SMEs and supply chain management: A functional perspective

SME

S AND

S

UPPLY

C

HAIN

M

ANAGEMENT

:

A

F

P

SME

S AND

S

UPPLY

C

HAIN

M

ANAGEMENT

:

A

F

P

Proefschrift

ter verkrijging van de graad van doctor aan de Technische Universiteit Delft,

op gezag van de Rector Magnificus prof. ir. K.C.A.M. Luyben, voorzitter van het College voor Promoties,

in het openbaar te verdedigen op dinsdag 2 oktober 2012 om 12.30 uur

door Jafar REZAEI

Master of Science in Industrial Management, University of Tehran, Iran geboren te Shahreza, Iran.

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Dit proefschrift is goedgekeurd door de promotor: Prof. dr. P. Trott

Copromotor: Dr. J.R. Ortt.

Samenstelling promotiecommissie: Rector Magnificus, voorzitter

Prof. dr. P. Trott, Technische Universiteit Delft/University of Portsmouth, promotor

Dr. J.R. Ortt, Technische Universiteit Delft, copromotor Prof. dr. A. Labib, University of Portsmouth, UK

Prof. K. Ruijgrok, Tilburg University Prof. dr. J.C.M. van den

Ende,

Erasmus Universiteit Rotterdam Prof. dr.ir. L.A. Tavasszy, Technische Universiteit Delft Prof. dr. C.P. van Beers, Technische Universiteit Delft

ISBN: 978-90-90-27097-5

Copyright © 2012 by Jafar Rezaei

All rights reserved. Save exceptions stated by the law, no part of this publication may be reproduced, stored in a retrieval system of any nature, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, included a complete or partial transcription, without the prior written permission of the author, application for which should be addressed to author.

iii

Acknowledgements

The road to understanding ourselves as human beings and the world in which we live is infinite. To keep from being overwhelmed by the sheer scale of the journey, we have designed some station along the way, one of the last of which is ‘PhD station’. However, in light of the endless of the journey we are on, we may just as well the PhD station as a beginning. My main concern during my studies has not been to find the best way. Instead, I have tried to find ‘a way’, for which, like anybody, I needed someone to put me in the right direction and people who stood by me on my journey. I have been very fortunate in both areas!

First of all I want to thank my promoter Paul Trott, who has been a tremendous help to me on my journey to the PhD station, who have me a lot of freedom to develop my scientific work independently, and who believed in my work, giving me courage and inspiration on the way. Special thanks go to my co-promoter, Roland Ortt, someone from whom I learned a lot, not only in my scientific career, but also in my personal life! We had many creative meetings which were full of learning and fun for me. Like any other PhD candidate, I encountered some closed doors, and some would simply say: “this is your problem”. These people are rational. Irrationality and unfairness happen when someone adds another lock to the door, and kindheartedness appears when someone is kind enough to hand you a golden key. Roland, that someone was you. Many thanks!

I am also grateful to many other persons during my PhD. I am grateful to Victor Scholten, who kindly provided me with the data on the entrepreneurial orientation of 59 Dutch SMEs, and who contributed to the second chapter of this book. I would like to thank my former roommates Geerten van de Kaa, Sergey Filippov, and Ayoub Mohammadian for the many prolific brainstorming discussions we had. I also wish to thank Patrick van der Duin, Ardalan Haghighat Talab, Mohammadbashir Sedighi, Marian Bosch-Rekveldt, Cees van Beers, Erik den Hartigh, Dap Hartmann, Elisa Anggrani, Claire Stolwijk, Mozhdeh Taheri, Prap Suprapto, Herman Mooi, Laurens Rook, Robert Verburg, and Sam Solaimani for their encouragement, El Arkesteijn and Helen Keasberry for their kindness and support in conducting my survey, and Fardad Zand and Mohsen Davarynejad for their invaluable support in my personal life.

I wish to thank the managers of 314 high-tech SMEs in the Netherland who completed my survey, and the manager of the broiler

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company who provided me with data for my case study in chapters three and four.

During my PhD, I have had the opportunity to work on some other scientific papers with some of my best colleagues and friends: Jos Vrancken, Jan van den Berg, Carlos Coello Coello, Shad Dowlatshahi, Mohsen Davarynejad, Mansoor Davoodi Monfared, Geerten van de Kaa, and Negin Salimi, from whom I learned a lot. Thank you all!

Last but not least, I am really grateful to Negin for her unconditional support and sacrifices. I would like to thank my parents, Hamzeh and Ehteram, my brother, and my sisters for their continuing support and encouragement, and my son, Pedram for the happiness he brings to me every second. I am indebted to you all forever!

Jafar Rezaei 1 September 2012 Delft, The Netherlands

v Table of Contents Acknowledgements iii List of Figures ix List of Tables x 1 Introduction 1 1.1 Small-to-Medium-Sized Enterprises 2

1.2 Supply Chain Management 6

1.3 Research Methodology 8

1.3.1 Problem definition 8

1.3.2 Objectives 10

1.3.3 Research questions 11

1.3.4 Scientific and managerial significance 12 1.4 An overall view of the other chapters 13

1.5 References 16

2 Measuring entrepreneurship: expert-based vs. data-based

methodologies 25 2.1 Introduction 26 2.2 Literature review 27 2.3 Methodologies 29 2.3.1 Naïve 29 2.3.2 Statistical 30 2.3.3 Fuzzy logic 31

2.3.4 Data Envelopment Analysis (DEA)-like 33

2.4 Application 35

2.4.1 Description of the real-world case and data collection 35

2.4.2 Naïve methodology 36

2.4.3 Statistical methodology 36

2.4.4 Intended fuzzy inference system 37

2.4.5 DEA-like methodology 41

2.5 Comparison 44

2.5.1 Ranking the firms 44

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2.5.3 Post analysis (vulnerability) 48

