paper presents a case study of an SME that manufactures and markets machines and machine tools for the automobile sector.  It describes and analyses the marketing activities of this enterprise.  The paper discusses the implications of small scale of operations for marketing strategy.

SME Marketing: Implication of small scale of operations for Marketing Strategy

Introduction:
Limited resources in terms of manpower, finance and infrastructure as compared to large enterprises characterize SMEs.  This impacts their scale of operations.  They are often owner-driven with little or no formal organizational structures, processes and systems.  They are over-dependent on few large customers and are vulnerable to environmental changes.  However they have some inherent advantages as compared to large enterprises.  Their smaller scale allows for greater flexibility in operations and greater scope for customization in order to respond to changing customer needs.  SMEs compete with large enterprises in several product markets.  What strategies can they adopt to remain competitive and deliver customer value despite their small scale of operations?  The paper presents the case study of a SME manufacturing and marketing machines and machine tools pre-dominantly for the automobile sector.  It describes and analyses the activities of the enterprise and discusses the implications of small scale of operations for marketing strategy.

Marketing Strategy and Overall Business Strategy:
Marketing Strategy flows from the overall business strategy of the organization.  While the main focus of business strategy is to enhance economic value added (EVA) for the business, the main focus of Marketing Strategy is to enhance customer value (Brown, 1997).  Business strategy is concerned with developing and allocating resources to achieve competitive advantage (Porter, 1980). Marketing strategy is concerned with creation of a market position based on this competitive advantage and customer perceptions of value.  Marketing as a functional area has an interface with the external environment of the organization. Strategic activities in marketing are aimed at segmenting and targeting markets which an enterprise finds attractive and which it can effectively serve, as also the creation of a competitive position through its ‘offering’, i.e. the product and other elements of the marketing mix.  Strategic activities in marketing have strong linkages with other functional areas of the business. 

Attractiveness of a segment may depend on:

Competitive forces that affect marketing strategy:
Porter (1996) suggests that strategy involves ‘the creation of a unique and viable position involving activities that are different from rivals’ and that this involves trade-offs in terms of resource allocation.  In other words an organization has to make a choice in terms of allocation of resources to various areas of business activity in pursuit of competitive advantage.  Porter suggests the following model of industry competition:

	The Industry: Jockeying for position among current competitors

In the model, the state of competition in an industry depends on the above five forces. 

Within an industry the extent of rivalry among competitors depends on the following factors:

Within an industry there may exist several ‘strategic groups ’i.e. groups of firms that have similar resources and pursue similar competitive strategies (Aaker, 2001).  Strategic groups have entry as well as exit barriers.

New entrants bring new capacity and resources to the industry.  To address this the industry incumbents can put up the following barriers to entry:

A supplier group may be powerful if:

A buyer group may be powerful if:

Substitute products place a ceiling on the prices charged by the industry and therefore limit the growth potential of the industry.

Growth Strategy and Marketing Strategy:
Most enterprises today operate in a dynamic business environment where growth has become a necessary objective for the survival and viability of the enterprise.  However the growth strategy an enterprise selects will depend on its own resources to enhance customer value as well as the extent of competitive activity.  Ansoff (1965) has suggested the following strategies that an organization can adopt in order to grow:

Source: Aaker, 2001.

Case Study:ABC Pvt. Ltd (ABC)
ABC Pvt. Ltd., was established in the year 1993.  The company manufactures adhesive and sealant dispensing machines and oil filling machines, which find application largely in the automobile industry, the electrical and electronics industry and construction equipment industry.  It is located in Pune and employs over 55 people.  Its annual turnover for the year 2006-07 was Rs. 8 crores.  The company has around 30 indigenously developed machines. 
Company Vision: The Company articulates its vision as follows - 'as a techno-entrepreneurial organization we are committed to deliver world class products and services to our customers in India and abroad based on the capacity to translate needs into high tech cost effective solutions.' 
Company Goal:  World-class manufacture of Adhesive Dispensing Machines &Fluid Filling Machines.
Current Manufacturing capacity: 16 machines per annum. (Value – Rs.15 crores)

Product Mix;

Customer segments: Automobile manufacturers, Auto component manufacturers, Electronics and Electrical industry, Construction equipment industry. Sales to automobile manufacturers and auto component manufacturers make up 90% of the total turnover. 
Products: Different products have different levels of customization.  All the Oil filling machines, the Metre Mix dispensing machines and the Robotic dispensing machines are 80% standardized with a 20% customized component.  The Single Component Dispensing Machines (SCDMs) are a completely standardized product.  This is a low cost offering with potential for volume sales.  On the other hand the Special Purpose Machines (SPMs) are a high cost high value offering created specifically for a single customer.  Dispensing machines as a product category has tremendous variety to cater to the physical characteristics of different types of sealants and adhesives used.  
The paper describes marketing strategies for the 2 products: Oil Filling Machines and Adhesive and sealant dispensing machines. 

