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Internal Business Processes of a Small and Medium Enterprise (SME)

What is Small and Medium Enterprise

The research in this study examines the adaptation of internal business processes of a small and medium enterprise (SME) performing as a value link global SMEs A SME experiences unique challenges when strategically aligned within a SCM process (SMEiSCM). In spite of the growing importance of this phenomenon, surprisingly little research has been done. This research partially fills that gap, identifying the adaptation of SMEs to the external demands of working practices, based on the data collected from the internal business processes.

In recent years, there is an increasing trend for SMEs to join the labor rules and regulations led by a large firm. For example, several SME’s supply to Wal-Mart and Wal-Mart with its immense scale of operations, orchestrates the strategy of the entire supply chain. A variety of information and communication technologies (ICT) enables Wal-Mart and its numerous SMEs to execute supply chain strategies (Boekhoudt, & Stappen, 2004), creating a new level of intra-organization. “Supply-chaining is a method of collaborating horizontally–among suppliers, retailers, and customer—to create value…they force the adoption of common standards between companies” (Friedman, 2005, p. 129). This has led some people to observe that competition is now between the supply chain of Target and the supply chain of Wal-Mart (Li, 2001, Kumar, 2001, Chapman, Ettkin, & Helms, 2000).

small and medium enterprise

When a SME chooses to join the working practices orchestrated by a large firm, the SME experiences both advantages and disadvantages. The reduction of risk to the company is the main advantage. The risks include overall cost and time reduction for the completion of the product or service to meet the needs of the customer; overall additional shared resources that are often limited for SMEs; and developing dependencies that lead to a foundation in the customer base (Larson, Carr, & Dhariwal, 2005; Sakaguchi, Nicovich, & Dirbree, 2004). Main disadvantages include the dependency created on the buyer; a loss of autonomy and flexibility; and the loss of the ability to make independent strategic decisions (Beck, Wigand, & Konig, 2005; Meckel, Walters, Greenwood, & Baugh, 2004; Larson, et al.).

The working practices modify their business and information systems (IS) strategies to align with the phases of the other supply chain members in general and that of the orchestrating firm in particular. Typically, the interactions between SMEs and the orchestrating firm are governed using formal contracts of various durations (medium and long run) as well as informal forms of contracts such as trust (Ratnasnigam, & Phan, 2003, Grossman, 2004). It is also believed that SMEiSCM will need to significantly redesign their external business processes (business processes dealing with firm’s customers and suppliers) to align with supply chain phases. Changes in external processes also lead to the redesign of the working practices internal business processes.

Phases of Small and Medium Enterprise

This study addresses the internal business processes within the UK working practices. The phases of this study included:

A review of the existing theoretical research on strategy and business processes in SMEs, which are part of a large working practice and then organized the theoretical findings into a framework. A review of current literature revealed that existing theories are incomplete in explaining how SME firms adjust strategies and adapt business processes. Therefore, the second phase of this research conducted an interpretive, grounded theory study of the adaptation of internal business processes in the working practices. Grounded theory method is useful in examining assumptions in existing theories as well as proposing new theories. The third phase of this research: Provided a theory of adaptation of business processes in global SMEs

Relevance and Significance


SMEs have a major impact on the economy, creating two-thirds to three-quarters of new jobs while employing 50% of the current total workforce including (Federal Reserve Board, 2003; Gramlich, 2003). SMEs, defined as those with fewer than 500 employees, significantly influence the United States’ economy accounting for over half of the private workforce and representing 99.7 percent of all employers (Larson, Carr, and Dhariwal, 2005).

In recent years, the rapid evolution of e-business technologies led large organizations to establish integrated supply chains (Sakaguchi, Nicovich, & Dibrell, 2004, Craighead, & Shaw, 2003). A supply chain consists of numerous SMEs performing various specialized functions such as baking the product for Sara Lee or manufacturing the shoes for Nike shoe company (Kalakota & Robinson, 2001). As the supply chain forms, the SME adapts and integrates, changing the business process. Historically, academic research has focused on the large firms that established the integrated working practices and neglected the SMEs that comprised the working practices in global SMEs. The adaptation of strategies and external and internal business processes among SMEs in the supply chain has received little attention in IS research (Johnston & Wright, 2004).