2.5.4 Data-set limitation 49

2.6 Conclusions, implications and future research 49

2.6.1 Conclusion 49

2.6.2 Managerial implications of the findings 51

2.6.3 Future research 51

2.7 References 52

3 A Multi-Variable Approach to Supplier Segmentation 57

3.1 Introduction 57

3.2 Literature review 59

3.2.1 The process method to supplier segmentation 59 3.2.2 The portfolio method to supplier segmentation 60 3.2.3 The involvement method to supplier segmentation 60 3.2.4 Evolution of supplier segmentation methods 63 3.3 A New Approach to Suppler Segmentation 65 3.3.1 Supplier selection and segmentation variables 65 3.3.2 Partnership and collaboration in other activities and

functional areas 72

3.3.3 Supplier management and supplier development 74 3.3.4 The practical steps of supplier segmentation 77 3.4 Illustration of the proposed approach in a real-world situation 78 3.4.1 Supplier segmentation for purchasing function 80 3.4.2 Supplier segmentation for marketing & sales 81 3.5 Discussion, Conclusion and Future Research Directions 84

3.6 References 86

4 Multi-Criteria Supplier Segmentation using a Fuzzy

Preference Relations Based AHP 93

4.1 Introduction 94

4.2 Proposed methodology 99

4.2.1 Preliminaries 100

4.2.2 Preference relations-based fuzzy AHP 102

4.3 Case study 104

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4.5 References 117

5 Supply Chain Partnership: A Functional Perspective 123

5.1 Introduction 123

5.2 Theoretical background 125

5.3 Methodology 130

5.3.1 Population, Sample and Data Collection 130

5.3.2 Analysis 131

5.3.2.1 Confirmatory factor analysis (CFA) 131

5.3.2.2 Regression Analysis 139

5.3.2.3 None-response bias analysis 141

5.4 Managerial implications, conclusions, and future research 143

5.5 References 145

6 SMEs and Supply Chain Partnership: Antecedents and

Consequences 151

6.1 Introduction 151

6.2 Conceptual framework and construct development 153

6.2.1 Entrepreneurial orientation 154

6.2.2 Firm’s drivers to engage in partnership 155

6.2.3 Functional partnership 156

6.2.4 Firm’s functional performance 158

6.3 Methodology 159

6.3.1 Population, Sample and Data Collection 159

6.3.2 Analysis 160

6.4 Managerial implications, conclusions, and future research 166

6.4.1 Managerial implications 166 6.4.2 Conclusions 167 6.4.3 Future research 168 Appendix A 169 Appendix B 170 Appendix C 173 Appendix D 177 6.5 References 179

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7 Conclusion 185

7.1 Main findings and scientific implications 185 7.1.1 Measuring entrepreneurial orientation 185

7.1.2 Supplier segmentation 188

7.1.3 SMEs partnering in SCM 190

7.2 Managerial implications 192

7.3 Limitations and Future research 194

7.4 Concluding remarks 197

7.5 References 197

Appendix 1 Questionnaire 200

Summary 212

Samenvatting 214

ix List of Figures

Figure 1.1 A typical supply chain of a firm 7

Figure 1.2 A general framework for inter-organizational relationships 14 Figure 1.3 An overview of the chapters of this thesis 16 Figure 2.1 Dimensions and items of entrepreneurial firm 29 Figure 2.2 The proposed two-level fuzzy inference system 37 Figure 2.3 Intended fuzzy inference systems 39 Figure 2.4 Rules output for two firms 45 and 59 46 Figure 3.1 Supplier segmentation based on supplier potential 68 Figure 3.2 Different supplier segmentation based on three dimensions

73 Figure 3.3 Supplier development based on supplier potential 76 Figure 3.4 The conceptual framework for supplier-related activities for

a buyer 78

Figure 3.5 Supply chain of the broiler company 79

Figure 3.6 Supplier segments (purchasing) 81

Figure 3.7 Suppliers segments (marketing & sales) 82 Figure 4.1 Fuzzy linguistic assessment variables 103 Figure 4.2 Defuzzified weight of capabilities criteria 110 Figure 4.3 Defuzzified weight of willingness criteria 111

Figure 4.4 Segments of the suppliers 113

Figure 5.1 Two conceptual models to operationalize SC partnership 129 Figure 5.2 Response trend projections for the coefficients of five

regression analyses 142

Figure 6.1 A typical supply chain of a firm 152 Figure 6.2 A conceptual framework of SMEs functional partnership and

its antecedents and consequences 154

Figure 6.3 A conceptual model for functional partnership 158

x

List of Tables

Table 1.1 Advantages, and challenges of SMEs 4 Table 2.1 Fuzzy rule base for innovativeness (level 2) 40 Table 2.2 The results obtained by the methodologies 42 Table 2.3 The ranking results of the methodologies 43 Table 2.4 The correlation between the results of the four methodologies

44 Table 2.5 The detail data of two selected cases for comparison purpose

(firms 45 and 59) 45

Table 2.6 Classification of the firms based on the final degree of their

entrepreneurship 48

Table 2.7 Characteristics of the methodologies 50 Table 3.1 The approaches and methods to supplier segmentation 62 Table 3.2 Variables of suppliers’ capabilities for possible supplier

segmentation 69

Table 3.3 Variables of suppliers’ willingness for possible supplier

segmentation 71

Table 4.1 A list of capabilities criteria 96

Table 4.2 A list of willingness criteria 98

Table 4.3 Fuzzy linguistic assessment variables 103 Table 4.4 Selected capabilities and willingness criteria 105 Table 4.5 Capabilities and willingness measures of the suppliers 106 Table 4.6 Fuzzy pairwise comparison of capabilities criteria 108 Table 4.7 Fuzzy pairwise comparison of willingness criteria 108 Table 4.8 Fuzzy linguistic preference relation decision matrix of

capabilities criteria 108

Table 4.9 Fuzzy linguistic preference relation decision matrix of

willingness criteria 109

Table 4.10 Transforming results of the six capabilities criteria matrix

from Table 4.8 109

Table 4.11 Transforming results of the six willingness criteria matrix

from Table 4.9 109

Table 4.12 Capabilities and willingness criteria weights 110 Table 4.13 Aggregated scores for suppliers' capabilities and willingness

