Title of Research: Effects of Organizational Resources on Organizational Performance: an Empirical Study of Bangladesh SMEs.

Name of Candidate:

Mohammad Ziaul Hoq.

Co-author:

Dr. Norbani Che Ha Sulaiman M. Ali

Name of Institution: Name of Supervisor:

University of Malaya (UM) Dr. Norbani Che Ha.

Phone: Hand phone/ Cell Phone: Fax E-mail:

+(6) (03) 7967 3744 +(6) 014- 2238948 +(6)(03) 7967 3810 hoq.ziaul@gmail.com

Date of enrolment: Student status:

July, 2006. Full time.

Effects of Organizational Resources on Organizational Performance: an Empirical Study of Bangladesh SMEs.

ABSTRACT
This study intends to look into the combined effects of Organizational Resources (social network orientation, market orientation, learning orientation, entrepreneurial orientation and strategic orientation) on SME performance and interaction effects of Innovation and Marketing Competencies (mediators) on the said relationship. Structural Equation Modeling (SME) will be used to test the measurements and substantive models.

This is the first examination of the role of all five orientations and multidimensional measure of SME performance. It examines SMEs in Bangladesh, a hostile business environment. Mangers and policy makers can enhance probability of their success by developing the different orientations.

Key words: Social Network, Entrepreneurial Orientation, Market Orientation, Learning Orientation, Strategic Orientation, SME.

1. Research Title: Effects of organizational resources on organizational performance: an empirical study of Bangladesh SMEs. 2. Objective of the study: The main objectives of this research are four fold. First; to investigate the effects of Organizational resources on Organizational performance. Second, to investigate the effects of Organizational resources on Marketing competency and Innovation. Third, to investigate the effects of Innovation and Marketing Competency on Organizational Performance. Fourth; to investigate the extent to which Innovation and Marketing Competency mediate relationship between Organizational resources and

Organizational performance.

High failure rates of small firms are largely attributed to weakness in financial management and marketing (McCaran-Quinn and Carson, 2003).Many classical management concepts are unsuitable for application in a small firm context, with research suggesting non-implementation of theoretically based marketing practices is the rule rather than exception in the small firm (McCaran-Quinn and Carson, 2003). SMEs cannot do conventional marketing because of the limitations of resources which are inherent to all SMEs. Also, SME owner/managers behave and think differently from conventional marketing decision-making practices in large companies ( Gillmore et al. , 2001).

More over, SMEs lack the resources and capabilities to develop their own markets and their small size makes it difficult for them to reap the benefits arising from the economies of scale and scope, and the experience curve (Nooteboom, 1993).

Further more, El-Namaki (1990) attributed small-business failures to a lack of professional management skills and to the entrepreneurs lack of general competence in the entrepreneurial process, i.e. centralization of power, lack of strategic planning, lack of technological innovation, etc. Ibrahim and Goodwin (1986) found that entrepreneurial behaviors and managerial skills were two key success factors in small-business management. (REF. SOCIAL CAPT1)

According to Barney, (1986a) research on competitive advantage should embrace firm resource variables. Similarly, contemporary research focuses on the integration and identification of those variables necessary for a firm to achieve competitive advantage is indicated by performance levels (Narver and Slater 1990, 1994; Jaworski and Kohli 1993; Baker and Sinkula 1999; Hurley and Hult1998).These variables are identified as Strategic Orientation (SO), Market Orientation (MO), Learning Orientation (LO), Entrepreneurial Orientation (EO), and Social Network Orientation (SNO).

Although the relationships between each of the five orientations- SO, MO, LO, EO, SNO and performance have been studied either individually or combination of 2 / 3 orientations, there have been no study of the combined effects of all of these orientation on performance (Kropp et. al., 2006). As such, we do not know how these constructs

interact to influence organizational performance. This study intends to shed new and important light on these constructs and the interrelationships among them. To do so we devise a theory-based structural equation model that links these constructs together.

In this study SO, MO, LO, EO, SNO are referred as Organizational resources. This study intends to look into the combined effects of Organizational resources on SME performance (financial and non-financial) as well as interaction effects of Innovation and Marketing Competencies (mediators) on the said relationship.

