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IMDS
115,6
Manufacturing strategy in SMEs
and its performance implications
Olli-Pekka Hilmola
1004 Department of Industrial Management,
Lappeenranta University of Technology, Kouvola, Finland
Received 20 December 2014 Harri Lorentz
Revised 15 March 2015 Turku School of Economics, University of Turku, Turku, Finland
20 April 2015
Accepted 23 April 2015 Per Hilletofth
School of Engineering, Jönköping University, Jönköping, Sweden, and
Jarmo Malmsten
Turku School of Economics, University of Turku, Turku, Finland

Abstract
Purpose – West European manufacturing has been going through challenging times after the global
financial crisis of 2008-2009. Some countries (e.g. Sweden and Germany) have recovered from the crisis,
while in others problems and job loss still persist. One of these problem countries is Finland. The
purpose of this paper is to examine manufacturing strategy priorities and their performance
implications in this country.
Design/methodology/approach – During the spring of 2014, a web-based survey was conducted,
targeting Finnish manufacturing companies. In this study we focus on small- and medium-sized
(SMEs) companies and link survey responses to financial performance data, which is available in
audited annual reports.
Findings – Research results indicate that SME manufacturers in Finland put less emphasis in new
product development, broadness of product line and after sales service, while showing high priority in
delivery speed and punctuality. As the manufacturing strategy dimensions are connected to audited
financial data, regression analyses reveal that superior quality is at central place for achieving higher
revenues and profits. After sales service has a positive impact on revenues and new product development
ability is connected to higher profits. Managing quality to meet specifications (minimum quality level),
leads only into higher employment. Some evidence is shown in support of flexibility in terms of product
changes having negative impact on revenue, while volume flexibility is connected to lower profits.
Research limitations/implications – This research is limited to a single country, and is cross-
sectional in nature. The primary data were combined with profit and loss statements in order to reduce
common method bias.
Practical implications – It is evident that SMEs may adapt their manufacturing strategy, with
emphasis on superior quality together with properly managed after sales service and new product
development activity. However, it is worrying that head count in manufacturing SMEs is not connected
to same factors, as are revenue and profit. It is suggested that flexibility in labour contracts and other
regulatory support measures are needed to support flexible manufacturing.
Originality/value – Advanced economies and their remaining manufacturing companies have been
receiving minor levels of interest in research. This is especially the case with SMEs, where this research
tries to fill important research gap.
Keywords Strategy, Financial performance, Finland, Manufacturing, Survey
Paper type Research paper