111

Table 4.14 Segments of the suppliers 112

Table 5.1 Some definitions of supply chain partnership 126 Table 5.2 Some characteristics of the sample, and the respondents 131

xi Table 5.3 Standardized estimations of the two models organizational,

and functional 134

Table 5.4 Fit indices of the models organizational, and functional 136 Table 5.5 Mean, standard deviation (s.d.) and correlation of the

constructs of the functional model 137

Table 5.6 The results of regression analysis: standardized coefficients

and their corresponding t-values 140

Table 5.7 The cumulative values for regression coefficients using the

projected respondent method 142

Table 6.1 Some characteristics of the sample, and the respondents 160

Table 6.2 Fit indices of the path model 164

Table 6.3 Standardized estimations of the CFA of the firm EO 169

Table 6.4 Fit indices of the EO CFA model 169

Table 6.5 Mean standard deviation (s.d.) and correlation of the

constructs of the EO model 170

Table 6.6 Standardized estimations of the CFA of the firm drivers to

engage in partnership 170

Table 6.7 Fit indices of the drivers CFA model 172 Table 6.8 Mean standard deviation (s.d.) and correlation of the

constructs of the Drivers model 172

Table 6.9 Standardized estimations of the functional partnership CFA

model 173

Table 6.10 Fit indices of the functional partnership model 175 Table 6.11 Mean standard deviation (s.d.) and correlation of the

constructs of the functional partnership model 176 Table 6.12 Standardized estimations of the functional performance CFA

model 177

Table 6.13 Fit indices of the functional performance model 179 Table 6.14 Mean standard deviation (s.d.) and correlation of the

1 Introduction

“Entrepreneurs strive to use resources, rather than own them” (Cooper, 2002)

Imagine a small firm in a high-tech industry with only a dozen employees as its major assets. Its primary concern would be to survive in today’s highly competitive market and then grow. Small firms, however, do not benefit from what their large counterparts take advantage of: “economies of scale, experience, brand name recognition, and market power” (Chen and Hambrick 1995). Building around limited resources and the knowledge and capabilities of a few people may motivate these small businesses to outsource some of their activities and to form partnerships (Cooper 2002) with other supply chain actors as a way to compensate for their lack of resources and realize sustainable competitive advantage. Forming partnership is not easy, however. A firm may face several important questions when deciding to make partnership. Perhaps the first and most important question would be: what is a partnership? How is it different from a contractual relationship? For which functions/activities, engaging in a partnership is more crucial to the market success of a firm? What is the impact of these partnerships on a firm's functional and overall performance? There are some more important questions in this regard that a firm should answer before engaging in and implementing partnership.

Although partnerships are beneficial (Halldórsson and Skjøtt-Larsen 2004; Tai, Ho et al. 2009), there are also disadvantages, such as an increased dependence on suppliers, communication costs and the risk of losing confidential information (Kelle and Akbulut 2005). As such, it becomes very important for firms to invest on relationships that are beneficial to the firm and that meet its expectations. The question is then how managers can distinguish beneficial partnerships in advance? And, assuming the firm was able to identify potentially beneficial relationships, can all these partnerships be managed in a same way? It would be also very interesting to see how a firm's level of entrepreneurship affects its engagement in supply chain partnerships. Because entrepreneurial firms are more innovative, prone to take risks and proactive, it is interesting to see how these characteristics affect their decision to engage in different kinds of partnerships with different supply chain actors.

The main purpose of this thesis is to propose some systematic models, bridging SME, entrepreneurship and supply chain management (SCM), to find some answers to these questions, and thus help small businesses enter into more effective and efficient partnerships. We begin by providing an

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overview of the building blocks used as a basis for this research. In other words, we first elaborate on small-to-medium-sized enterprises (SMEs), to determine the boundary of this research, and clarify the advantages and challenges of SMEs may lead them towards supply chain partnership. Next, the main concepts of SCM are presented. Supply chain partnerships are investigated as a potential solution to the obstacles SMEs face. However, as mentioned above, not every partnership is beneficial. As such, we elaborate on the effect of partnerships on firm performance to identify the beneficial partnerships in a systematic way. After that, the research methodology including the main problem, the objectives and the research questions are discussed. Different data sets and methodologies used in the rest of this thesis, along with an overview of the remaining chapters, are also briefly addressed.

1.1 Small-to-Medium-Sized Enterprises

Small-to-medium-sized enterprises (SMEs) play an essential role in the economy. They are a major source of employment, entrepreneurial skills and innovation. In the enlarged European Union of 25 countries, some 23 million SMEs provide around 75 million jobs and represent 99% of all enterprises (European Commission, 2003). In the US, more than 5,500,000 SMEs create 2 out of 3 new jobs (US Small Business Administration 2000), are responsible for almost half the Gross National Product and employ over half of the workforce (US Census Bureau 2000). In Japan, 69% of the workforce is employed by SMEs (Barnes, 2008). In China and Singapore, SMEs number around 90% of all businesses, and in Hong Kong they account for 98% of all registered businesses (ACCA 2006). In Australia 74% of the Australian workforce is employed by SMEs (ABS). In the UK, they represent for 56% of employment and 52% of the national turnover. In Iran, SMEs number around 92% of all businesses and account for 63% of employment (MN 2007).

