Journal of Advances in Management Research

Determinants of SME integration into global value chains: Evidence from Indian automotive component
manufacturing industry
Chandra Mouli V V Kotturu, Biswajit Mahanty,
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Chandra Mouli V V Kotturu, Biswajit Mahanty, "Determinants of SME integration into global value chains: Evidence
from Indian automotive component manufacturing industry", Journal of Advances in Management Research, https://
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 Determinants of SME integration into global value chains: Evidence
from Indian automotive component manufacturing industry

Abstract
Purpose - In recent years, due to intense competition, small and medium enterprises (SMEs) are unable to
meet performance expectations and find difficulty in fulfilling the needs of the original equipment
manufacturers (OEMs). Consequently, the growth of the SMEs has slowed down considerably. Constrained
by their infrastructural resources, SMEs’ participation in global value chains has the potential to bring
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significant benefits, such as enhancing technological learning and innovation and generating positive
contributions to the development of the SMEs. This article explores competitive priorities, key factors and
causal relationships influencing SMEs to enter global value chains.

Design/methodology/approach - In this article, the global value chain framework is adopted and
qualitative feedback loop analysis is used to identify the key factors influencing the competitive factors. A
questionnaire survey was carried out with the automotive component manufacturers of a transnational
corporation in India.

Findings - Survey in the automotive component manufacturing industry reveals product quality standards
as the most important priority for joining global production networks, followed by price competitiveness,
timely delivery, innovativeness, manufacturing flexibility, service, and dependability. The qualitative
findings reveal continuous personnel training, capacity expansion, research development, and others as key
factors influencing competitiveness.

Practical implications - To retain SMEs’ role in economic development and to accelerate the growth of
global production networks in India, thereby realizing opportunities from the emerging global value chains,
support is needed for SMEs regarding the aspects identified in this study.

Originality/values - The study explores the dynamics of each competitive priority of SMEs in Indian
automotive component manufacturing industry to enter the global value chains. No study explored the
dynamics of SMEs competitiveness to enter global value chains in the automotive manufacturing industry.

Keywords - Small and medium enterprises, global value chains, Indian automotive component
manufacturing industry, questionnaire survey, feedback loops.

Paper type - Case study

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 1. Introduction
Small and medium-sized enterprises (SMEs) are the backbones of all economies (Wang, 2016),
accounting for over 95% and up to 99% of enterprises. In India, about 95% of the enterprises are SMEs.
They play major roles in generating employment and they contribute significantly to the country’s exports
(OECD, 2006; Todd and Javalgi, 2007). The growth of the SMEs are very much dependent on the
original equipment manufacturers (OEMs), as a majority of the SMEs are suppliers of products to the
OEMs and are bound by contracts (Bala Subrahmanya, 2007). In recent years, due to rapid changes in
market conditions, OEMs demand high levels of engineering and technological capabilities from the
supplier SMEs. In the automotive manufacturing industry, OEMs are transferring many of their
responsibilities to component suppliers in order to effectively tackle challenges and remain competitive.
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Consequently, suppliers now need to be involved in the product design and development of the OEMs
(Pillania, 2008), deliver assemblies rather than parts, bear the cost of new product development, and so
on. OEMs’ contractual responsibilities to SMEs are often limited to sharing production quantities,
delivery schedules, and quality-related feedback for the supplied components. As a result, SME
subcontractors receive little or no support from OEMs in the technical, financial, or human resource-
related aspects (Mouli, 2011). SMEs are competing by reducing wages and profit margins, rather than by
improving productivity. Consequently, they are dwindling financially (Giuliani et al., 2005). Since the
majority of the SMEs are constrained in terms of resources, knowledge limitations, and other such
constraints, they face great difficulties in meeting OEMs’ requirements, thus finding themselves in an
intensely competitive environment (Chaturvedi, 2003; Singh et al., 2007). Consequently, the performance
of the SMEs has been significantly affected, and the growth and survival of the SMEs are at stake (Saini
and Budhwar, 2008; Saranga, 2011). To retain their role in the country’s economic development, it is
important to identify the determinants of their growth and survival (Kotturu and Mahanty, 2016).

Foreign direct investment (FDI) has emerged as the most significant source of international capital,
especially for developing countries. Since 2000, FDI inflows have been rising continuously, reaching a
growth rate of 47% in 2006 and recording a new high in 2007 amounting to USD 1,833 billion. During
2010, the inflows reached USD 20.4 trillion, a three fold increase on the inflows was recorded during
2000 (UNCTAD, 2011). According to UNCTAD (2014) statistics, India ranks as the seventh most
attractive location for FDI after China in the world and FDI stocks grew significantly. Indian government
is continuously adopting various policies and measures to generate positive effects in the economy. Due
to FDI inflows and recognition of the country’s market potential, many global players are shifting their
production bases to India (Jain et al., 2011) and expanding their production network systems across
multiple nations. During the last few years, more than 500 global production networks have established