There are significant differences between large firms and SMEs. Coviello and Martin (1999) suggest that, in contrast to large firms, SMEs “deal with unique size related issues … and they behave differently in their analysis of, and interaction with, their environment” (p. 42). The small size of a SME and lack of resources leads to a lower level of sophistication in, among other things, “knowledge pertaining to management, marketing, commercialization, or information technology” (Jutla, Bodorik, & Dhaliwal, 2002, p. 140).


The research to date is limited with very little focus from the working practices perspective. Operating within a global SME requires firms to share information across organizational boundaries within a network of alliances, including suppliers and end-users (Sakaguchi, Nicovich, & Dirbrell, 2004, Craighead, & Shaw, 2003). This in turn involves extensive IT infrastructure and standardization across the chain. SMEs face special problems, as they are often dependent on larger enterprises where they are suppliers of products (Meckel, Walters, Greenwood & Baugh, 2004). For example, Wal-Mart is requiring all vendors to have secured radio frequency identifiers (RFID) in the product supplied to Wal-Mart (Editorial Staff, 2005). The mandate requires the vendors supplying the product must change the process of manufacturing to include the application of RFID.

The orchestrating firms in large businesses, in the interest of alignment of business objectives across the value chain, are likely to force SMEs to adapt certain business and IT strategies to conform to the larger firm’s strategic objectives (Levy, & Powell, 2005). The SME formulates internal business processes out of these strategic plans, aligning with the large firm.

A large firm, such as Wal-Mart, designs strategies such as every-day low pricing with a business model based on large volumes. Wal-Mart then identifies the product mix, pricing and inventory policies, and communicates this to the SME. The SME does not have an independent strategy, but a derived strategy – the strategy is derived based on Wal-Mart’s requirements. The SME then designs external business processes such as inventory policies, to satisfy Wal-Mart requirements. Next, the external processes translate into a set of internal process requirements such as determining production lot size, raw material and finished goods inventories, work force policies, etc.

The specific framework that is used in the research focuses on the internal business processes within a SME. The general framework scopes the work by restricting attention to internal business processes within the global SMEs. This is in line with extensive IS research which uses business processes as a unit of analysis (Hammer, 2001). Another reason for using business processes as the foci of the study is that business processes have been extensively studied in the IS literature (Elia, Lefebvre, & Lefebvre, 2004).

The dissertation uses business processes as the unit of analysis. The idea is to study re-alignment of external and internal business processes within a global SME. Therefore, an operational version of the general diagram is required for this work. There is considerable work on defining generic business processes within the firm. One such classification is by Elia, et al. that lists 36 processes within five major functional areas. Elia, et al. lists the functional areas, based on research from a multi-stage study, identifying areas e-commerce impacts in a business.

Three main sources of information were used to develop and validate the indicators: 1) an analysis of previous surveys and studies of e-commerce penetration; 2) simulations of simple and advanced e-commerce applications carried out at a university laboratory; 3) results of focus groups (p 3).

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Barriers and Issues

There existed several challenges in accomplishing this research. The first barrier arises from the lack of clear definitions for several terms used in the literature. The researcher reviewed the literature and adopted clear definitions for the purpose of this study and the definitions are presented later in this chapter. The adoption of definitions will create a precise focus for the research.

A second barrier was the lack of an accepted theory specific to SMEs and the interactions with large organizations in relation to supply chains. The research in this study includes a review of the literature to isolate the changes in SMEs within an e-business society and establish an understanding of supply chains. The research then creates a framework using the literature. Elia, Lefebvre, and Lefebvre (2004) have identified a business process typology, which provided a basis for the framework used in the research.

The third barrier included the lack of theory to support the development of hypotheses. An interpretive study, conducting interviews and building case studies provided the research methodology adopted for this study of analyzing the phenomenon and having the theory emerge. The grounded theory is “to build theory that is faithful to and illuminates the area under study” (Strauss & Corbin, 1990, p. 24).

Research Questions

The research questions were formulated primarily from the literature review identifying the SME with unique business questions different from the large organizations that are often studied in the supply chain process. The research questions were:

  1. What are the internal business processes of a SME in a global SME system?
  2. How do SMEs adapt internally as the demands of the global SMEs?
  3. What kinds of internal business process adjustments must the SME make to meet the demands of the global SMEs?
  4. What kind of influences does the global SMEs have on the internal business decisions?