Marketing Strategy for Oil Filling Machines:
Segments: This product has applications in the following segments: Automobile Manufacturers (Indian), Automobile manufacturers (MNC), Auto component manufacturers and Construction equipment manufacturers.  Adherence to quality standards and delivery schedules, service and customized products and ‘product systems’ from a single source are the main benefits that customers seek.
Competition:
Competition for this product comes from Indian SMEs and Multinational companies (MNC).  MNCs are focusing on market penetration rather than enhancing profits and they offer standard products, which require less service inputs. They have greater brand recognition with MNC automobile manufacturers and larger installed base through centralized buying and contracts in the automobile manufacturer’s home country.  Indian SMEs offer customized products and service.  Competition also comes from ‘Systems Integrators’ who offer complete automation solutions of which oil-filling systems is a part.
Resources and Resource Gaps:
The company has resources in R&D and operations to create a customized product and also service personnel to service the product. However, its brand is not well known and established with MNC automobile companies. 
Growth Strategy: Currently the Company focuses on increasing market share in its current target segment i.e. Indian Automobile manufacturers.  It has also initiated efforts to develop a new segment viz. MNC Automobile companies.  With increasing pressure on automobile prices due to increased competition and the growth in the small car market, MNC Automobile companies are looking for low cost alternatives for their oil filling needs.  The Company hopes to capitalize on this. 
Target segment: The Company has largely been targeting Indian Automobile manufacturers through fully customized products or products with a high degree of customization.  It has initiated efforts to address MNC Automobile companies. 
Positioning: The Company positions itself as a well-known Indian brand with expertise in this area and quality products and service at affordable prices. 

Analysis:
Although the company brand is well recognized in its target segment, it faces constraints in terms of market coverage, as the numbers of sales personnel are limited. There is over dependence on one segment – Indian Automobile Manufacturers. This makes the Company vulnerable.  System Integrators also pose a threat to the company as they offer end-to-end solutions in automation, which includes filling systems.  The buying cycle for this product is around 2-3 years.  This means that a re-buy decision comes up after 2-3 years or as the buying organization enhances its manufacturing capacity.  So far the company has a good track record of customer retention.  However, a lot of automobile companies are now appointing ‘Project Consultants’ to evaluate alternatives in automation solutions.  Often these Project Consultants collaborate with System Integrators.  This could queer the pitch for ABC, as the vendor specifications developed may not be in its favour. 

The main gap in developing the MNC Automobile companies market appears to be market coverage.  The company needs to employ a larger sales force to address this segment.  There is also a gap in terms of the skills of the current sales force.  Since this is a business-buying context, ABC needs to build strong relations with all rungs of decision makers in the buying organization.  So far the Company has acquired adequate skills in this area for dealing with Indian Automobile manufacturers.  How ever the decision making process, key decision makers as well as their cultural parameters are quite different in MNC Automobile companies.  ABC needs to develop skills in this area or recruit sales force experienced in selling to this segment. 

Addressing the MNC Automobile companies segment could have another benefit for ABC.  Many of these companies, especially of Japanese origin, go in for concerted vendor development programmes and support the vendor in terms of technical know-how and quality control processes.  This can lead to tremendous learning and skill development for ABC in design, manufacturing and quality control. 