There are different definitions for SMEs in different economies, mostly based on the number of employees. As this research was conducted in the Netherlands, we use the definition of SME provided by European Commission (European Commission, 2003):

“The category of micro, small and medium-sized enterprises (SMEs) is made up of enterprises which employ fewer than 250 persons and which have an annual turnover not exceeding 50 million euro, and/or an annual balance sheet1 total not exceeding 43 million euro.”

1 _{Assets = Liabilities + Shareholders' Equity}

3 Based on Wynarczyk et al. (1993), there are three central aspects, apart from size, in which small firms are different from large firms: 1) Uncertainties associated with being a price-taker, having a limited customer and product base, and having greater diversified objectives of the owners; 2) Innovation, small firms work in innovations that are more related to ‘niches’, they invest less in R&D than large firms, even though the likelihood of introducing fundamentally new products and services in small firms is higher compared to large firms; and 3) Evolution, the likelihood of change and evolution in small firms is much higher compared to large firms. However, the authors mentioned that a small firm that becomes larger undergoes multi-stage changes rather than a single-stage change and, as a result, its management styles and organizational structure changes fundamentally (Storey, 1994). These changes are similar to the evolution of a caterpillar becoming a butterfly (Penrose, 1959) and, consequently, we cannot easily generalize the findings related to large firms to small firms.

Nooteboom (1994) determines many characteristics of SMEs, including intertwined ownership and management, integration of tasks in worker, variation and improvisation, few hierarchical levels, short communication lines, few and simple procedures, personal, direct, oral internal communication, personal and close relations with customers, craftsmanship, tacitness of knowledge, and idiosyncratic perception, few products and markets, small volume of production, no staff functionaries, lack of managerial time, much authority and many functions in one hand, low level of abstraction product- or technique orientation, and possible lack of finance. These characteristics can affect different parts of this research. For example, many new firms can be expected to experience difficulties in obtaining financial resources from the formal capital markets, for example because the available governance mechanisms are often insufficient to protect the financial interests of these institutions because quantifying the risks involved is very difficult. These firms are able to establish themselves successfully by using less formal business contacts, through access to a network of embedded business relationships (Wynarczyk and Watson, 2005). SMEs use upstream vertical alliances to access critical resources, to obtain the legitimacy they need and to learn about current benchmarks as well as future opportunities (Arend, 2006).

SMEs have some advantages because of their characteristics, the core characteristics of these businesses are small scale, personality and independence (Nooteboom, 1994). Many obstacles and weaknesses in SMEs are also emphasized in existing literature. We summarize these advantages and disadvantages (Nooteboom, 1994; Rothwell, 1994, 1989;

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Cooper, 1964; Vossen, 1998; Buijs, 1987; Freel, 2000; Filson and Lewis, 2000; Cobbenhagen, 1999; Pissarides, 1999; Scozzi and Garavelli, 2005) in Table 1.1.

Table 1.1 Advantages and challenges of SMEs

Advantages Challenges and Problems

Strong relationships with customers

Rapid response to technical and market shifts

Dynamic and entrepreneurial management style

High average capability of technical people

Less expensive innovations High ability to explore new technical spaces

More efficient and effective innovations Motivated management/commitment Motivated labor No bureaucracy Internal flexibility

Little filtering of proposals Low costs and little distortion of internal communication

Capacity for customization Unique or scarce competencies Originality of initiative Dynamic and entrepreneurial managers

Willingness to accept risk Efficient and informal internal communication networks Fast response to internal problem solving

Lack of financial resources Lack of skilled workers

Weakness in external information and linkages Difficulty in coping with government regulations Unable to exploit new products

Limited organizational, managerial and marketing capabilities and ad hoc management

Reluctance to change

Tendency to ignore procedures Focus on short-term requirements Lack of strategic vision

Diffusion of a blame culture Unopposed misapprehensions

Limited capacity for absorption of new knowledge /technology

Technical myopia Little spread of risk Limited synergy

Diseconomies of small scale

Lack of functional and technical specialists Vulnerability to discontinuity of management and staff

Lack of means for growth

Unable to support a formal R&D effort on an appreciable scale

Lack the time or resources to identify and use important external sources of scientific and technological expertise

Inability to spread risk over a portfolio of projects Inability to offer integrated product lines or systems Unable to afford time or costs involved in patent litigation.

Lack of structured organizational memory

As becomes clear from Table 1.1, SMEs are struggling with several shortages, most notably a lack of resources or a lack of means to grow. These shortages force SMEs to engage in partnerships with other actors of supply chains. Lambert (2008), and Lambert et al. (1996) identified a list of potential drivers for firms to engage in supply chain partnerships in four

5 main categories: asset/cost efficiency, customer service, marketing advantage, and profit stability/growth. Forrest and Martin (1990) identified technology development, technology commercialization and financial benefits as the most important drivers in the biotechnology industry. Table 1.1 shows that many advantages and challenges may motivate SMEs to engage in partnerships.

In this thesis, we focus mainly on SMEs operating in high-tech industries. We will also evaluate the entrepreneurial degree of SMEs to see the effect of their level of entrepreneurship on their engaging in partnerships and their performance. Because there is little agreement among entrepreneurship researchers on how to define entrepreneurial firms, they have conceptualized entrepreneurial firms in multiple ways, ranging from a high-growth firm, to an owner-managed business, to a founder-run business (Daily et al., 2002). Entrepreneurial firms have often been defined based on their size, growth rate and origin (Tansky and Heneman, 2006). Miller (1983, p.771) argued that "an entrepreneurial firm is one that engages in product-market innovation, undertakes somewhat risky ventures, and is first to come up with 'proactive' innovations, beating competitors to the punch." In other words, entrepreneurial firms engage in entrepreneurial orientation (EO). A firm’s entrepreneurial orientation (EO) has been defined to consist of the processes, practices and decision-making styles that lead to entrepreneurial behavior in the organization (Lumpkin and Dess, 1996). EO has been conceptualized by Covin and Slevin (1986) as having three dimensions:

1. Innovativeness, 2. Proactiveness, and 3. Risk-taking.

Innovativeness: The essence of entrepreneurship is creation (Schumpeter,

1934; Drucker, 1985; Sweeney, 1987; Porter, 1985; Hornaday, 1992) and innovation (Lumpkin and Dess, 1996; Shane and Venkataraman, 2000). “Innovativeness reflects a firm's tendency to engage in and support new ideas, novelty, experimentation, and creative processes that may result in new products, services, or technological processes” (Lumpkin and Dess, 1996).

