Underlying Success Factors for SMEs in Thailand - Essay Example

What is below the surface and what are the underlying success factors for small and medium enterprises in Thailand?

Paper 3: CONCENTRATION CURRICULUM

Abstract

A positive outcome of the aftermath of the 1997 crisis was that many SMEs have adapted themselves to the new globalised economic conditions. SMEs now have the potential to propel Thailand forward and the government is keen to support them. Initiatives such as improving access to finance are an immense help, and web presence helps SMEs reach out to a wider audience. In the international business environment, SMEs also need to adhere to international standards and as shown by a case study, give special attention to customer relations.

Introduction

Drawing from recent literature on the topic area ‘What is below the surface and underlying success factors for small and medium enterprises in Thailand?’ this paper will evaluate the unique contributions and extensions of the research questions to the discipline on International Business. It will draw upon personal experience and a case study as well as the greater body of literature to address the intersection of the seminal work discussed in the earlier paper two with the current state of literature on International Business and the chosen research question.

This paper begins with a brief examination of some underlying success factors of relevance within the context of the international business environment, and then discusses some further challenges and possible solutions including the important issue of financing of SMEs. The case study revisits the company introduced in paper two by focusing on its international business relations. It ends with a brief look at how SMEs are coping in the current competitive and globalised economic climate.

Underlying Success Factors

Although the economic crisis of July 1997, known locally as the ‘Tom Yum Kung disease’ and which followed a devaluation of the currency, made thousands of Thai SMEs bankrupt, a positive outcome of the aftermath of this crisis was that many SMEs have adapted themselves to the new globalized economic conditions. They have become more “tolerant to the changing economy and new environment” (Srivihok & Intrapairote, 2004). Large enterprises (LEs) had also been hit but SMEs were looked upon as hope for economic recovery. The resilience of SME has been evident in later crises such as SARS in 2003 and the tsunami in 2005. The contribution of SMEs to GDP was 40% in 2006 and to industrial exports was 75% in the same year (Yadav, 2008).

For Thailand, SMEs have the potential to propel Thailand forward in the highly competitive and globalized world we live in today. Although the country is lacking in capital and labor for technology-based production, “SMEs seem to offer a way to tap the country’s rich local wisdom and cultural heritage to produce various unique high quality products” (Srivihok & Intrapairote, 2004b). The government is therefore keen to promote SMEs as discussed in paper one because they help to generate employment, improve labor skills, and can also attract foreign currency and foreign investment.

Linking with Internet based companies such as directory sites can enable SMEs that either cannot make their own website or have little expertise with information and communication technology, to reach out to a wider audience. A recent success story is of Jatujak Market, an online shopping directory for a range of Thai products in the categories of art and antiques, gifts, furniture, sports goods, handicrafts, pet accessories, clothing and clothing accessories, and home utensils. Jatujak Market is a physical shopping area in Bangkok but with the creation of their website in December 2009, they now have the capability to sell their products and services online in a global marketplace. Initiatives such as this one are a great boon to SMEs.

Further Challenges and Solutions

At the international business level, it is also necessary to adhere to international standards. While SMEs may enjoy certain advantages in what they produce and how they conduct their business, the international arena is a different ballgame. It is a challenge of ‘craft versus standard’. On the other hand, there are also foreign SMEs operating in Thailand such as Korean and Japanese manufacturing SMEs that have strong links with their home country but weaker links in the country of operation. They are usually “adept in adjusting to international market standards, but less skilled in forging ties with local sector networks” (McNamara, 2005). In other words, they are adept at globalization but not localization. Examples of local ties include networks with specialized home producers, local knowledge in respect of laws and regulations, organizational culture, machinery and state resources.

A suggestion put forward by McNamara at the 2005 APEC Conference in Korea was to create a regional ‘learning environment’ among SMEs for “driving a continual process of integrating local craft with global standards”. The main advantage for SMEs would be technology transfer and the main advantage at a global level would be innovation. He promotes knowledge as “the key to flexibility” and knowledge can transfer both vertically between locals and transnationals, and horizontally within a particular local industry. Learning communities can help foster effective sharing of knowledge among local and foreign SMEs, and APEC has the potential to play a major role in this regard (McNamara, 2005).

Another line of action is to assist SMEs in Internet based and electronic commerce. The advantages of doing so include “decreasing costs, expanding marketplaces, enhancing competitiveness, improving business image, and increasing revenues” (Srivihok & Intrapairote, 2004b). Information technology attracts customers due to the convenience factor, access to detailed information, and greater range of products, and e-commerce allows the conduction of real-time transactions remotely and at low operating costs.