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 their manufacturing facilities in India, and this number is expected to grow further. Operating in highly
competitive global markets, global network systems or global value chains (GVCs) link local producers
from developing countries to international markets. In GVCs, the lead company, a transnational
corporation (TNC), manufactures and controls production through its network of suppliers by working
closely with them and maintaining backward linkages. To ensure quality standards and operational and
financial benefits, TNCs or their affiliates transfer technology and managerial capacities to local supply
firms to enable those firms to lower their production cost. The recent international business literature
widely acknowledges that participation in GVCs both upgrades and produces benefits for local firms,
such as gaining access to technical knowledge and fostering their learning and innovation capabilities
(Lema et al., 2015; Pietrobelli and Rabellotti, 2011; Saliola and Zanfei, 2009). This provides ample
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evidence for SMEs to overcome weak infrastructural resources that would ensure their sustenance and
growth.

Favorable industrial core policies initiated by Indian government have resulted in significant growth of
value chain networks in the last few years (Bala Subrahmanya, 2014). Although this growing prevalence
of GVCs shows an immense potential for SME growth, the extent of SME supply linkages and SME
participation in GVCs remain quite low (OECD, 2015). In fact, according to GVCs mapping statistics
(OECD, 2015), the growth of forward linkages declined by almost 15 percentage points in India. While
GVC literature studies have been carried out on the growth aspects of GVCs, governance of GVC, and
the benefits of GVC participation, no studies have explored the drivers and possibilities for integrating
SMEs into GVCs, how to make use of the opportunity to enter into GVCs and acquire competitiveness,
and the key factors promoting participation in GVCs. This gives rise to questions on how to connect local
SMEs to GVCs. To derive useful benefits from GVCs, what competitive priorities do SMEs need to
develop given the rapid advancements and complexity in GVCs? What are the factors and their dynamics
that influence competitiveness in becoming successful partners within GVCs? As an SME ascends the
value chains, performing complex tasks with the continuous involvement of the value chain facilitates
improvement of their own value-added capabilities. Here, it is also important to explore how GVCs
coordinate with SMEs, thus enabling their overall development. To answer these questions, a survey was
conducted in automotive component manufacturing SMEs – who are all suppliers of a TNC. The survey,
using Gereffi’s global value chain approach (Gereffi, 1994), attempted to find out the determinants that
enable SMEs to participate in and promote linkages with GVCs.

The rest of the paper is organized as follows. A literature review on the sustainability of SMEs and on
GVCs is presented in the next section, followed by the methodology and the details of the questionnaire

4
 survey. The survey findings are given in the subsequent section, followed by the conclusions and the
managerial implications.

2. Literature review
Sustainability and studies on SMEs
Considering the SMEs’ role in economic development, studies on strategies for sustainable development
of SMEs are of increasing interest to researchers and policy makers. Sharma (2003) defined business
sustainability as the challenge to improve social and human welfare simultaneously, while also reducing
ecological impact and ensuring the effective achievement of organizational objectives. To survive in the
present competitive and rapidly changing market, enhancement of core capabilities is necessary to raise
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SMEs’ competency levels and enable them to take advantage of the market opportunities arising from
globalization (Chaston and Mangles, 1997).

To compete in the present global market, driven by products of short lifecycle and rapid changes in
technology, fostering new product development is considered a key factor (Schmidt and Gary, 2002). To
foster new product development, SMEs perceive that many activities are involved, such as their
collaboration with the manufacturer in product designing, manufacturing samples, modifying samples
based on testing and trial runs, producing a pilot batch, further analysis, and so on. For all of these
activities, SMEs are required to bear the entire product development cost themselves (Kotturu and
Mahanty, 2016). As the large enterprises are manufacturing for global distribution, Viswan and Tannock
(2004) emphasized the importance of product quality and analyzed the quality economics of small firms,
addressing both issues of quality and cost benefits; they suggest that the continuous organization of a
quality improvement program can achieve delivery of products at high-quality levels for SMEs. Meeting
quality standards is a customer-dependent system, and it requires the establishment of customized
processes and systems, which needs huge investments. Trailer and Garsson (2005), investigating the
financial aspects of small firms, reveal that price reductions with product enhancement are appropriate
ways to increase market share and growth. Grobler et al. (2008) analyzed different product ranges and
found that, to compete in the present market conditions, an increase in product price is the most
considerable factor for SME growth.