This study focuses on the SME creating internal business changes to align with the external business demands often orchestrated by a large business as the SME joins the working practices.

Limitations and Delimitations


The research for small to medium sized enterprises in a global perspective is limited, but rapidly growing and developing as organizations are adapting to demands from the economy. The research primarily focuses on large organizations and their business plans of the global SMEs based on large organizations. The limited amount of research on the SME creates a challenge in developing a specific hypothesis. Grounded theory provided the methodology for this study. The limited amount of research requires a qualitative study of business to understand the phenomena before a quantitative study can test the hypothesis that emerges from the theory.

Another limitation was the rapid changes occurring in business attempting to create the competitive advantages while at the same time meeting the current demands. As the research was being conducted, new adoptions of internal business processes needed to be evaluated and included in the study. A business is a complex system unable to operate in isolation, thus a business must adapt as it faces the different demands. The research in this study recognizes the difficulty of studying a business in a complex environment that is continually adapting.


The understanding of a business within the context of the environment is challenging. This research addresses the challenge by identifying key business processes to study, recognizing the key business processes are ultimately driven by the necessity to compete and thrive within the environment of society. The study focuses on the level of business that is internal, rather than a high level where the complexities are too large to create a specific theoretical application.

The literature research reviewed the business process; small to medium sized enterprises; as well as supply chain management applications. There is a large amount of literature for each of these areas and an exhaustive study is virtually impossible; thus, the literature search will focus on the key elements of this research, which include the business processes that are impacted by a supply chain management available in a small to medium sized enterprise.


The research completed on a small to medium sized enterprise in a supply global environment is limited because it is in the early stages and rapidly evolving. The infancy as well as the rapid changes, along with the complexity of the entire process creates a challenge for researchers to complete empirical analysis of the impact of working practices on SME. The purpose of this research is to focus on one specific business, completing an in-depth study of the internal business process. This allows the research to be completed at a level that demonstrates the impact of the changes occurring in the working environment. This paper studies the previous literature drawing on concepts identified in the activities of SMEs and business processes. Then, using a grounded theory approach, this research studied the internal business processes to understand how SMEs are adapting to the demands of the global working practices.

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Review of the Literature


The purpose of the literature review is to identify gaps in the understanding and provide theoretical and conceptual frameworks to guide the research. The literature review in qualitative, grounded theory research stimulates theoretical sensitivity and provides accurate descriptions of reality and knowledge of existing theories to act as secondary sources of data as well as to stimulate questions (Strauss & Corbin, 1990).

Reviewing the literature as the research proceeded added to the “grounding” of the theory into the current literature as the grounded research proceeded and new concepts emerged. The amount of literature available is limited on the working practices, thus the literature review included information from each area of study separately. The literature was then linked together through a review on the alignment of a business as it related to a supply chain process. This chapter presents the review of the literature in relation to the study of small to medium sized enterprises, e-business processes, supply chain management, incentive alignment and agency theory as they relate to the global SMEs.

Small to Medium Sized Enterprises Overview

Small to medium sized enterprises (SME) represent over 98% of business in the total economics of the United States (Lockett & Brown, 2004). This is not only true in the economy of the United States, but also across many different countries. The economic growth of a country is dependent on the development of SMEs, thus many countries recognize the necessity to study as well as support SMEs (Jutla, Bodorik, & Dhaliwal, 2002). In Mexico, the SME represents 43% of the Gross Domestic Product and about 30% of the working force (Trejo-Ramirez, Rodriques-Abitia, & Munive-Herrera, 2004).

According to Boekhoud and Stappen (2004), the Netherlands have almost 700,000 companies with only 1% having more than 100 employees. SMEs account for 60% of the Dutch labor force and 52% of the national income in the private sector. The focus of this research is not on globalization, though it is important to recognize as globalization continues to impact business. SMEs across the R&A are recognizably similar.