Industrial Management & Data

Systems 1. Introduction
Vol. 115 No. 6, 2015
pp. 1004-1021
The role of small- and medium-sized enterprises (SMEs) has increased during the recent
© Emerald Group Publishing Limited
0263-5577
decades as large corporations have reduced their basic research budgets, while applied
DOI 10.1108/IMDS-12-2014-0380 product development and business acquisitions have been used instead as basis for
growth. In other words, SMEs are no longer just a source of raw materials, components Manufacturing
or semi-finished items, but they increasingly serve as sources of new ideas, new strategy in
products and “complete package” subcontractors, with the original equipment
manufacturers’ (OEM) brand put into the product. Therefore, requirements for price,
SMEs
quality, delivery and flexibility have increased, and SMEs have to provide these with
advanced IT systems (Haug et al., 2011), development resources (Arrunada and
Vázquez, 2006; Hilmola et al., 2005) and financing ability (Ma and Hilmola, 2007). In the 1005
recent decades, it has been difficult for pure manufacturing companies to make
significant profits, as services have taken a considerable share of the market growth
and final product prices for manufacturers have been weak due to price inflation
(Marquis and Trehan, 2010). Therefore, OEMs have been forced to use suppliers
for global delivery and concentrate on value capture, and service offerings (like Apple;
Haslam et al., 2013).
Based on recent empirical research conducted in Spain on companies of various size
(Minguela-Rata et al., 2014), it was shown that medium sized companies are the most
innovative, and that innovation takes place in a mode of collaboration with customers,
which are typically larger corporations. Also age appears to play an important role
as innovation is present most often in younger companies. It could be said that large
corporations are increasingly talking about innovation and seeking opportunities,
but these are sought after at stakeholders and through active technology licensing,
business acquisition and divestment activity. The phenomenon of open innovation is
one of the hottest topics within innovation discipline, and it does not only emphasize
collaboration between companies, but also with universities, research laboratories and
government (Naqshbandi and Kaur, 2014).
For the initiation of new companies, it is important that risk finance, as well as
markets for products and research and development funding (and organizations) are
available. Therefore, it is justified that growing GDP results in good environment for
establishing and sustaining SME (Kshetri, 2014). With SME serving manufacturing
sector or large tangible projects, it is important that share of imports and exports is
having high share out of GDP and imports and exports is growing (Kshetri, 2014). This
ensures manufacturing SMEs to have legislative (coupled together with low
bureaucracy) and financial support from government as well as from surrounding
financial sector. The supply of competence and resources from pool of labour is also
assured in such environment (as sub-sector grows).
Global financial crisis (GFC) was a tipping point for many advanced economies, and
continuing decline has been at the agenda in many economies, particularly in
Europe. Before the GFC, these countries were models for emerging economies, and the
country serving as the research context, Finland, was one of them. Finland has been
continuously at TOP10 positions in global competitiveness rankings of World
Economic Forum (Schwab and Porter, 2008; Schwab, 2011, 2013), and in the most
recent ranking it was as high as the fourth place (Schwab, 2014). However, development
of the manufacturing environment has been extremely sluggish in Finland after the
GFC, and is the weak part of the economy. Both export (Finnish Customs, 2014a) and
GDP (Statistics Finland, 2014a) were at the end of 2013 at the level of year 2006, and
showing significant decline from the pre-crisis peak level of 2008 (export declined
nearly 15 per cent and GDP declined more than 5 per cent). During the years,
employment at the manufacturing sector has also been severely hurt: based on official
statistics the decline has been some 15 per cent since year 2008, and nearly one-fourth
after year 2000 (Statistics Finland, 2014b). This all translates into significant challenges
IMDS for manufacturing companies as they are export oriented and the size of domestic
115,6 market is very limited. On the positive side, the amount of manufacturing companies,
and particularly that of SMEs, has not changed at all during the previous decade. Of
course employment and revenue has been hit, but companies mostly still try to survive
in the difficult environment. There is no major change in sight even during the data
collection year of 2014, as exports and imports are nearly the same in comparison to
1006 the situation in the previous year (Finnish Customs, 2014b). Foreign trade will show
a fourth consecutive year of deficit for Finland in year 2014. Manufacturing and foreign
trade malaise is a result of number of issues, but surely offshoring as well as
outsourcing after the IT bubble burst in year 2001 and the GFC in year 2009, have
influenced the trend, combined with the lower demand for paper in Europe due to
digitalization and emergence of smartphones based on the platforms of Android and
Apple. In international comparisons, Finland is also one of the highest labour cost
countries in the world, if direct and indirect costs (sick leave, maternity leave, vacations
and part of the healthcare) are included (Bureau of Labour Statistics, 2012).
As economies change and advance so should the leading sub-branches of it do as
well. This change should be mostly present among SME companies as they are
typically the innovation engines and represent the future growth of any economy. This
is equally true in developed European economies as it is now in China (currently under
transformation from secondary and tertiary industry dominated manufacturing
country to knowledge economy). In this research, we are concentrating on SME
manufacturing companies in Finland, as they represent a possible leading decision
group, and as they have been forced to transform their practices lately. This situation
has persisted for years, and therefore remaining companies in manufacturing must
have carefully developed their strategies to survive. Also increasing competition from
emerging markets (Low, 2007; Lorentz et al., 2007; Shah and Jolly, 2011; Laisi et al.,
2012; Sodhi and Tang, 2013), such as the ones in Eastern Europe and Asia, are adding
further pressure together with the relatively strong currency of euro. Based on the
above discussion, it is interesting to consider the following research questions:
RQ1. What dimensions of manufacturing strategy companies prioritize?
RQ2. What is the relationship of manufacturing strategy prioritization and key
performance measures such as revenue, profits and employment?
These research questions are addressed in this manuscript with a survey of Finnish
manufacturing companies, which was conducted in early 2014. These data are
connected to audited financial statements from each respondent, allowing us to
combine two datasets and mitigate common method bias.
The paper is structured as follows: In the following Section 2, the manufacturing
strategy literature is reviewed. Description of research methodology follows in Section
3. Empirical data analysis is elaborated in Section 4, while in Section 5 results are
discussed by taking the perspective of a single firm, as well as by considering wider
industry and society impacts implied by this research. Finally in Section 6 we conclude
our work and provide avenues for further research in this area.