In fact, the sustainability of a firm’s business is not the result of a single factor alone, but rather a
combination of many factors. Miles and Snow (1994) determined that for sustainable SME performance,
strategy should be evolved for the combination of system structure and processes. A study on the
strategies of decision making for long-term growth and sustainability by Normann and Ramirez (1993)

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 found that all the activities and resources at firm level should be improved. A suitable strategy in this
regard may be found in Porter (1990) in order to create fit among activities and determine how to carry
out the activities well by integrating them. As SMEs are constrained by limited infrastructural resources,
accumulating the required resources involves significant delays. Such long delays in building resources
can have serious effect on the long-term profits. Additionally, many of the controlling variables
leveraging productivity are dynamic in nature and are dependent on the market conditions (Mouli, 2011).
It is thus imperative that for sustainable growth, SMEs must be able to meet an increasing number of
stringent product standards laid down by the manufacturer, contending with rapid advancements in the
market while keeping costs, delays, and organizational disruptions at or near zero levels. In reality, the
factors that promote SME competency need to be examined and addressed from a systems perspective.
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Global value chain’s role in upgrading SMEs

In 1994, Gereffi coined the term “global commodity chains” and introduced the global value chain (GVC)
concept. Later, international business scholars further developed the GVC approach, to which governance
is central. Kapilnsky and Morris (2001) defined GVC as referring to “the full range of activities which are
required to bring a product or service from conception, through different phases of production, delivery to
final customers, and final disposal of after use.” The activities mostly include research, design and
development, manufacturing, sales, and marketing. The ultimate focus of a GVC is linking all its
members around the world and providing a stepping stone for manufacturers and workers to integrate into
the global economy (Gereffi et al., 2011).

The value chains operate in global markets characterized by a highly competitive environment, with an
objective of transferring knowledge along the chains. Continuous focus on activities along the chains
offers interesting opportunities for upgrading (Humphrey and Schmitz, 2000) its members to enable them
to meet desired production and quality standards. Particularly for SMEs, participation in a GVC has the
potential to bring multi-dimensional benefits. Participation promotes strong linkages and provides
exchanges of information related to products and processes of SMEs. GVC members regularly visit SMEs
to assist in conducting regular inspections and suggesting improvements in the processes and products.

Empirical studies (Giuliani et al., 2005; Schmitz and Knorringa, 2005) have shown that international
linkages with GVCs can play a crucial role in creating a learning environment, ultimately improving the
competency levels of its members. Deepening technological knowledge by continuous learning enables
members to engage and survive in the modern manufacturing environment. Rapid learning activity
provides innovation and industrial upgrading, exposing them to expand their business to a large customer
base in other chains, as well in the global market (ADB, 2015). Yuhua and Bayhaq (2013) conducted an
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 exploratory survey on the benefits for SMEs of participation in GVC networks, examining benefits at
both macro- and micro-level. They found that GVC initiation begins with involvement in technical
activities, then progresses to gradual guidance in a sustainable direction towards internationalization.

Case study evidence (Morrison et al., 2007) suggests that local suppliers’ participation in a GVC brings
positive and significant improvement and becomes a source of knowledge transfer, access to state-of-the-
art technologies, technology transfer, etc.; however, the potential and long-term gains from GVC
participation are not automatic. Armando et al. (2016) finds that participating in a GVC requires SMEs to
perform additional activities to contribute to value chains. These additional activities require continuous
investment in skills and advanced technological progress. Several researchers have studied the process of
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technology transfer and SMEs technological capabilities. Some studies (Kokko, 1994; Meyer Klaus and
Sinani, 2009) emphasized that technology transfer is regarded as a learning process, and is positively
related to the initiatives and technological capability of the recipient firms, which need certain minimum
capabilities to acquire and translate the technology into their organizations. Ernst and Kim (2002) studied
the knowledge diffusion aspects among the SMEs linked to a GVC - they found that to remain within a
GVC, SMEs must constantly upgrade their absorptive capacity and develop and retain managerial and
workforce skills. The extensive and detailed analysis of Giuliani et al. (2005) highlights that participation
in a GVC offers opportunities to upgrade SMEs but also has certain remarkable drawbacks. Their analysis
shows that upgrading is limited to some forms of chains. Lee and Gereffi (2014) underlined that the
benefits of participation and upgrading in a GVC largely depend on the competitive position of each
SME. The literature indicates that active participation in a GVC results in development benefits through
knowledge and technology spill-overs, and is considered a development strategy; however, SME
participation in a GVC is not easy. Upgrading is likely to happen only when the SME has developed
sufficient ability to learn and receive knowledge transfer effectively, and it depends on firm-level efforts.
To effectively integrate themselves into a GVC and reap the benefits, SMEs need to raise their level of
manufacturing competencies in accordance with the expectations of the GVC.