Marketing Strategy for Dispensing Machines:
Segments: This product has applications in the following segments: Indian Auto component Manufacturers, Multinational (MNC) Auto component Manufacturers, Electrical and Electronics Industry, Construction equipment industry. Both Indian as well as MNC Auto component manufacturers face tremendous price pressure from their buyers – Automobile companies.  Therefore they are always scouting for products, which offer acceptable quality at lower prices. 
Competition: Competition for this product is largely from International SMEs from Europe and USA who focus on MNC Auto component manufacturers.  International SMEs focus on share gains in the Indian market through centralized contracts in the auto component manufacturer’s home country (e.g. Germany or USA).  International SMEs have the advantage of a known brand name and they also work on project basis for MNC Auto component manufacturers. Their prices, though on par with European and US standards are higher than their Indian counterparts.  Threat also comes from System Integrators offering end-to-end automation solutions.
ABC also faces threat from Auto component manufacturers integrating backwards to manufacture their own dispensing solutions.  Adhesive and sealant manufacturers who want to offer the adhesive/sealant+ dispensing machines as a complete solution are also taking such actions.  New technologies in dispensing also pose a threat to the Company’s product. 
Resources and Resource Gaps: The Company has resources to address both Indian as well as MNC Auto component manufacturers.  Its brand name though not as well known as its international counterparts is fast gaining recognition as a brand that stands for ‘affordable quality’.
Growth Strategy: Currently ABC focuses on increasing market share in its current market segments i.e. Indian Auto component Manufacturers, MNC Auto component manufacturers, Electrical and Electronics Industry.  The new segments it can address are the following: Packaging, Construction equipment, Healthcare.  However, threat from international players in all these segments is very high and ABC does not have the advantage of a known brand name in these segments.  Therefore ABC has decided to not address these segments as of now.  In the segments currently served these is an increasing tilt in favour of standardized products at lower prices rather than customized ones.  ABC has developed standard products and accessories for these segments. 
Target segments:  Indian and MNC Auto component manufacturers, Electronics and Electrical Industry. 
Positioning: The Company has positioned its products as ‘quality products at Indian prices.’ It also differenciates itself on ability to provide service, customized products and low cost of spares. 
Analysis:Due to resource constraints the Company has not been able to sufficiently develop the Electrical & Electronics and the Construction equipment segments.  MNC Auto component manufacturers are the most attractive segment as they are willing to pay higher prices as compared to their Indian counter parts.  There is also demand for standardized products for adhesive/sealant dispensing which could also offer opportunities for lowering costs. 
This product category has tremendous variety, which has been created in part by the fact that different types of adhesives/sealants require a different mechanism for dispensing.  However this has increased the manufacturing costs for the Company.  It has also put tremendous pressure on sales and service force skills and knowledge to handle such variety in products.

Discussion:
It appears that that there are 3 strategic groups within the filling machines industry as well as the adhesive/sealant dispensing machines industry:

ABC belongs to the fourth category.
Its main entry barrier for other strategic groups is its ability to customize products and deliver service. This is possible because of its small scale of operations.  Price is the main barrier put up by ABC to address competition from International SMEs and MNCs.   The main threat it faces is from Systems Integrators who offer end-to-end solutions in automation.  Systems Integrators often out-source different systems in the total automation solution.  Their focus is on low price and acceptable quality.  One of the ways in which ABC can address this threat is by entering into collaboration with System integrators to sell their filling and dispensing machines.  This would also lead to ABC minimizing its coverage costs.  In a later section we will look at the bargaining power of this prospective buyer group.

Entry barriers:
The two industries face considerable threat from new entrants who want to gain foothold in the Indian market.  These are largely International SMEs and MNCs.  They have substantial financial resources, brand name as well as technology at their disposal.  What barriers can ABC put up to address this threat?  It obviously does not have the advantage of economies of scale due to its small scale of operations.  However it can resort to cost advantages independent of scale through experience curve effects or proprietary technology.  ABC already has patents for three of its machines.  It has to proactively take steps to protect all its intellectual property related assets.

Can ABC actually utilize experience curve effects to its advantage? According to the experience curve concept unit costs of manufacturing the product decline with ‘experience’ or a company’s cumulative volume of production (Porter, 1995). It is primarily based on the following (Aaker, 2001):

Though ABC does have the advantage of experience, the sheer variety of offerings (it has 30 indigenously developed machines), especially for adhesive and sealant dispensing reduces the scope for transference of learning at an operational level.  Also the Special Purpose Machines (SPMs) that ABC develops for adhesive and sealant dispensing solutions are completely customized and offer no scope for experience effects to take place. 

Knowledge of design and manufacturing processes is limited to the MD and few key persons in ABC.  It is therefore implicitly held and not properly documented.  Unless proper documentation takes place organization –wide learning will not ensue.  Proper documentation would also lead to ease of monitoring and delegating activities and quality control. 

There are also external factors, which can affect experience curve effects.  We see that threat of entry comes from International SMEs and MNCs.  These companies have different cost structures and greater financial resources as compared to ABC.  If they can easily buy technology commensurate or superior to ABC’s technology, ABC’s experience curve advantage is negated. 

Product differenciation is an entry barrier that ABC has put up.  It has resources in R&D and Operations to design, develop and manufacture customized products or products with a degree of customization that offers superior value at prices lower than international competitors.  In addition it could differenciate on low cost of service and spares.  

Although ABC does not have the advantage of economies of scale it can reduce unit costs of production by increasing the standardized component of every product.  Also R&D can focus on simplifying product design through modularization and increased usage of common modules for different types of adhesive/sealant dispensing and oil filling machines.  This would again reduce costs. 
Buyers’ power:
Currently ABC is overly dependent on buyer groups, which have a great deal of bargaining power.  It needs to focus on buyer groups, which are less powerful.  The following buyer groups have a need for dispensing solutions and are also attractive: Electrical & Electronics Industry, Food processing industry, Shoe sole manufacturers and Construction equipment manufacturers.   Of these, ABC has tried to tap Electrical and Electronics Industry and Construction equipment manufacturers in a limited way.  The others have not been tapped. These buyer groups are attractive as they earn high profits and are therefore less sensitive to price.  Also, the quality of ABC products is important to the quality of their end product and so they are willing to pay a higher price for superior customer value through product features or customization. 