Proactiveness: Proactiveness is reflected in anticipating and acting on

future needs of firms by "seeking new opportunities which may or may not be related to the present line of operations, introduction of new products and brands ahead of competition, strategically eliminating operations which are in the mature or declining stages of the life cycle" (Lumpkin and Dess, 1996; Venkataraman, 1989).

Risk-taking: Risk-taking is reflected in “the degree to which managers are

willing to make large and risky resource commitments i.e., those which have a reasonable chance of costly failures” (Miller and Friesen, 1978).

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Several studies have investigated the relationship between EO and other firm features. For example (Lumpkin and Dess 1996; Wiklund and Shepherd 2003; Wiklund and Shepherd 2005; Rauch, Wiklund et al. 2009) have studied the relationship between EO and firm performance, and found a positive effect of EO on firm performance. Rauch et al. (Rauch, Wiklund et al. 2009), conducting a meta-analysis, found that the correlation between EO and performance is moderately large. In this research we are interested to measure EO using different methodologies, and to study the relationship between EO and a firm's to engage in supply chain partnerships, and in turn its effect on firm performance.

1.2 Supply Chain Management

As mentioned before, SMEs face many resource-related restrictions. One way to overcome them is to engage in partnerships and in fact use the resources of others to create a sustainable competitive advantage. Inter-organizational relationships help firms create value by combining resources, sharing knowledge, increasing speed to market, and gaining access to foreign markets (Doz and Hamel, 1998). These inter-firm cooperative relationships can help firms, especially SMEs, which face with many obstacles and weaknesses, such as a lack of financial resources, inadequate management and marketing, a lack of skilled workers, weakness in external information and linkages, and difficulty in coping with government regulations, which limit their competitiveness (Buijs, 1987; Freel, 2000; Rothwell, 1994). The inter-organizational relationships are placed between the two extremes of pure market and vertical integration. Within this spectrum, supply chain management (SCM) is an intermediate type of relationship (Harland, 1996). The term ‘supply chain management’ originated in the early 1980s, when Oliver and Webber (1982) first coined the term to refer to the integration of different business functions. However, it was not until the 1990s and 2000s that SCM received real attention. There are many definitions of SCM (e.g. Ellram and Cooper, 1990; Cooper and Ellram, 1993; Mentzer et al., 2001; Min and Zhou, 2002; Mouritsen et al., 2003; Burgess et al., 2006; Lambert, 2008). One of the most comprehensive definitions sees supply chain management as “the systemic, strategic coordination of the traditional business functions and the tactics across these business functions within a particular company and across businesses within the supply chain, for the purposes of improving the long-term performance of the individual companies and the supply chain as a whole” (Mentzer et al., 2001). Successful supply chain management requires the involvement of these

7 corporate functions (Lambert, 2008). These functions are marketing and sales, logistic, purchasing, production, finance and R&D (Mentzer, 2004; Lambert, 2008). Figure 1.1 shows a typical supply chain as a network of materials, products, service and information flows.

Suppliers _Customers

Focal firm

Purchasing Production Marketing & Sales

Logistics Finance

Research & Development

Figure 1.1 A typical supply chain of a firm

Over the last four decades, the role of supply chain management has changed considerably within organizations. In the 1970s, supply chain management, which was primarily known as distribution, was focused on the optimization and integration of warehousing and transportation within firms, the goal being to reduce inventories and distribution costs. In the 1980s, the focus was on the re-engineering of supply chain cost structures in order to reduce supply chain operating costs and supply chain assets. In the 1990s, the focus shifted from reducing costs to improving customer service. Product development and growth also became objectives of the supply chain organization. In the 2000s, the focus was on the evolution of strategic supply chain management, which meant that supply chain management was viewed as a driver and enabler of the business strategy of the firm and no longer solely as the forming part of a firm’s operational strategy (Evans and Danks, 1998).

Partnership is a central concept in supply chain management (SCM), and is in fact the driving force of effective SCM (Horvath 2001). Apart from the centrality of the concept in SCM studies, there are a few works on the concept itself and its operationalization (Anderson and Narus 1990; Spekman et al., 1998). Maloni and Benton (1997) define supply chain partnership as “a relationship formed between two independent entities in supply channels to achieve specific objectives and benefits”. While existing literature focuses mainly on an organizational perspective on partnership, the functional perspective has received relatively less attention. It is necessary to include all of the traditional business functions in the process and implementation of partnerships (Mentzer et al., 2001). When it comes to the functional perspective, we see that most partnerships involved logistics and purchasing (see for example: Caniëls et al., 2010;

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Caniëls and Gelderman 2007; Carr and Pearson 1999; Ellram, 1995; Gao et al., 2005; Heide and John 1990; Miller and Kelle 1998; Noordewier, John and Nevin 1990; Stump and Sriram 1997), which can be attributed to the dominant role of these functions in buyer-supplier relationships; a few studies are devoted to other functional areas, such as research and development (R&D), marketing and sales, production, and finance (Rezaei and Ortt 2012). Notwithstanding this, it has been shown that other business functions also play an important role in partnerships. For example, according to Ruekert and Walker (1987), marketing plays a coordinating role in connecting all the other functional departments to the outside environment. A study by Hagedoorn (2002) showed a general growth pattern for R&D partnership, especially in high-tech industries, during the last four decades. So, in this research, partnerships are investigated from a functional perspective to better understand the effect of engaging in partnership on firm performance, which means we not only look at the relationship between two organizations as two entities, but rather at their relationship in different functional areas, such as R&D, marketing, etc.