Competitive priorities of SMEs

Growing technological complexities, with short product life cycles, have created a strong impact on the
SMEs. To remain in the market, they need to orient their manufacturing strategies in consonance with the
changing market conditions. Researchers have long recognized that manufacturers’ competitive priorities
(Skinner, 1974) are key components in manufacturing strategy research. Porter (1990) introduced
competitiveness as a yardstick for performance at enterprise-level. Particularly for SMEs, competitive
priorities act as guidance for manufacturing, to enable them to meet expectations. According to Schwantiz
et al. (2002), competitiveness means the abilities of individual firms or the whole sector to assert

7
 themselves successfully in the domestic and global markets. It has been suggested that competitiveness is
a result of the entrepreneurial activities of individual firms, performed with appropriate structural policies
and functioning with adequate infrastructure (Karaev et al., 2007). Competitive priorities have been
defined (Leong et al., 1990) as a consistent set of goals for manufacturing. Vickery et al. (1997) studied
competitive priorities extensively and found that they are widely accepted in four dimensions: cost,
delivery, quality, and flexibility. Leong et al. (1990) introduced innovativeness as a fifth dimension.
Against the backdrop of intensified competition due to rapid changes in the international market, Chen
(1999) added two further dimensions – service and dependability – and proposed seven competitive
priorities for SMEs. Several researchers (Dangyach and Deshmukh, 2005; Noori and Radford, 1995
Leong et al., 1990) have extensively studied competitive priorities to propose various measures to
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improve the competitiveness of SMEs.

3. Methodology: data collection and questionnaire survey

This study is based on the collection of data from the SMEs using a questionnaire survey. To design the
questionnaire, a preliminary study was first conducted over three months during 2014. The researchers
carried out detailed personal interviews and discussions with an automotive vehicle manufacturer (a well-
known TNC), and its component suppliers. The structured questionnaire that was designed comprised of
47 questions and was divided into two sections. The first section addressed the competitive priorities. In
this section, seven competitive priorities were given, and the respondents were asked to rank them
according to their order of preference. The second section addressed identification of the influencing
variables of the seven competitive priorities, investigated through 40 questions.

The questionnaire survey was administered among the automotive component suppliers (SMEs) of a
TNC, one of the largest vehicle manufacturers in India. The TNC has a supplier base of 412 SMEs
supplying the engine, body, electrical components, etc., pursuant to contractual agreements. The
questionnaire was posted to all the 412 suppliers during June 2014; of these, 62 useful responses (a
response rate of 15%) had been received by the end of January 2015. The majority of the responding
enterprises (64%) were small enterprises, while the rest were in the medium category. The individual
respondents within these SMEs have worked in various capacities, such as manager, general manager,
and operations director, with a wide range of experience from 2 to 45 years, with the mean being 18.5
years. The majority of these individuals were involved in operations, and about 73% were more than 40
years old. More than half of the individual respondents held the position of works manager in their SMEs.
Analysis of the questionnaire responses is presented in the next two sections.

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 To pretest the competitive priorities for SMEs, the authors first conducted a preliminary study. After
detailed discussions with the executives of the TNC and its SMEs, all the seven competitive priorities
were found to be relevant for the automotive components manufacturing SMEs (Chen, 1999). In the
context of suppliers in the automotive industry, the competitive priorities and their description are set out
below in Table 1.

<Insert Table 1 >

The identified priorities of the SMEs are: (a) quality, (b) cost, (c) dependability, (d) innovativeness, (e)
service, (f) time, and (g) flexibility. The respondents were asked to rank these priorities in decreasing
order of importance. Table 2 shows a preference matrix that was constructed using the responses. The
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preference matrix is then shown in terms of percentage values in Table 3. In Table 3, for instance, the cell
in the fourth column of the first row shows 23.34%, which means that 23.34% of the respondents
prioritize innovativeness over quality, while the remaining 76.66% prioritize quality over innovativeness.
From the data of this table, Z values (area under the normal distribution curve) related to the preference
values were calculated and are shown in Table 4.

<Insert Tables 2, 3 and 4>

Kendall coefficient R* (Reuver et al., 2008) is used to test the measure of interval scales and determine
the association between two variables. The values for R* have been obtained by adding 0.49 to all the
mean Z values, thus making the mean Z value for competitive priority ‘service’ as the reference point of
zero. The interval scales of the priorities, i.e., the R* values, have been plotted in Figure 1.

<Insert figure 1 >

The interval scale shown in Figure 1 suggests that the respondents considered (a) quality as the most
important priority. The next most important priority for them is (b) cost, followed by (f) time, (d)
innovativeness, (g) flexibility, (c) dependability, and (e) service.

Statistical validation
Kendall proposed (Reuver et al., 2008) a coefficient named “coefficient of concordance” or “coefficient
of agreement” to test the validity and evaluate the consistency of rankings among a set of respondents. It
is a measure of agreement among the respondents with respect to the outcome. The preference matrix
presented in Table 2 is used for this purpose. The coefficient of agreement/concordance can be computed
according to the formula given in Reuver et al. (2008). The coefficient of concordance for the competitive
priorities of the SMEs is 20.17%, which conveys a fair agreement between the rankings (Reuver et al.,