ORGANIZATIONAL RESOURCES
Social Network Orientation

Strategic Orientation

ORGANIZATIONL CAPABILITY

ORGANIZATIOL PERFORMANCE Financial Performance

Market Orientation

Marketing Competencies

Learning Orientation

Innovativeness

NonFinancial Performance

Entrepreneurial Orientation

Figure: Theoretical Framework

The theoretical foundations underpinning this research are couched in terms of a resource-based perspective (Barney, 1990), since the key model constructs can be perceived as internal resources. This perspective views firm-specific resources, such as assets and capabilities, as the drivers of a firms business strategy (Ekeledo and Sivakumar, 2004). Capabilities reside in superior managerial skills and knowledge (Day and Wensley1988; Hall, 1992; Hofer and Schendel, 1978) that make it possible to engage in advantageous business process activities (Day, 1994). The firm, therefore, is the source of competitive advantage (Capron and Hulland, 1999), with its competitive advantage residing in the resources it has available (Barney, 1991; Peteraf, 1993; Teece et al. 1997). Thus, EO, MO, SO, LO, SNO can be viewed as resources which potentially enhance the success of SMEs. Based on the literature and the above theoretical framework above, the study could posit the following hypothesis: H1:Social network orientation (SNO) will have a positive direct relationship with organizational performance. H2: Market orientation (MO) will have a positive direct relationship with organizational performance. H3: Learning Orientation (LO) will have a positive direct relationship with organizational performance. H4: Entrepreneurial orientation (EO) will have a positive direct relationship with organizational performance.

H5: Strategic orientation (SO) will have a positive direct relationship with organizational performance. H6: Social network orientation (SNO) will have a positive direct relationship with marketing competency. H7: Market orientation (MO) will have a positive direct relationship with marketing competency. H8: Entrepreneurial orientation (EO) will have a positive direct relationship with marketing competency. H9: Learning orientation (LO) will have a positive direct relationship with marketing competency. H10: Strategic orientation (SO) will have a positive direct relationship with marketing competency. H11: Social network orientation (SNO) will have a positive direct relationship with innovativeness. H12: Market orientation (MO) will have a positive direct relationship with innovativeness. H13: Learning orientation (LO) will have a positive direct relationship with innovativeness. H14: Entrepreneurial orientation (EO) will have a positive direct relationship with innovativeness. H15: Strategic orientation (SO) will have a positive direct relationship with innovativeness.

Referring to the framework, seven hypotheses can be developed to have indirect relationships. These are as follows: H16: Social network orientation (SNO) will have a positive relationship with organizational performance via marketing competency (indirect effect). H17: Marketing orientation (MO) will have a positive relationship with organizational performance via marketing competency (indirect effect). H18: Learning orientation (LO) will have a positive relationship with organizational performance via marketing competency (indirect effect). H19: Entrepreneurial orientation (EO) will have a positive relationship with organizational performance via marketing competency (indirect effect). H20: Strategic orientation (SO) will have a positive relationship with organizational performance via marketing competency (indirect effect). H21: Social network orientation (SNO) will have a positive relationship with organizational performance via innovativeness (indirect effect). H22: Marketing orientation (MO) will have a positive relationship with organizational performance via innovativeness (indirect effect). H23: Learning orientation (LO) will have a positive relationship with organizational performance via innovativeness (indirect effect). H24: Entrepreneurial orientation (EO) will have a positive relationship with organizational performance via innovativeness (indirect effect). H25: Strategic orientation (SO) will have a positive relationship with organizational performance via innovativeness (indirect effect).

H26: Marketing competency will have a positive relationship with organizational performance. H27: Innovativeness will have a positive relationship with organizational performance 3. The Importance of the Proposed Research The study expects to contribute to both theory and practice of SMEs strategic issues. First, this is the first examination of the combined role of five organizational orientations and multidimensional measures of financial and non- financial performances. Second, the combined mediating effect of Innovation and Marketing Competencies in relationship between Organizational Orientation and Organizational Performance has not been studied before, so the study intends to investigate whether Innovation and Marketing Competencies play the role of mediators in the said relationship. Third, the study examines Bangladesh SMEs, a hostile business environment. Fourth, the results are expected to allow managers to evaluate performance of their organizations by developing different organizational orientations, depending on their strategic objectives. Fifth, the result of the study will allow policy makers to get guidelines to make effective policies for development of SMEs. 4. Literature Review Small Medium Enterprises (SMEs) are perceived as vulnerable yet valuable entities, important both economically and socially (McCaran-Quinn and Carson, 2003). They are recognized as engines of economic growth. The growing economic significance of the SMEs as sources of new business creation and employment generation in the developed, OECD countries especially since 1970s is now widely recognized in an increasingly growing volume of literature (OECD1997). It is widely recognised today, that SMEs

represent the backbone of the local economies in Europe. SMEs contribute to more than two-thirds of employment (70.2 per cent) and turnover (70.3 per cent) in the Union and between 65 to 85 per cent of the total value added (European Commission, 1993a). Growing recognition of the economic contribution of SMEs has given rise to a large number of activities in many international organisations, both governmental and nongovernmental (OECD, 2000).

Furthermore, the commonly perceived merits often emphasized for SMEs promotion especially in the developing countries like Bangladesh include their relatively high labour intensity, dependence on indigenous skills and technology, contributions to entrepreneurship development and innovativeness and growth of industrial linkages (Uddin, 2001). The case for fostering SME growth in Bangladesh is irrefutable as these industries offer bright prospects for creating large-scale employment and income earning opportunities at relatively low cost for the unemployed especially in the rural areas strengthening the efforts towards achieving high and sustained economic growth (Uddin, 2001).