Moreover, advances in the adoption of information and communication technologies can help Thailand “to survive and compete in a highly competitive globalised world” (Srivihok & Intrapairote, 2004b). Physically located enterprises are restricted by geographical constraints whereas e-commerce websites can reach out globally. For example, Oil Painting Repro is a Thai based company that specializes in reproducing oil paintings that are now able to take orders and deliver worldwide through their website oilpaintingrepro.com.

Financing of SMEs

On the subject of financing, an article in Cab Calling (Yadav, 2008) discussed innovative ways in financing SMEs in Thailand and Vietnam. It is noted that banks in South East Asian countries are taking a greater interest in supporting SMEs because of their important role in economic development. The following common problems being faced by SMEs are pointed out: “access to finance, collaterals, obsolete technology/machineries/equipments, deficiency of business development services, marketing, infrastructural bottlenecks, poor financial and managerial knowledge, and inadequacy of inputs/skilled labour…” From the perspective of bankers, SMEs are considered a high risk and as having ‘inadequate managerial competence’. There have been government supported initiatives such as loan/credit schemes, interest subsidies, export financing and so on, but they have been largely unsuccessful and led to greater dependency. The diagram below illustrates the business model used for financing SMEs in Thailand. It shows there is a special national agenda of the Thai government to support SMEs under which subsidies may also be given. There are also other sources and types of finance available as well. In short, a structural framework has been established to financially assist SMEs. Furthermore, bankers encourage innovative practices and collective involvement and undertake credit risk assessments in deciding to finance SMEs.

Figure 2: The Thai business model for financing SMEs

Source: Yadav , 2008

Case Study Revisited

In the case study mentioned in paper 2, Apibunyopas and Songmuang (2007) sought to examine the critical success factors behind SMEs during the previous three years (prior to the start of the current global financial crisis) during which economic development in Thailand had been impressive. Thai SMEs along with firms from other developing countries had been noted for challenging the high quality and low price phenomenon in developed countries by producing similar products at even lower costs. Although many Thai SMEs still rely on cheap labor as part of their low-cost strategy, they have given greater attention to improving customer relations.

The company under focus (ABC Furniture Company Limited) expanded into Japan following the granting of export promotion status by the Thai Export Promotion Department. It also obtained an ISO 9001 and ISO 9002 quality assurance status. Now, 80% of its sales are from Japanese customers and it exports to Europe and America as well. There is competition from China and Vietnam but Thailand has the comparative advantage of low labor costs. The strong features of the company are quality furniture, minimal defect and punctual delivery. As such, the company demonstrates a high level of customer and market focus notwithstanding the fact that the majority of its customers are outside of Thailand. On an international level, the company is also active in attending foreign trade fairs, maintains knowledge of the codes of conduct and culture of the foreign countries it operates in, and it has established a permanent showroom in Japan in addition to their existing one in Thailand. The company is well aware of the different needs of local and foreign customers, and it has devised a separate strategy and priority order for both as shown in the table below.

Table 4: Order of priority for domestic and foreign customers of ABC Furniture Company Ltd

Table 1: Order of priority for domestic and foreign customers of ABC Furniture Company Ltd

Order of priority for domestic customers

Order of priority for foreign customers

• Price
• Delivery time
• Quality
• Design
• Service

• Design
• Price
• Production potentials
• Quality
• Punctuality
• Service

The Current Direction of SMEs

In the current era of globalization and a high level of competitiveness, SMEs that engage in exports are under pressure, and in the current global financial crisis face an issue of survival. To help them, OSMEP in collaboration with the Thailand Productivity Institute (FTPI) started a project by the name of ‘Improving the Efficiency of Internal Processes among SME Pilot Group’ (Siriprapawan & Walsh, 2008). A select number of SMEs awarded the Thailand Quality Award were studied in terms of their efficiency and effectiveness for the benefited of other SMEs using a mixed-methods design. This international award is granted to “organisations with the best practices and excellent performance in Thailand”. The award criteria show the level of efficiency and effectiveness required for being granted the award, and these include having “visionary leadership, customer-driven excellence … valuing employees … managing for innovation … social responsibility …” etc.

Conclusions

The resilience that arose after the disaster of the 1997 Asian crisis has become a fundamental success factor for SMEs. They are now at the heart of the Thai economy and the government’s recognition of their importance is demonstrated by its support of SMEs. It has also been seen that some Thai SMEs have matured for example by adopting the latest technologies that enable them to engage in the competitive global marketplace. Issues that exist in this international business environment include international standards and Internet presence, and practically all SMEs usually face problems with access to finance. Thai SMEs have adapted to cope with crises in the past and to globalization, but the current financial climate poses new challenges although Thailand is not alone in this. The case study showed how Thai SMEs can have a competitive advantage in the form of low production costs in particular, but also how they can leverage by giving greater attention to international customer relations.