9
 2008).Significance of Kendall coefficient is that it can handle any number of distinct outcomes and is not
affected by marginal distribution of underlying variables.
4. Qualitative study through feedback loop analysis
To reach a solution for a given problem, clear understanding and analysis of the factors causing the
problem is necessary. Qualitative study is one tool applied to analyze the factors involved in problem
solving. Qualitative analysis is a way to develop transparent maps, which provide a basis for learning and
facilitate understanding the “insights” in managerial decision making (Coyle, 1983; Wolstenholme,
1982). In the present study, based on our survey and expert opinions, interconnectedness and
interrelationships amongst the factors influencing the competitive priorities are identified. The closed
sequence of factors’ causes and effects are called ‘causal loops’ or ‘feedback loops’ (Senge, 1990). A
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feedback loop in any system structure that causes the output from one node to eventually influence the
input to that same node. In complex systems, problem symptoms arise from the forces generated by the
system’s feedback loops. Therefore, to describe and investigate the behavior of a system, understanding
the interrelationships between the variables in terms of cause and effect, represented by feedback loops
that shape the system, is necessary. Two types of feedback loops control a system: one is a positive
feedback loop and the other is a negative feedback loop. In a positive feedback loop, an increase
(decrease) in the variable in the loop feeding back on to itself results in an increase (decrease) in the
value, which, hence, exhibits growth, indicating a self-reinforcing process (Mohapatra and Mahanty,
1993). In a negative feedback loop, an increase in the variable in the loop feeding back onto itself results
in a decrease in value, which, hence, exhibits goal-seeking behavior. In the next section, feedback loops
are presented and discussed in detail.

Business growth loop for SMEs

There is no general agreement on how to measure the business growth of an SME. Growth may be
measured according to its revenues or profits earned, or by the amount of human and physical assets.
Researchers have used a number of variables to measure the growth of a small firm. An SME can grow in
its output and assets without any growth in employment. Delmer et al. (2003) considered sales or order
fulfillments as a precise indicator of how a firm is competing in the market and of growth. The growth of
any firm starts with the receipt of an order from the customer, and successful order fulfillment leads to an
increased level of customer satisfaction. However, with more customer orders, more requests for
modifications or design changes will be received; and the supplier needs to carry out the required design
improvements to process the orders received. Increased design improvements will also lead to ability to
develop new models. As an SME is able to develop new models for the TNC, its customer base increases.

10
 If, for some reason, the orders are not processed, customer satisfaction decreases, leading to fewer orders.
Figure 2 shows the growth engine of SMEs.

< Insert Figure 2>

Growth balancing loops of SMEs

The growth balancing loops of SMEs are presented in Figure 3. There are two important balancing
feedback loops present. An increase in the component price increases profits for the SMEs, which
motivates them to invest in production capacity expansion. An increase in the capacity leads to higher rate
of production. This higher productivity brings the unit cost down, thus creating a balancing loop.
Similarly, as customer base increases, the rate of customized investments in technologies also increases,
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resulting in an increase in capital and production, itself leading to a higher operating cost. The higher the
operating cost, the higher the unit cost, thus leading to an increase in the component price for the
customer. However, this reduces the customer base, thus creating a balancing feedback loop effect on
growth.

< Insert Figure 3>

Causal mechanism of quality improvement

SME growth depends on its responsiveness to customer needs. Meeting a customer’s desired quality
standards is primary to SME success. Of the surveyed SMEs, 92% of the SMEs indicated that the TNC
insists on more stringent specifications and continuous improvements of quality standards for the
components manufactured. The quality standards and requirements vary between TNCs, and demand for
quality increases as the customer base increases. SMEs need to focus on building the abilities to develop
and manage their systems to ensure that quality requirements are met. In order to meet the increasing
quality standards, they need to continuously update their resources for meeting the desired standards.

There are several dimensions that influence the maintenance of desired quality levels. Our field study has
identified the causal relationships that play a key role in improving quality. The dynamics of the quality
improvement are shown in Figure 4.
<Insert Figure 4 >

Causal mechanism of cost competitiveness

The responses indicate that component price is the primary criterion on which contracts are awarded. The
SMEs need to provide details of the processes involved in manufacturing the components and are

11
 required to submit breakup of the cost details. The TNC decides the component price based on the
supplied cost data and past performance rating. Furthermore, along with the specifications, the component
suppliers are asked to work on target-based pricing. Simultaneously, the TNC imposes a standard
reduction on component prices, which is around 5 percent per year.

An increase in TNC order rates demanding increased quality requirements creates more gap between
quality requirement and quality achieved. A decrease in the actual quality causes an increase in the
required time for processing the orders. The consequent increase in the time spent fulfilling orders causes
production delays. This reduces productivity, resulting in an increased price ratio that leads to a decrease
in orders. An increase in quality requirements increases pressure on improving the quality, requiring
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additional effort to meet the desired quality. To preserve attractiveness, in the present competitive
environment, continuous quality improvement is essential for SMEs. The causal loops are presented in
Figure 5.
<Insert Figure 5>