In defining the characteristics of a SME, not all researchers follow the same criteria. For example, some researchers recognize a SME as less than 250 employees. Other researchers, however, identify a SME as having less than 500 employees (Beck, Wigand, & Konig, 2005). Shakir and Viehland (2004) differentiate SMEs from larger firms based on revenue rather than the number of employees, with a SME’s revenue recognized as having NZ$20M-NZ$100M. Lockett and Brown (2004), research defines SMEs as follows:

In the UK the Department of Trade and Industry (DTI), defines three categories of SME: 1) 0-9 employees Micro; 2) 10-49 Small; 3) 50-249 Medium. The Office for Telecommunications (OFTEL) in the UK defines two categories: 1) 1-50 employees – Small; 2) 51-500 Medium. The European Commission defines three categories: 1) Maximum 9 employees- Micro; 2) Maximum 40 employees – Small; 3) Maximum 249 employees – Medium. The US Small Business Administration (SBA) has one categorization of less than 500 employees for most businesses, some report less than 100 separately. The Canadian Federation of Independent Business (CFIB) defines five categories: 1) 0-4 employees; 2) 5-19; 3) 20 – 49; 4) 50 – 99; 5) 100 – 499 employees.

SMEs are not simply smaller versions of large organizations and thus should be researched separately identifying the unique business criteria of a SME (Coviello, & Martin, 1999; Levy, & Powell, 2005). SMEs differ in the culture of the business because of the size and the number of resources. Mirchandani and Motwani (2001) state the differences of small businesses:

  1. Have highly centralized structures with the chief executive officers making most of the critical decisions.
  2. They have a tendency to employ generalists rather than specialists because of difficulty in attracting and retaining skilled IS staff.
  3. Due to a lack of IS specialists, they have a lower level of awareness of the benefits of IS and they lack the resources of larger businesses and thus are highly susceptible to short-range planning, adopting inadequate low cost IS and underestimating the time and effort required for IS implementation, thereby increasing the risks of IS adoption failure.
  4. Small businesses are also unable to absorb the aftermath of an IS adoption failure and hence are wary toward new IS. (p. 71).

Small to medium sized enterprises encounter unique challenges. The literature research in this study on SMEs recognizes challenges faced by the SME internally and externally as well as the changes in society affecting the business environment. The organization faces a shortage of expertise in certain areas such as technology and strategic development professionals (Beck, Wigand & Konig, 2005; Cote, Vezina, & Sabourin, 2005).

The changes in the economic structure of business today often requires the SME to join other organizations in an effort to create and deliver goods and services through a collaborative effort creating a supply chain. The structure of the supply chain focuses on the process of creating a product for a customer based on a demand from the customer.

The structure creates a pull through effect forcing the entities in the supply chain to efficiently link along a value chain, where each entity must add value or the supply chain will eliminate the link from the chain (Larson, Carr, & Dhariwal, 2005). The competitive environment of the economic world today further drives efficiencies, built on a system where there is a timely delivery of the final product and at a price lower than another supply chain.

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E-Business Processes

A business process consists of a set of interrelated work activities with specific inputs and value-added tasks that produce outputs (Sethi & King, 1998). As the business processes change to align with a new economy, using new tools, strategies are changing to align with the latest trends in technology creating an electronic business (e-business) platform (Kalakota & Robinson, 2001). Liu and Hsieh (2005) identify a process as a series of activities where enterprises collect different materials and produce the required products utilizing four basic elements: functional, behavioral, organizational and informational. The research in this study used a process analysis approach to analyze internal business functions as well as external alignments to identify value systems recognizing the need to create synergy to build a strong e-business environment.

The challenges facing an e-business are in the hands of management as the complexities of the business create an interwoven stream of transparent activities internally and externally difficult to study and understand in isolation. The complexities along with the demands of a changing society often seem to create chaos within a business, when in actuality what appears to create chaos creates the culture for the changes necessary to align within an economic system (Basu & Kumar, 2002; Ehrlich, 2004). The business process will change as the culture changes attempting to maximize the enablers of success, while minimizing the inhibitors (Hammer, 1999; Luftman & Brier, 1999). A strategy of alignment will form as the organization seeks to identify the technology necessary to support the enablers, investing in technology to remain competitive as an e-business (Rai, Patnayakuni & Patnayakuni, 1997).