Moreover, SMEs are not simply to be smaller copies of big ones and there is a recognized need for concepts of strategic management that address the special characteristics and situations of small firms (Borch and Huse, 1993; Dandridge, 1979). The study of business competitiveness is a recurring theme examined by academics, consultants and practitioners. The internationalization of economy, the frequent and uncertain change, the greater competition among firms, the need for continuous innovations, and the growing use of information technologies force companies to face the 10

challenge of improving their competitiveness. These difficulties are greater for SMEs because their economies of scale and their resources are less than those of large firms.

The importance of a firms internal resources is widely accepted in the strategy literature in general (Barney, 1991; Manoney and Pandian, 1992) and the competitive dynamics literature in particular (Smith and Grimm, 2000). In the past years, strategic literature drawing on the context provided by the resources-based theory (Barney 1991; Prahalad and Hamel, 1990; Wernerfelt 1984) has persistently insisted on the relevance of internal resources- especially those of intangible nature as determining factors of business competitiveness (Hall 1993, 1992).

Likewise, high Performance of SME is explained primarily by the strength of a firms resources, and not by the strength of its market position (Wernerfelt, 1984). The resources based theory has gained importance, since Prahald and Hamel (1990) emphasized the link between core competencies and competitiveness of an organization.

In addition, the fundamental premise of successful firms possessing resources that are superior to those of their competitors has been prevalent in the related literature (Hofer and Schendel 1978. Rumelt 1984, Porter 1985. Reed and DeFillippi 1990). Likewise, Barney (1986), Black and Boal (1994) stated that resources should possess certain characteristics that would benefit the firm. This has fostered a wealth of research to

determine the source, as well as the necessary maintenance of these resources.

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It is through this ongoing process of competing and ultimately succeeding through idiosyncratic resources/capabilities that provides the catalyst for superior financial performance. These capabilities, which are developed over time, provide a source of advantage that must be continually protected and improved (Hunt 1997).

In this regard, Pelham (2000) pointed that the expanding competitive environment has motivated both the academia and practitioners to reemphasize Market Orientation (MO), whereas Hurley and Hult (1998) made recommendations for incorporating constructs related to innovation into research on MO. On the other hand, according to Baker and Sinkula, (1999b); Day (1996); Dicson (1996); Hunt and Morgan (1996) Learning Orientation (LO) can be viewed as resources that a firm might employ to attain competitive advantage

While Some researchers (Covin and Slevin, 1989) argued that formal strategic management procedures are particularly inappropriate for small firms which have neither the management nor financial resources to indulge in elaborate strategic management techniques, other researchers (Hambrick 1983; Snow and Hrebiniak 1980) indicated that Strategic Orientation (SO) of the firm may be considered a key element for the management and efficiency of SMEs.

Despite the widely acknowledged importance of Entrepreneurial Orientation (EO) in small business research (e.g., Naman and Slevin, 1993 and Wiklund and Shepherd, 2005), the empirical literature lacks evidence regarding the way SMEs are classified

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according to EO. Alternatively , firms with high levels of EO tend to constantly scan and monitor their environment in order to find new opportunities and strengthen their competitive positions (Covin and Miles, 1999).

While scholars developing the resource based perspective have highlighted the importance of social factors, no attention has been given to network resources. However, some researchers found Social Network Orientation (SNO) can offer strong opportunities for a balanced enterprise development of SMEs in a competitive environment (Jarillo, 1988; Ring and Van de Ven, 1994; Sanchez et al., 1996).

In previous studies these orientations have been selectively studied. For example, Past studies (Covin and Slevin 1991, Smart and Conant 1994 and Wiklund 1999) found positive impact of entrepreneurial orientation on SME performance, whereas Hult, Hurley and Knight (2004) recognized positive relationship between entrepreneurial orientation and innovativeness. On the other hand, Covin and Miles (1999) revealed the existence of a positive association between entrepreneurial orientation and firm competitiveness.

Several researchers (Kohli and Jaworski 1990; Narver and Slater 1990) found positive relationship between the degree of market orientation and firm performance while Henard and Szymanski (2001) identified positive connection between market orientation and innovativeness. However, Lumpkin and Dess, (2001); Simon et al., (2007)

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recognized that market orientation is a positive contributing factor to competitive advantage.

Baker and Sinkula (1999) found positive tie between learning orientation and innovation driven performance, whilst Hult et. al (2004) have demonstrated a positive connection between learning orientation and innovation. Other researchers (Baker and Sinkula 1999b; Day 1996; Dicson 1996; Hunt and Morgan1996) established the positive affiliation between learning orientation and competitive advantage.