Causal mechanism of time

The responses show that competitiveness in terms of time means timely delivery of requested
components. To minimize inventories, the TNC demands frequent deliveries of small batch quantities
from their suppliers. Quantity and frequency of the delivery may vary depending on the component
models and the rate of assembly of vehicles. Any delivery delay directly affects the TNC’s production
processes. According to the responses received, other than body components, all the other components
should be delivered twice a day. The SMEs need to improve their responsiveness to customer orders and
achieve timely delivery. The causal relationships involved are shown in Figure 6 and are described below.
<Insert Figure 6>

The ability of an SME to meet orders depends on its production capacity. If the customer order rate
exceeds its capacity, unfulfilled orders are accumulated in the form of an order backlog. An increase in
the size of the order backlog instructs the firm of the need for capacity expansion. The greater the
capacity expansion, the greater the rate of order-fulfilling and the smaller the order backlog. This raises
customer satisfaction, leading to more orders and, thus, the growth of the firm. Therefore, SMEs need to
frame their policies for investment on the timely addition of capacity, enabling them to improve their
customer base.

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 Small firms need to focus on building their production capacities, enabling them to improve their delivery
performance. Advanced information of future orders from the TNC helps the SME in effectively planning
the expansion of its capacities.

Causal mechanism of innovativeness

The SMEs responses reveal that they must be innovative to create new ideas and processes, enabling them
to enhance new component development. Because of short product life cycles, new product development
is considered as the driver of competitive advantage. Vehicle manufacturers are changing product designs
and are introducing new models rapidly. As a result, they are demanding innovation from their SME
suppliers with respect to their components. Therefore, SMEs need to accelerate new component
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development without compromising quality. Since the future profits of the products depend on the initial
cost, managing the cost in the component development stage is crucial. However, outperforming
competitors in terms of quality and price may be critical to the success of many SMEs.

The responses show that the failure rate of new component development, is as high as 60%.The success
of new products depends on the scientific and technical capabilities of the SMEs. To be successful, they
must continuously engage in the development of new components within a short timeframe. In this
respect, firms must have high-quality design teams and their research and development (R&D) activities
are critical to enhancing the success of new product development. R&D activity is highly cost intensive,
and a certain amount of profit is needed to invest in it continuously. Figure 7(a) shows the feedback loop
for new component development.
<Insert Figure 7(a)>
An adequately trained workforce has been indicated as an influencing variable for innovativeness.
Upgrading the skills of different categories of operators, as well as managers, is central to SME
innovativeness, performance, and, therefore, growth. Unless the personnel attend training programs, it is
difficult for them to develop and deliver better practices as technology is changing at a rapid pace.
Surveyed SMEs indicate that a high degree of training to the personnel improves their firm performance,
however, 96% of the SMEs perceive that the cost of training is often prohibitory and they do not have the
capital available to invest in training.

The training programs organized by SMEs vary in nature. The program’s objective may be to highlight
the design and development of components and adaptation of new technology. Training programs are
designed separately for operators, supervisors, and front-end staff. To train the SMEs personnel TNC is
organizing training programs continuously and insist that supplier personnel must attend the training. The

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 TNC interacts, discusses, and explains the supplier personnel at all levels, suggesting measures for
process and product improvements. The dynamics of innovativeness are presented in Figure 7(b).

<Insert Figure 7(b) >

Causal mechanism of manufacturing flexibility
Whenever there is a gap between orders received and processing capacity, delivery delay usually results,
leading to a decrease in customer satisfaction. Firms may perceive this gap only after a delay. This is due
to frequent changes of product models and low volumes of batch production. Thereafter, there may be
decision delay as the management may not be proactive in developing the required process setups for
quick model changeovers. Apart from the perception and decision delays, there may also be delays in
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procurement and installation of the various tools and gauges required. These time delays play a vital role
in meeting TNCs’ orders. Figure 8 shows the causal mechanisms of manufacturing flexibility.

<Insert Figure 8 >

The survey responses confirm that timely addition of capacity is an important requirement for SMEs. This
can be achieved only when the management is proactive. Capacity addition is fraught with delays in
procurement, operations, and coordination. Since most of the suppliers are resource-constrained, the TNC
is involved in its SMEs production and capacity planning, the exchange of machinery and equipment, and
providing technical and financial support for expansions. Their support in providing resources encourages
the growth of SMEs, as well as that of the TNC. The feedback loops of manufacturing flexibility are
shown in Figure 8.

Feedback loop analysis of dependability

SMEs should strictly adhere to commitments and promises given to the TNC in delivering components
and design modifications, new component development, change of specifications, etc. At the end of every
month, SMEs are required to act on feedback from the TNC, which is essential for the SMEs to
understand the TNC’s needs and views. The responses show 92% of the surveyed SMEs are not analyzing
the responses and complying with the norms of their TNC. Figure 9 shows the external feedback loop on
the dynamics of dependability.
<Insert Figure 9>
Figure 9 shows the following:

• SMEs should receive feedback from their TNC, in the form of either complaints or suggestions,
to improve their performance.
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 • compliance with TNC expectations is essential.
For SMEs, tracing the causes and effects are important, and they also become inputs for continuous
improvement. The management must determine the real causes and evaluate the effects, considering the
different delays and nonlinearities between the factors that are involved in the system. For an organization
to learn, it must engage in creative thinking. Customer feedback is vital in such cases for designing the
policies and programs to meet TNC expectations. Feedback helps SMEs to make decisions on capacity
addition, product and process innovations, etc.
Service priority
All of the surveyed SMEs are supplying 95% of their manufactured components directly to the TNC and
the remaining quantities to replacement markets. In both cases, where any customer complaint arises, the
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SMEs need to resolve them. For every complaint, the SMEs are expected to send their personnel to
address the issues. Later, the initiation of necessary action plans is required to eliminate the recurrence of
such complaints. Two activities involved in service priority: establishing appropriate procedures and
systems and the involvement of personnel. Timely responsiveness with adequate product knowledge and
ability to interact with TNC is most important.

5. Conclusions
The ongoing expansion of GVCs shows immense potential and offers interesting opportunities for SMEs
to learn and upgrade. To support the integration of SMEs into GVCs, this paper aims to identify the
competitive priorities needed and to explore various factors promoting the competitiveness of the SMEs.
Our survey of automotive component manufacturing SMEs reveals that competitiveness in ‘quality’ is the
most significant priority, followed by competitiveness in ‘cost’. The remaining priorities, in descending
order of importance, are ‘time’, ‘innovativeness’, ‘flexibility’, ‘dependability’, and ‘service’.

Competitiveness in quality and the cost of manufactured products are seen by SMEs as important
requirements for participation in a GVC. Among the prominent factors promoting quality improvement
and product cost include: adequate technical and skilled personnel and process and product
improvements. On-time delivery of products is another important priority. To overcome delivery delays
caused by low levels of production, SMEs perceive that timely addition of production capacity enhances
production and prevents delays in product delivery. The majority of the surveyed SMEs are facing
difficulties in capacity addition mainly due to decision and implementation delays. As work orders
increase, SMEs are experiencing increasing quality gaps. To be competitive and to maintain desired
product quality levels, SMEs require increased investment to reduce these quality gaps. This indicates that
they require customized investments, needing additional cash flows to maintain adequate managerial and

15
 workforce and expertise. In addition, the surveyed SMEs are constrained by the fact that they cannot
increase the price of their components; in fact, there is continuous pressure on them to reduce the price of
their products from year to year to retain TNC work orders.

The most important competitive priority for participation in a GVC is innovation. Value chains seek
innovativeness in manufacturing products, with continuous design modification and changes, fostering
new product development. New product development and product design modifications depend on SMEs’
technology competence and improvements in internal research development activities. Greater impetus is
needed in research and development activity, enabling SMEs to increase productivity and reduce product
cost. Our findings show that technical expertise and know-how are the most important enabling factors
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for SMEs to improve their innovativeness.

Innovativeness is central for successful participation and facilitates fostering new product development
activity, with productivity enhanced by reducing the product cost. Meeting product delivery schedules
while maintaining enhanced quality levels are internal capabilities. Development of these internal
capabilities alone is not sufficient. External capabilities, such as infrastructure development, production
capacity enhancement, and securing financial support, also require focus since external capabilities
significantly enhance internal capabilities.

The value chain interacts with SMEs and provides expertise and know-how from the product
development stage to the process and product improvement stage on a continuous basis. This indicates
GVCs are creating a learning environment for SMEs, thus helping to promote their internal capabilities.
To enable SMEs to improve their external capabilities, the government needs to provide a favorable
environment, particularly in financial dimensions, by creating new kinds of organizational structures to
enhance financial support. To promote the SME sector, concerned agencies should initiate proper
schemes that address improving the business environment and conditions on a continuous basis, enabling
the SMEs to integrate into and maintain healthy linkages with the GVCs.

The present study is confined to the issues and constraints for the SMEs in the automotive
component manufacturing industry. Similar studies may also be taken up in other sectors such as
food, chemical, or pharmaceutical sectors. Another limitation to the study is related to the data
collection methodology of the research work. As the present research work is carried out on the
basis of data received through the feedback and responses from the component manufacturing
industries, a certain amount of bias in the data cannot be ruled out. It has also been observed
16
 during the expert interviews and the questionnaire surveys that the respondents of the component
manufacturing SMEs tend to protect their TNCs from any blame.

6. Managerial implications
The stringent quality requirements, faster delivery, cost competitiveness, etc., required by GVCs have
certain important benefits for SMEs in the long run. They facilitate SMEs working in an environment that
enables them to make commitments that they are driven to fulfill. One important aspect is that SMEs need
to adopt appropriate pricing policies and establish working systems to enable them to enhance their
capacities, skill development, etc., through internal investment. They should focus on developing the
ability to learn and being innovative. In this direction, developing linkages with governmental
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organizations and local networking among SMEs would enable them to share pricing strategies and
product- and process-related information. However, it is essential to understand their present core
competencies and reorient themselves to face the reality of fierce competition in the market. To sustain
their growth, SMEs should be able to assume increased responsibilities by building their capabilities: the
only way for them to ensure sustained growth.