IT Impact

Technology is a tool for improving processes as well as for completely redesigning the business structure at a visionary level across multiple platforms (Venkatraman, 1994; Sethi, & King, 1998). Historically businesses used IT to improve processes to create efficiencies to generate reductions in costs. Today however, businesses use IT to change the process of doing business (Hammer, 2001, Levy & Powell, 2005). The e-business view must cross the entire architecture of the structure to make sure the specific e-business processes are not inhibiting necessary changes (Kakakota & Robinson, 2001).

Organizations have attempted to utilize technology to create a competitive advantage; however, the results are often less than anticipated. Today, as businesses attempt to change the processes using technology, employees are rebelling. “No one in an organization wants reengineering” (Hammer, 1998, p. 66). The end users are reluctant and unwilling to change. “People will do tomorrow what they did today because that is what they did yesterday” (Sethi & King, 1998, p. 6). Changing business processes often cross boundaries created by the employees, which are outside of the comfort of the individual employees. When technology is used to generate efficiency in business processes, employees are willing to make the change; however, if technology completely reengineers the process, employees are often reluctant to change. Ba, Stallaert, and Whinston (2001) recognize the need to create an incentive for employees within an organization to create the necessary changes. Ratnasnigam and Phan (2003) connect a need for a sense of trust to be established both internally and externally to allow the changes to occur. The driving forces of e-business are built on this trust which drive the e-business strategies either formally or informally, and as the strategies are implemented the external and internal business processes form.

A large challenge for understanding information technology (IT) impact is measuring the value of IT in relationship to the standards of business (Rai, Patnayakuni, & Patnayakuni, 1997). IT applications are integrating the tasks and the processes creating efficiencies and changes in the methodology of the internal business practices. Elia, Lefebvre, and Lefebvre (2004) create a framework of internal business practices based on the application of processes using IT platforms. The research in this study focused on the internal business processes.

Supply Chain Management Strategy

Driving Forces of Supply Chain Management

The business environment continues to change rapidly and businesses are constantly striving to create a competitive advantage. Historically, businesses often created a competitive advantage by redesigning a department inside the business (Kalakota, & Robinson, 2001). For example, a business redesigned the accounts receivable process to collect outstanding debt faster. As this became a practice for all businesses, the next step towards efficiencies involved the development of the Enterprise Resource Planning (ERP) to build information systems that crossed organizational departments and merged the business process. ERP allowed information to be employed across business functions, analyzing the business from a conceptually horizontal view (Huin, Luong, & Abhary, 2002). This technology is valuable in several industries, for instance the wool industry where fashion and style change frequently. The rapid changes require fast scheduling and delivery periods, thus the production control and marketing activities must be integrated (Gupta, A., Whitman, L., & Agarwal, R. K. 2001). Vemuri and Palvia (2006) researched the impact of the ERP systems on improvements to the operational systems to determine if ERP had delivered the desired benefits. The benefits are recognized, but additional empirical research needs to be completed to deliver conclusive data to determine if the benefits outweigh the cost of implementation.

Levy and Powell (2005) determined that it is necessary to improve processes internally in order to squeeze out every penny, while process improvement alone is no longer a competitive advantage, additional changes need to occur to create a competitive advantage. Liu and Hsieh (2005) identify the next step as a redesign of the entire business including the upward and downward integration breaking down internal and external business boundaries. This level of reengineering is conducted from a strategic level, building “social networks” rather than utilizing a linear process left over from the industrial revolution (Basu & Kumar, 2002, Chan, 2005, Chau, & Turner, 2002, Ehrlich, 2005). For example, Nike has set up a network with United Parcel Service (UPS). When a customer places an order, an external company manufactures the shoe based on Nike specifications while UPS manages the logistics and distribution. Nike concentrates on product design and brand building. This allows the shipping and manufacturing steps to be completed in parallel (Hammer, 2001). “With increased global competitive pressures, companies operating in these competitive environments are not only looking to their distribution division to save money, but also to generate competitive advantages. One technique is the integrated supply chain” (Sakaguchi, Nicovich, & Dibrell, 2004, p. 2).