Another prospective buyer group that ABC can focus on is ‘Systems Integrators’.    Instead of competing with them ABC can consider selling its products to them. 

System Integrators are an attractive buyer group as they do not buy in large volumes and hence do not have high bargaining power.  Quality of ABC products directly affects the quality of the total solution they offer and they also save on costs by buying ABC products, as they do not have to develop and manufacture them themselves.  However, they may also be unattractive on account of the fact that they earn low profits as they themselves are selling to highly powerful buyer groups, and therefore will be price sensitive.

Growth Strategy of ABC:
Currently ABC is focusing on growth in present markets through activities to enhance market share.  With its skills in R&D and Manufacturing processes it is also developing new products for present markets.  However it has not developed new segments and is overly dependent on the segments it presently addresses.   This could be partly because of lack of market coverage capability in terms of sales force size and skills.  There could however be another reason for this.

Like most SMEs ABC too is primarily an owner driven organization.  The R&D and technological capabilities of ABC reside mainly in its Managing Director.  ABC’s emphasis on developing new products as opposed to new markets could also be due to the inclination of the Managing Director to take on ‘technological challenges’. 

ABC needs to focus on market development to recover its investments on product development, reduce dependence on current segments and to explore the possibility of earning higher profits through hitherto untapped attractive segments such as Electrical and Electronics industry, construction equipment industry, shoe sole manufacturers, food processing industry, etc.

Resources:
ABC has a superior R&D and manufacturing capability, which is not matched       by its market coverage capability in terms of size and skills of sales force.  Between R&D and manufacturing, the R&D capability outperforms manufacturing capability.  The R&D department has the capability to churn out customized offerings with indigenously developed technology.  While this is laudable, the real benefits from this will not accrue to the Company unless other areas of the value chain are commensurately developed to take advantage of this. The tremendous variety due to customization and niche areas of product applications (e.g. different types of adhesives and sealants require different dispensing mechanisms) also adds to costs of manufacturing and puts strain on skills of human resources in manufacturing and sales.  Increased standardization and modularization coupled with enhanced market coverage capability will help the organization exploit opportunities for growth.

Conclusion:
Though ABC does not have the advantage of economies of scale it has created and maintained product differenciation through quality, customization and service at prices lower than international competitors.  The current market scenario supports this positioning. 

However, its small scale of operations has limited its ability to gain market share in its currently served segments and also the ability to develop new segments.  This has led to over-dependence on powerful buyer groups who can bargain for lower prices.  This has reduced profitability of ABC. 

ABC can consider joining hands with Systems Integrators to enhance its market share.  It can also consider collaborating with sealant and adhesive manufacturers who want to offer the adhesive/sealant+ dispensing system as a complete solution.  It can also join hands with manufacturers of substitute technologies for dispensing who are seeking to gain a foothold in the Indian market. 

ABC also needs to develop new market segments to fully realize the profit potential of all its products. 

It appears that currently the organization has a ‘technology-focus’, rather than a ‘business-focus’.  In other words there is an emphasis on developing indigenous technology to match international standards and to enhance customization through the use of technology, rather than on enhancing profitability by addressing customer segments who are willing to pay for superior value and/or by reducing costs of design and manufacturing through modularization and other means. 

The case –study in this paper is based on a real life organization.  However, its name has been disguised for reasons of confidentiality.  The author is grateful to the Managing Director for sharing information about the organization.

References:
Aaker, David A (2001), ‘Strategic Market Management’, Sixth Edition, John Wiley and Sons, Inc.
Ansoff, H I (1965), ‘Corporate Strategy: An Analytical Approach to Business Policy for Growth and Expansion’, McGraw Hill.
Brown, L (1997), Competitive Marketing Strategy.
Iyengar, G, Bhupatkar, A P, Kandalgaonkar, S P (1998), ‘Strategic Planning and Organisational Development: The case of a technology company’, Management of Development, AMDISA-Excel Books.
Porter, Michael E (1980), ‘Competitive Strategy’, The Free Press.
Porter, Michael E (1995), ‘How Competitive forces shape strategy’, Marketing Classics: A selection of influential articles, Prentice Hall.
Porter, Michael E (1996), ‘What is Strategy’, Harvard Business Review, November-December 1996.

This paper was presented at a Marketing Conference held at IES Management College, Bandra, Mumbai in February, 2008.