Some researchers have reported that engaging in the supply chain benefits SMEs, while others identified some disadvantages. For example, Koh et el. (2007), based on a survey conducted in Turkey, reported that SCM practices increase the operational performance of SMEs, which in turn leads to an improved organizational performance related to SCM, while Arend and Wisner (2005), based on a survey among senior managers (mostly from the US and with experience in SCM and/or SMEs), concluded that SCM practices do not improve the performance of SMEs. We believe that engaging in SCM may have different effects on functional performance in different contexts. Therefore, it would seem that adopting a functional perspective on partnerships may resolve many problems and questions practitioners and scientists have regarding the relationship between supply chain partnership and SME performance.

1.3 Research Methodology

1.3.1 Problem definition

SMEs play a central role in the world economy. They are a major source of entrepreneurial skills, innovation and employment (European Commission, 2003) and play a key role in the evolution of markets (Almeida and Kogut, 1997). Despite their critical role, most of them

9 cannot survive for long terms, especially because of their financial obstacles (Rothwell, 1989).

Inter-organizational relationships (IORs) help firms create value by combining resources, sharing knowledge, increasing speed to market, and gaining access to foreign markets (Doz and Hamel, 1998). There are many different forms of IORs, such as joint ventures, networks, alliances, trade associations, interlocking directorates (Barringer and Harrison, 2000), partnership franchises, license agreements, contractual relationships, service agreements, administrated relationships (Golicic et al., 2003), innovation networks, and R&D consortia (Trott, 2008). Supply chain management (SCM) is an intermediate type of relationship in a spectrum ranging from vertical integration to pure market or arm’s length (consisting of either one-time exchanges or multiple transactions) (Harland, 1996; Contractor and Lorange, 1988; Lambert, 2008). Most relationships between organizations are at arm’s length, whereby a supplier offers standard product/service to many customers and when the exchanges end the relationship ends, while partnerships refer to a closer and more integrated relationship, providing significant benefits to both firms (Lambert, 2008).

For many reasons, such as its emphasis on time and quality-based competition, supply chain management has been a dominant strategy for many firms in the past recent decades (Cooper et al., 1997). However the main focus in existing literature is on studying different aspects of SCM in large firms (Thakkar et al., 2008). Recently, some researchers have studied some challenges, advantages and disadvantages of SCM in SMEs (e.g. Tan

et al., 2006; Rosanna and Andrea, 2006) but, despite the importance of

high-tech SMEs, few studies examine issues involving SCM in these enterprises. Many SMEs, choose to make SCM part of their strategy implementation (Arend and Wisner, 2005), although the implementation of SCM in SMEs is different from that in large enterprises (LEs) and while some SMEs successfully engaged in SCM, others could not benefit from that (Thakkar et al., 2008, Arend and Wisner, 2005). In fact, as pointed out by Penrose (1959), a small firm is not a miniaturized version of a large firm, like a caterpillar is not a miniaturized version of a butterfly. Consequently, based on the differences between the quality and ways of implementation of SCM in LEs and SMEs, we cannot generalize the findings of existing studies to this kind of firms. Therefore, the view of these firms towards SCM, the potential benefits and obstacles of engaging in SCM, and the quality of the implementation of SCM are not yet clear. This research project aims to investigate these scientific gaps.

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1.3.2 Objectives

The main purpose of this research is to identify the challenges SMEs introducing and developing their products are faced with in SCM in order to find more effective and efficient SCM strategies. The objectives of this research are:

 To find out the drivers of SMEs to engage in partnership;

 To find out the SCM strategies of SMEs in engaging in partnership with the other actors;

 To find out the effects of the SCM strategies of SMEs on their performance in order to identify more successful SCM strategies for SMEs.

High-tech entrepreneurial SMEs have a combinational set of characteristics of SMEs, high-tech, and entrepreneurial firms such as small scale, research intensive, innovativeness, proactiveness, and risk taking, some of which may encourage them to engage in SCM, while others may limit the extent to which they benefit from SCM. For instance, one of the most important elements of an inter-organizational relationship is its degree of dependence (Jap and Anderson, 2007), while one of the characteristics of SMEs (generally) (Nooteboom, 1994) and especially high-tech entrepreneurial SMEs (Lumpkin and Dess, 1996) is independence or autonomy. Therefore, as the first objective of this research, we are interested in finding out why these firms choose SCM as a strategy to leverage their limited resources. As the second important objective, we want to know how these firms, with several conflict characteristics, enter into

partnerships with other actors in supply chains. There are many studies on

the SMEs challenges, weakness and strengths of SMEs and how and why they make innovative products and services and therefore are able to survive in competitive environments. In this research, our aim is not to find these issues, but instead we want to know how these firms overcome their obstacles and reinforce their advantages to engage in supply chain partnerships and gain a competitive advantage. Once we can find different SCM strategies, the third objective of this research is determining the effects of these strategies on firm performance, which will allow us to distinguish successful strategies - which will finally result in competitive advantages - from unsuccessful ones.

Reaching the objectives discussed above will give us some managerial tools to make SMEs more aware of potential advantages and disadvantages of engaging in SCM and apply more successful SCM strategies, and decide which partner is more suitable for which function, when and where.

11 1.3.3 Research questions

This research aims to answer the following main question.