Theoretical Framework

The “focus of efforts to improve performance of organizations has shifted from the organizational level to the inter-organizational level” (Elia, et al., p. 2). The impact is not on a single business function, but rather a cluster of major business processes that are also impacted by an external supply chain, completely shifting the structure of the business. The strategy originates within the supply chain, driving the external business process, ultimately creating internal business changes.

The framework completed by Elia et. al, (2004) is based on manufacturing businesses with five functional areas including: product development, engineering & design; procurement/purchasing; production/operations; sales, marketing & after-sales service; and distribution & logistics. Under these five functions there are 36 specific processes designed to match with each functional area. The specific processes are then classified into three broad categories; processes shared with customers (downstream), processes shared with suppliers (upstream) and processes primarily internal (in-house).

These processes were designed based on previous surveys and studies, simulations of business applications carried out in a University laboratory and results of focus groups. The research in this paper adapted the functional areas and incorporated the study by Hammer (2001) to create the framework used in the grounded theory study.

Incentive Alignment and Agency Theory

The alignment of a small to medium sized enterprise in a supply chain creates dependencies across business platforms. The alignment of the business within the supply chain is similar to the alignments of different departments within the constructs of the business.

Incentive Alignment

Organizational processes are changing as information systems become ubiquitous, and the necessity to operate effectively requires the ability to change rapidly, with decisions made utilizing real-time data. The driving change factors point towards organizational relationships developing from resource to consumer demand. The development of the relationships across organizations creates a need to align the strategy and produce incentives to conduct business efficiently and effectively across the entire supply chain.

Ba, Stallaert, and Whinston (2001) argue that the shift towards e-business creates a need to restructure business models so that information and products move smoothly across the supply chain. The need to create ubiquitous information systems that are pervasive across the entire supply chain creates a new level of commitment of relationships between businesses (Xu, & Beamon, 2006). The demands are creating the necessity to develop a business platform using additional driving forces to adapt and change to create a supply chain that flows internally and externally across different businesses. As the organizations processes become imbedded in the application of IS, which allows the flow across the supply chain, the IS design as well as the user acceptance are two dimensions that have been researched extensively. “However, a system that takes into account only principles from the above two dimensions will not necessarily lead to a successful organization outcome” (Ba, et al., p. 226). Distributed processes across many business units and even across different businesses leads to a complexity in which conflicting objectives are brought into equilibrium through the development of the relationships based on an incentive to succeed. For instance, an IS system must be designed to meet the ability to adopt the technology, the user must accept the technology and the third dimension, the incentive must “induce” the users to employ the system.

Agency Theory

Agency theory is an organization theory relating, “Two (or more) parties when one, designated the agent, acts for the other, designated the principal, in a particular domain of decision problems” (Eisenhardt, 1989, p. 136). The supply chain model desires the optimal contract form for the relationships between the acting partners. Jensen and Meckling (1976) found the following:

In most agency relationships the principal and the agent will incur positive monitoring, bonding costs (non-pecuniary as well as pecuniary), and in addition there will be some divergence between the agent’s decisions and those decisions, which would maximize the welfare of the principal (p. 308).

The principal-agent theory has historically been predicated on the employe-eemployer relationship, where “the firm” establishes the relationship to complete the necessary tasks of utilizing resources. “Principal-agent problems in the economics literature bear some resemblance to the issues of incentive alignment in information systems” (Ba, et al., p. 230). The principal can limit divergences from his interest by establishing appropriate incentives for the agent serving the needs of the principal. In the supply chain, the SME becomes the agent, with the larger organization acting as the principal. In the agency theory, the contract acts as the link to secure the necessary behaviors and minimize the potential hazards of the agency theory of adverse selection and moral hazard. The research conducted in this study will investigate the impact on the SME as it interacts with the larger organizations inside of the supply chain.

Summary of what is Known and Unknown about the Topic

The research in this study included a review of literature on the SME, e-business processes, and the alignment within the global working practices. A SME encounters unique differences in comparison to large organizations. When the small size and limited resources encounter the need for rapid change in a technology driven environment, challenges are added to the complexities of the business processes. The demands on business to continue to develop improvements to establish a competitive advantage along with the expansion of the use of technology have also added additional demands.