Declaration of conflicting interests

The authors declare that there is no conflict of interest.

Funding
This study received no specific grant from any funding agencies.

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 e c g d f b a
|---|------------------------|---|---|-----------|--------------------------------------------|
0 0.03 0.30 0.45 0.54 0.83 1.29

Figure 1. The interval scale of the competitive priorities of the SMEs.

Customer + Orders
Base + Receiving Rate
+
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+
Ability of Component Customer Need of Design
Development Satisfaction Improvements
+ +

+
Orders
Fulfillment

Figure 2. Growth engine of the SMEs.

Rate of Customized
Investments +
Operating Cost
+ -

Customer Base Capacity Expansion +

- + Unit cost

Revenue
+
+
Price to Customer

Figure 3. Growth balancing loops of the SMEs.

1
 Customer + Demand for Defects
Base Product Quality Quality -
Achieved Generation
+ +

Level of Customer + -
Satisfaction Process
Gap in Quality Variations
-
+
+
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Total Cost + Process Change

+ Resources
Requirment for Rate of +/Modification
Quality Rework
Cost of +
Quality
-
Productivity
Figure 4. Causal mechanism of quality improvement.

Order Rate

-
+ Customer Base
Desired Quality
+

Price Ratio
+
- Customer
Quality Gap
Attractiveness
+
Productivity
+ +
Efforts for Quality Product
Improvement Quality
+
+
Process Quality

Figure 5. Causal relationships for price competitiveness.

2
 Customer Capcity Investment Policy
Order Rate Expansion
+ +

+ +
Customer Production
Satisfaction Order Backlog Rate
- -

+ +
Delay in - Order Filling
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Delivery Rate

Figure 6. Causal mechanism of time.

Production
Capcity + Orders
+ Rate
+
Capcity NewProduct +
AdditionRate Success Monthly Revenue
+ +

+
Investment
PresureTo on R&D Revenue Ratio
Increase capacity
+ +

+
Average Profit

Figure 7(a). Causal relationships for innovativeness.

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Figure 7(b). Causal relationships for innovativeness.

Figure 8. Causal relationships for manufacturing flexibility.

4
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Figure 9. Causal relationships for dependability.

5
 Table 1. Competitive priorities of manufacturing.

Competitive Priority Description

Quality Products with high quality performance standards
Dependability Honoring promises
Cost Producing and supplying products at low cost
Flexibility Responding to or confirming to new situations such as changes in
product mix, volume etc.
Innovativeness Introducing new products and processes improvements consistently
Service Providing pre and after sales service
Time Producing and supplying products faster
Source : Leong et al., 1990 and Noori and Radford, 1995
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Table 2. Preference matrix for competitive priorities

Factors PreferredF
Quality Cost actors
Dependability Innovativeness Service Time Flexibility

Quality 0 11 5 9 4 7 7
Cost 29 0 8 13 11 16 8
Dependability 35 32 0 27 19 27 28
Innovativeness 31 27 13 0 16 21 17
Service 36 29 21 24 0 32 27
Time 33 24 13 19 8 0 15
Flexibility 33 32 12 23 13 25 0

Table3. Preference matrix for computing coefficient of

concordance.
Factors Preferred Factors
Quality Cost (in%)
Dependability Innovativeness Service Time Flexibility

Quality 0 30 13.34 23.34 10 16.67 16.67

Cost 70 0 20 13.34 30 40 20
Dependability 86.66 80 0 66.67 46.67 66.67 70
Innovativeness 76.66 66.66 33.33 0 40 50 43.34
Service 90 70 53.33 60 0 80 66.67
Time 83.33 60 33.33 50 20 0 36.67
Flexibility 83.33 80 30 56.66 33.33 63.33 0
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Table 4. Z Values related to preference matrix in Table 3.

Factors Preferre
Quality Cost dFactors
Dependability Innovativeness Service Time Flexibility

Quality 0 -0.53 -1.11 -0.73 -1.29 -0.97 -0.97

Cost +0.53 0 -0.85 -0.43 -0.53 -0.26 -0.85
Dependability +1.11 +0.85 0 +0.43 -0.09 +0.43 +0.53
Innovativeness +0.73 +0.43 -0.43 0 -0.26 0 -0.17
Service +1.29 +0.53 +0.09 +0.26 0 +0.85 +0.43
Time +0.97 +0.26 -0.43 0 +0.85 0 -0.34
Flexibility +0.97 +0.85 -0.53 +0.17 -0.43 +0.34 0

Total +5.6 +2.39 -3.26 -0.30 -1.75 +0.39 -1.37

Mean Z +0.8 +0.34 -0.46 -0.04 -0.49 +0.05 -0.19
R* 1.29 0.83 0.03 0.45 0 0.54 0.3