Why and how do high-tech, entrepreneurial small-to-medium-sized enterprises create their relationships in supply chains, and what is the effect of this on their performance?

This question looks at three main issues of these firms in SCM: 1. Motivations/drivers of SMEs to engage in partnership; 2. Establishing relationship with partners in SCM context; 3. Effect of SCM strategies on SME performance

Which lead to the following sub-questions.

 Why do SMEs engage in partnership with other supply chain partners?

How do SMEs engage in partnership with other supply chain partners?

What is the relationship between SCM strategies of SMEs and their performance?

Below, we discuss these research questions in more detail:

Why do SMEs engage in partnerships with other supply chain partners?

Firms may have a variety of reasons (drivers) for engaging in partnership with other firms. Drivers should be examined before engaging in partnership (Lambert 2008). They must exist to set the supply chain goals (Min and Zhou 2002), and must be strong enough for a firm to strengthen the relationship with other supply chain partners (Lambert et al. 1996). It has been found that, while cost reduction, having a reliable source of supply and reduced lead time are key drivers for buyers to engage in partnerships, revenue/profit enhancement, strategic market position and customer satisfaction are key drivers for suppliers (Spekman et al., 1998).

How do SMEs engage in partnership with other supply chain partners?

The answer to this question determines the different strategies SMEs use to engage in supply chains. We want to determine these strategies in terms of two dimensions:

o The characteristics of the relationships, such as the degree of joint decision-making, information sharing, commitment, trust, etc. o Business functions that the relationships are based on, such as marketing and sales, logistics and purchasing, research and development, etc.

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What is the relationship between SCM strategies of SMEs and their performance?

As mentioned before, in this study, we begin by determining different SCM strategies of SMEs. This question relates to the relationship between these strategies and firm performance. Because these strategies link the firm with other firms to perform different functions, we investigate the effects of these strategies not only on the overall performance of the firm, but also on its different functional performances.

1.3.4 Scientific and managerial significance

The aim of this study is to contribute to the theoretical body of knowledge on SCM in small-to-medium-sized enterprises, especially high-tech entrepreneurial ones. SMEs, making up the largest part of today’s economies, may benefit from outcomes of this research.

SMEs are the most important part of almost all economies. For instance, in the European Union, SMEs represent 99% of all enterprises (European Commission, 2003). We can see that the majority of enterprises in different economies are SMEs. Therefore, although studying SCM with regard to SMEs seems to have a significant value, most studies have so far focused on large enterprises (Thakkar et al., 2008). On the other hand, SMEs implement SCM in a different compared to LEs (Arend and Wisner, 2005), which means we cannot easily apply existing findings on SMEs.

Recently, some researchers have focused on specific aspects of SCM, such as the integration, planning and implementation in SMEs (e.g. Stefansson et al., 2002; Macpherson and Wilson, 2003; Lajara and Lillo, 2004; Arend and Wisner, 2005; Morrissey and Pittaway, 2004, 2006; Wagner et al., 2003). They attempted to investigate issues like the strengths and weaknesses of SMEs entering the SCM, the relationship between supplier and buyer in SCM, fitness of SCM for SMEs, and the effect of engaging in SCM on firm performance. However, there is a common characteristic in most of these studies, which is that they consider concepts such as “entering the SCM”, “engaging in SCM” and or “doing the SCM” as a single construct rather than a concept that can be decomposed to completely different forms.

Here, we argue the main reasons why the engagement of SMEs in SCM should be considered as a set of constructs as follows.

 Some researchers (e.g. Arend, 2006; Arend and Wisner, 2005) have investigated the relationship between the engagement of SMEs in SCM and their performance. We believe that considering SCM as a single concept cannot lead to useful results in this field. Each SCM is constructed

13 from a large number of inter-organizational relationships between different partners, for different purposes and to carry out different business functions, which that assessing the fitness of SMEs and SCM is not easy and meaningful. Instead it seems more logical and beneficial if we investigate the effects of different relationships with different partners for different business functions.

 Firms have different relationships with different partners. While some of these partners may have a positive impact on a firm’s performance, others may have a negative effect, or a firm can do well in some SCM functions and less well in others.

 Different SMEs have different organizational structures, objectives and resources and operate in a specific industry structure. Therefore, engaging in SCM depends on the firm characteristics and on the drivers for engaging in a partnership.

Also, it seems that engaging in SCM does not have the same impact on all kinds of SMEs. According to some special characteristics of entrepreneurial firms, such as risk taking and innovativeness, they are expected to behave differently in engaging in SCM.

So, we believe that establishing a relationship between the two concepts of SCM and SME as two single entities, while both of them have several subsets, cannot lead to efficient and effective practical results. Instead, we intend to determine the relationship between their subsets under different circumstances. As such, in this research, instead of an organizational perspective on partnership, we propose and examine a functional perspective on partnerships. In other words, we investigate how SMEs make different partnerships with different supply chain partners in different functional areas. The functional perspective allows top-management to assess which functions depend most on, or are relatively best in, collaboration with supply chain partners. Furthermore, the effect of the degree of partnership on firm performance in different functional areas can be assessed by indicating where the collaborative efforts pay off and where they do not.

1.4 An overall view of the other chapters

To examine the research questions and realize the objectives of this project, a set of studies have been conducted. We begin with a general framework, which is a guideline for developing any inter-organizational relationship (see Figure 1.2).