The literature research demonstrated the challenges all businesses are facing: rapid technology developments and globalization that have changed the economics of business today. E-business is a necessary component to conduct business and is the competitive advantage in many cases. The methods for conducting business are changing with internal and external alignments creating supply chains that cross business boundaries. The literature indicates a need to change and to meet the economic demands to remain competitive in the market. Research has focused on the changes in society, with the forming of supply chains and the creation of new business processes. The research is lacking in how the small to medium sized business functions internally to meet the demands of society.

Conclusions, Implications, Recommendations, and Summary


The research in this study started with a review of the literature on small to medium sized enterprises in a global working environment. The preliminary review of the data revealed a lack of empirical research for working practices, thus this study was completed to partially fill this gap. The study used a grounded theory approach based on an interpretive philosophical perspective to research how a small to medium sized enterprise adapts as a working environment emerges and the economic factors of the society change. The drive for a competitive advantage through the development of efficiency continues at a rapid pace as technology and new processes develop. It is no longer enough to improve the process, today the processes must continually be reengineered (Hammer, 1998; Kalakota & Robinson, 2001). The trend is to develop a working process that utilizes a different approach from previous business applications where each business including both small to medium sized enterprises (SMEs) and larger firms competed independently in how they developed and sold products and services based on demand. The global working practices links businesses together to produce the product or service efficiently and creates a dependency between businesses to produce the final product or service. The purpose of this study was to identify how a small to medium sized enterprise reacts to the demands of the economy’s working practices.

The global SMEs have emerged from the consistent desire to find a competitive advantage. The use of different firms along a business process allows the specialization of performance to develop, creating efficiencies in the specific application. Each business must then be efficiently joined together to create the final product or service thereby, serving as a link in the working environment. The global SMEs recognize the strengths of each link and reengineers the processes to flow to the lowest level possible to maximize efficiency. Relationships develop to create a seamless process of transactions across the working envirionment. The relationships create a dependency and relationship-specific investments occur within the business units. Customized processes deliver the outcomes required of the organization by the supply chain. The return on the initial relationship-specific investment is recovered through the development of on-going process improvements as well as the benefit of domain-knowledge specificity and business-process specificity. The SME must remain as a strong business unit able to add value to the supply chain.

The SME adapts to the demands of the environment based on the supply chain by entering into contractual agreements that are beneficial to the SME, but at the same time maintaining autonomy through business diversity. The SME is able to analyze the costs associated with the manufacturing process as well as the transaction costs associated with completing a business transaction in one system, one “checkbook”. This allows the SME to quickly analyze costs and only enter into contractual agreements that are beneficial to the SME understanding and covering the complete costs of manufacturing. The SME maintains business diversity, never allowing one customer to exceed 20% of total sales.

This protects the SME from creating complete asset-specificity to one large orchestrating firm and reduces the chances of the loss of autonomy and flexibility. The contractual agreements and the business diversity create a level of security that allows the SME to adapt to the SCM without threats of being taken-over or being forced to perform a certain task on demand.

Internally the SME adapts by creating a system to understand the complete costs of the manufacturing process as well as the number of items to manufacture at one time to maintain the economic order quantity (EOQ). The development of the supply chain created a new demand on the SME to ship smaller quantities in a timely fashion. The demand required the SME to begin an inventory system, adding expenses to the company and the necessity to develop a new manufacturing process. The development of an information system allowed the manufacturing floor to continue to follow the EOQ and create a scheduling system that provided a resource plan to continue to add value to the SME. An in-house information system provided the ability to manufacture product in a timely fashion at a level that was economically feasible while also able to communicate with the larger firms. The SME also developed relationships with their suppliers requesting the same type of service from the supplier that the larger orchestrating firms requested from the SME. Contracts with the supplier requested shipments for quantities needed for immediate manufacturing, thus allowing storage space previously used for supplies to store inventory. The SME was able to understand the costs of the added processes and passed this onto the large orchestrating firm in the contractual agreements.

The research in this study conducted an in-depth analysis of a successful SME inside of the supply chain management processes. The ability to study the SME through interviews, review of reports as well as spending time learning about the business created an understanding of the SME’s challenges and desire to be adaptable. The interpretive process allowed the research to focus on the full complexity of hermeneutics and phenomenology. The limitations of the study include the fact that studying one business in-depth may find differences when applied to other SMEs that identify the themes addressing the global SMEs.