While Conant, Mokwa and Varadarajan (1990) found positive association between strategic orientation and innovation, Slater and Narver (1993) identified positive link between strategic orientation and performance.

Zou and Myers (1999) advocated that a firm's competencies in marketing are key sources of competitive advantage. Several researchers (Smart, Denise , Conant and Jeffrey 1994) discovered entrepreneurial orientation is positively and significantly

related to distinctive marketing competencies and organizational performance.

Past studies showed that social network positively related to performance and competitive advantages (Batjargal, 2003; Benson, 1998; Florin, Lubatkin & Schulze, 2003; Pennings, Lee, & Van Witteloostuijn, 1998) whilst Castilla et al. (2000); Mitsufuji (2003); Bhat (2005) uncovered positive association of social network aspects of the innovation processes.

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5. Research Methodology
SAMPLE It was appreciated that there were difficulties in obtaining a universally accepted definition for a small business (Hertz, 1982). The study will concentrate on SMEs in Bangladesh. Mail survey will be used to collect data. Questionnaire will be sent to managing directors of 3,000 small firms which will be randomly drawn from commercial data base with employee size less than 50. A second mailing to non-respondents followed after three weeks. For the company that does not response yet, follow-up will be done via telephone call.

To measure market orientation, the study plans to use the scale of Narver and Slater (1990) and will assess the sub factors of competitor orientation, customer orientation, and inter- functional coordination.

Innovativeness will be quantified using the scale from Hurley et al. (1998) and will measure the introduction of new processes, products, or ideas in the organization.

Learning orientation will be measured using items derived from Baker and Sinkula (1999), Hult and Thomas (1998), and Sinkula et al. (1997). It will evaluate commitment to learning, shared vision and open mindedness (Baker, Sinkula and Noordewier, 1999).

The Miles and Snow typology, which are defenders, prospectors, analyzers, and reactors (Miles and Snow, 1978), will be used as the model of strategic orientation. There are 15

many ways to assess this typology. The paragraph, self-typing approach will be used in this study. The paragraph method has been widely used (McDaniel and Kolari 1987; McKee, Varadarajan, and Pride 1989; Segev 1987; Snow and Hrebiniak 1980; Zahra 1987).

Marketing competence is characterized as the ability to assess customer needs, provide quality customer service and introduce innovation. It will be assessed in this study using measures created by Conant, Mokwa, and Varadarajan (1990). Some of the scale items of marketing competencies relate to activities that facilitate the implementation of strategies (e.g., planning process activities), while others relate to realized marketing effectiveness (e.g., capabilities in specific marketing activities such as pricing).

Entrepreneurial orientation will be measured with items adapted from Naman and Slevin (1993), Covin and Slevin (1989), and the originally devised by Khandwalla (1977). It will measure risk taking, proactiveness, autonomy, innovativeness and competitive aggressiveness (Lumpkin and Dess, 1996)

The general theoretical approach chosen by Seibert et al. (2001) for measuring social capital will be adopted for this research design. Social capital will be considered both as a function of network structural configurations and embedded social resources within networks. The instrument for measuring social capital is based on Burt's research (see particularly Burt 1997, 2000a 2000b as well as Burt, et al. 2000). Burt (2000a, 2000b) asserts that the bridging or bonding aspects of a social network may be measured by

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means of a "network constraint index" which is described (Burt 2000b: 4) as a "summary measure of social capital." (REF. THESIS SOC NET, VP TH SOC LEADER)

The scale for performance will assess profitability, growth in sales and market share as well as general performance. There is no one commonly accepted measure of performance in strategy literature. Therefore two measures of performance were adapted for use. First, an operationalization of Quinn and Rohrbaugh's (1983) Competing Values Framework was employed (Quinn 1988). The second measure of performance was the Perceived Performance scale created by Van de Ven and Ferry (1980).

The first step in analyzing the data will be addressed by validity testing, factor analysis, and reliability. Then, data evaluation will be conducted trough identifying outliers, testing of normality, heteroskedasticity, and multicolinearity. This evaluation is carried out to fulfill some assumptions before running the regression analysis to get the data fit. Given the multidimensional nature of SME performance in this study, it is anticipated that Structural Equation Modeling (SEM) will be used to test the measurements and substantive models.

The proposed study is expected to be completed within three and a half year. The break down is as following: 1. Course work , literature review: 12 months 2. Detailed study proposal development, literature review: 12 months

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3. Data Collection: 3 months 4. Data analysis, result discussion and submission of thesis: 16 months 6. Tentative Budget (a) Equipments:
(b) Supplier (Chemicals/ Glassware/ Stationary etc): (c) Overseas Traveling: 8,840.00 (RM) 810.00 (RM) 1,980.00 (RM)

Total:

11,630.00 (RM)

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