14

Partner Selection Partner Segmentation Partner Relationship Management

Figure 1.2 A general framework for inter-organizational relationships

Generally speaking, there are three consecutive steps in any inter-organizational relationship: (1) Partner selection; (2) Partner segmentation; and (3) Partner relationship management. In these steps, the term partner refers to customers, suppliers, third party logistics or any other possible partners in inter-organizational relationships. In the first step, a firm selects a sub-set of partners from a bigger set, to optimize the potential benefits from the relationships. Many studies focus on this strategic decision (e.g. Dickson, 1966; Weber et al., 1991; Swift, 1995; Choi and Hartley, 1996; Hitt et al., 2000; Kannan and Tan, 2002; Smeltzer, 1997; Huang and Keskar, 2007; Handfield et al., 2002; Humphreys et al. 2003; Chan, 2003; Ho et al.; 2010, Ravindran et al., 2009; Rezaei and Davoodi, 2008, 2011, 2012). Given a specific set of partners (e.g. suppliers), supplier relationship management provides a basis for firms to develop and maintain relationships with these suppliers (Lambert, 2008). Especially when firms have many suppliers, it is difficult to manage every relationship individually, which is why, in supplier relationship management, firms develop business-to-business strategies for different groups of suppliers (Wagner and Johnson, 2004). Supplier segmentation, as a step between these two strategic activities (supplier selection and supplier relationship management), yields distinct groups of suppliers based on their similarities. Finally, what is very important is how to manage the relationship with different partners.

In this thesis, we focused on the last two steps. However, because we want to see what effect entrepreneurial orientation (EO) has on an SME's engagement in SCM activities, we begin by discussing some methodologies to measure the level of entrepreneurship of a firm (Chapter

2: Measuring entrepreneurship: expert-based vs. data-based

methodologies). In other words, we apply statistical and expert-based

methodologies to measure EO and show how different methodologies can be applied in different circumstances. Next, a new conceptual framework for supplier segmentation is proposed in Chapter 3 (A Multi-Variable

Approach to Supplier Segmentation). As a basis for this new approach, we

developed three requirements to create an overarching approach to supplier segmentation. Firstly, supplier segmentation should be based on long-term potential, which we propose to assess in terms of a supplier's capabilities and willingness to cooperate. Secondly, other functional areas,

15 beyond purchasing, have to be considered when segmenting suppliers. Thirdly, supplier segmentation should be viewed as a step in a longitudinal process that includes selecting and segmenting suppliers, managing the relationship with them and actively developing their role over time. In Chapter 4 (Multi-criteria supplier segmentation using a fuzzy preference

relations based AHP), a multi-criteria decision-making approach is

applied to the supplier segmentation problem. A methodology is proposed that includes a fuzzy Analytic Hierarchy Process (AHP), which uses fuzzy preference relations to incorporate the ambiguities and uncertainties that usually exist in human judgment. The proposed methodology is used to segment the suppliers of a broiler company. Chapters 3 and 4 together cover the second step (i.e. supplier segmentation). Then we go to the third step (partner relationship management). In Chapter 5 (Supply chain

partnership: A functional perspective), we look at the supply chain

partnership from two perspectives: organizational and functional. The organizational perspective assumes that partnerships are formed by organizations as a whole, while the functional perspective claims that partnerships are formed by business functions, such as marketing or R&D, within organizations. To evaluate these two perspectives, we conducted a survey among high-tech SMEs. We used confirmatory factor analysis (CFA) to evaluate the fitness of a functional and organizational model. The results of CFA show a better fitness of the functional model, meaning that collaboration between organizations is reflected in functional rather than organization-wide aspects. We then studied the relationship between the functional model and the overall performance of the firm. The results indicate a significant relationship between partnerships in research and development (R&D) and the overall performance of the firm. We believe these results provide a new opportunity for both scientists and practitioners to increase their understanding of partnerships within supply chain management. In Chapter 6 (SMEs and supply chain partnership:

Antecedents and consequences), based on the previous data, a

comprehensive set of constructs and their relationships are examined as a whole model for partnership of SMEs with their supply chain partners considering several antecedents and consequences. We used CFA, and structural equation modeling (SEM) to see the relationships between different levels of the model. Several interesting results are discussed in Chapter 6. Chapter 7, finally provides the conclusions and some suggestions for future research (see Figure 1.3).

16

CHAPTER 6 (Statistical, N=279) Overall Model (SMEs Partnership: Antecedents, and

consequences) Firm CHAPTER 5 (Statistical, N= 279) SC Partnership Firm Performance CHAPTER 3 (Conceptual) CHAPTER 4 (MCDM, N=43) Supplier Segmentation CHAPTER 2 (MCDM and Statistical, N=59) Entrepreneurial Orientation (EO) Drivers to engage in SC partnership Partnership in marketing and sales Partnership in research and development Partnership in purchasing and logistics

Partnership in production Partnership in finance

Performance in marketing and sales Performance in research

and development Performance in purchasing and logistics

Performance in production Performance in finance Supplier Segmentation in

marketing and sales

Supplier Segmentation in research and development

Supplier Segmentation in purchasing and logistics

Supplier Segmentation in production

Supplier Segmentation in finance

Partner Segmentation Partner Relationship Management

C H A P T E R 1 I n tr o d u ct io n C H A P T E R 7 C o n cl u si o n

Figure 1.3 An overview of the chapters of this thesis

As can be seen in Figure 1.3, in this thesis, two different types of methodologies are applied: (1) Multi-criteria decision-making (MCDM) methodologies; and (2) Statistical methodologies on three different data sets (43 suppliers of an SME in the food industry, 59 Dutch high-tech SMEs, and 279 Dutch high-tech SMEs). In the next chapters, we discuss how different methodologies suit different situations. Generally speaking, when the main goal is to make a decision for a particular purpose, and when there is a limited amount of data, MCDM methodologies are more suitable. It is clear that, here, the goal in not to generalize the results to the other members of the corresponding population. However, when the main goal is to discover a phenomenon or to find out the relationship between different phenomena, and when usually more data is available, statistical methodologies are more suitable. In that case, the researcher wants to generalize and apply the results to the other members of the corresponding population.

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