The study delivers implications for both researchers and practitioners. The necessity to understand the economic impact of a supply chain on the business is critical in developing relationships both inside the business and externally. The grounded theory methodology with the interpretive perspective was used to allow the data to be presented based on the findings from the interviews with the employees of the SME. Researchers can use the findings from this study to develop theories linking the findings with theoretical economic practices. Practitioners can use the study to develop business practices that will allow them to align within a SCM and remain as a strong link in the process.

The grounded theory approach assumes theory is hidden in the data collected and utilizes a sound process of understanding the situation with a continual search for evidence. The processes that emerged from this study identify the autonomous nature of a SME able to adapt and remain flexible while developing business and knowledge-domain specificity. The changes in society, as efficiencies continue to drive out expenses and boundaries continue to minimize, create a new environment and businesses have to adapt.

The SME is no different, it does have to adapt; however, because of the size of the organization it faces unique challenges. It is not a small version of a large organization. The SME has to recognize the strengths of being small, including the added flexibility and agility often encountered in SMEs as well as the weaknesses including the lack of resources. The SME has to embrace the ability to be flexible and not diminish this by entering into supply chains that consume the resources of the company. The weaknesses are minimized by entering into supply chains where the SME can create a certain level of specificity providing dependency on the SME. This allows the SME to become a strong link in the chain that cannot easily be replaced. The size of the business does not matter, if the SME has a service or product that the rest of the chain is dependent on and if the specificity has been created between the SME and the supply chain, then the supply chain will support the SME in providing the service or product.

Further research would benefit the development of the theories identified in this research, including a review of SMEs and the allocation of customers to see if the 20% is a consistent number. Continued shifting of tasks and costs creates a need to understand the complete costs of an organization. The SME in this research appears to understand the costs because of a strong information system that provides a complete view of the organization. Research on SMEs and the role of the information system would provide a deeper understanding of the impact the information system has on other SMEs. In this particular case, it appears the information system allowed the SME to grow profitably with the new demands.


The research in this study provides data to support the successful internal adaptation of a SME to align within a supply chain. The processes emerged demonstrating practical applications; however, the research is limited and additional research would provide a broader scope of the implications from this study. The research in this study was conducted on the adaptation of a working practice based on a grounded theory approach. The development of hypothesis from this study could provide further in-depth research to see if these theories do provide a successful alignment. The studies could be conducted on other SMEs to see if the diversity of business and the development of the information system do provide the necessary platform for maintaining autonomy and embracing the flexibility of the SME. The research could test the theory to see if there is a significant difference in the success rate of SMEs that maintain business diversity verses SMEs that lose the autonomy in a global economy.


This dissertation presents a grounded theory research study using an interpretive philosophical approach on the adaptation processes of a small to medium sized enterprise (SME) as it aligns within a supply chain (SCM). There is a large amount of research and literature available on SMEs, SCM and business processes, however, there is a limited amount of studies specific to the SME inside the working environment. Societies recognize the value of SMEs with the majority of the growth of an economy through the development of SMEs. The SME is a critical part of the economic growth of a society.

This study is to partially fill the gap to understand how SMEs can successfully adapt to the demands of a global economy. The research in this study recognized the lack of literature thus; an in-depth grounded theory study was conducted to allow themes to emerge from the data collected, grounding it in the current literature available on the different aspects of the SMEs.

The approach does not predefine dependent and independent variables, but focuses on the complexity of human senses making as the situation emerges (Klein & Myers, 1999). The philosophical perspective of an interpretive study created the foundation for the principles that were used when interpreting the interviews within the SME. The approach led to this study about the adaptation of a global business processes.

Supply chains develop a seamless link between companies to produce a product or service in an effort to create an efficient business process. The development of a supply chain requires organizations to streamline inter-company processes as corporate boundaries fade and responsibilities realign. The working environment often shifts costs and activities to the SME from the larger orchestrating firm. The SME is then required to meet the demands of the supply chain. As a small to medium sized business participates inside of a global economy the internal business processes adapt to align with the external demands, seeking to deliver the product creating value to the supply chain and to the SME. The research in this dissertation focused on the internal adaptation of a SME, using an interpretive qualitative study.

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