2. Literature review on manufacturing strategy

Manufacturing firms can only outperform competitors, if they can create a competitive
advantage that they can sustain. Advantage can be created by offering customers
superior value, either by providing the same benefits as competitors at a lower cost
(cost advantage), or by providing benefits that exceed those of the competing offerings Manufacturing
(value advantage) or both (Porter, 1996). The source of advantage is found in the ability strategy in
to differentiate from competition with regard to products and customer service, and in
the ability to operate at lower cost with fewer resources (Christopher, 1998). This is
SMEs
achieved by organizing the firm around how customer value is created efficiently, how
customer value is delivered efficiently, and how these processes can be coordinated and
managed (Hilletofth, 2011). 1007
Depending on the nature of competitive advantage pursued, the manufacturing
firm may focus either on the value creation processes, the value delivery processes or both
(Porter, 1996). Thus different business models can be distinguished in the manufacturing
industry (Hilletofth and Lättilä, 2012). Some firms use a value-oriented model by focusing
on the management of the value creation processes. This enables them to increase
revenues by developing and selling desirable products ( Jüttner et al., 2007). The
competitive advantage is created by providing higher product value (value advantage).
Other firms use a cost-oriented model by focusing on the management of the value
delivery processes. This enables them to reduce lead-times and costs in the manufacturing
and supply chain, as well as improve asset turnover ( Jüttner et al., 2007). The competitive
advantage is created by providing comparable product value at a lower cost (cost
advantage). A final group of firms uses a customer-oriented model by focusing on the
management of both the value creation and the value delivery processes. This enables
them to increase revenues and reduce costs by developing and selling desirable products
and delivering them cost-efficiently (Hilletofth, 2011). The competitive advantage is
created by providing higher product value at a lower cost (value and cost advantage).
The competitive advantage is formulated in the business strategy and should later be
transferred to the functional manufacturing strategy (Hayes and Wheelwright, 1984; Hill,
1995; Flynn et al., 1999; Frohlich and Dixon, 2001). Two core elements are central to the
definition of a manufacturing strategy (Dangayach and Deshmukh, 2001; Leong et al., 1990;
Platts et al., 1998). The first is a statement of what the manufacturing function must
accomplish (referred to as the manufacturing tasks, objectives or priorities) and can be
defined as the capabilities the manufacturing unit must have to compete, given its overall
business strategy (Hayes and Wheelwright, 1984; Miller and Roth, 1994; Platts et al., 1998).
In other words, emphasis should be placed in the future on these desired capabilities.
The second element of a manufacturing strategy is a pattern of decisions that a company
makes, which determine the actual capabilities of the manufacturing system (Hayes and
Wheelwright, 1984; Miller and Roth, 1994; Platts et al., 1998). The company makes decisions
in terms of manufacturing, given the specified priorities, available resources and this result
in some manufacturing (or competitive) capabilities (Anderson et al., 1989; Gröβler and
Grübner, 2006). The manufacturing capabilities form the basis for organizational
(e.g. revenue, profit and asset turnover) and operational (e.g. lead-time, unit cost and set-up
cost) performance (Figure 1). The notion that top-down alignment of business strategy and
competitive capabilities drives performance is well established (Frohlich and Dixon, 2001).
Miller and Roth (1994) proposed taxonomy for competitive capabilities. This
taxonomy has become one of the most influential frameworks for manufacturing
strategy literature and has been used and improved in many later studies (e.g. Frohlich
and Dixon, 2001). Typical dimensions of competitive capabilities commonly used and
also included in the initial taxonomy of Miller and Roth (1994) include price, quality,
flexibility, delivery and service (Table I). Even if some studies also suggest innovation
and sustainability as critical dimensions of competitive capabilities, most of the
research stresses the five dimensions mentioned above.
IMDS
115,6 Business strategy

Manufacturing strategy
1008
Competitive Decision
priorities categories

Manufacturing
capabilities

Manufacturing
Figure 1. Performance
Manufacturing
strategy, capabilities
and performance Sources: Based on Frohlich and Dixon (2001),
Leong et al. (1990), Gröβler and Grübner (2006)

Competitive capabilities Defined as the capability to

Price 1. Low price Compete on price

Flexibility2. Design flexibility Make rapid design changes and/or introduce new product quickly
3. Volume flexibility Respond to swings in volume
4. Broad product line Deliver a broad product line
Quality 5. Conformance Offer consistent quality
6. Performance Provide high-performance products
Delivery 7. Delivery speed Deliver products quickly
8. Dependability Deliver on time (as promised)
Table I. Service 9. After sale service Provide after sale service
Dimensions of 10. Broad distribution Distribute the product broadly
manufacturing 11. Advertising Advertise and promote the product
strategy Sources: Frohlich and Dixon (2001) and Miller and Roth (1994)

As can be seen in Table I, each dimension includes one or more defined capabilities.
The quality dimension includes the capabilities to offer consistent quality
(conformance) and to provide high performance products (performance). The flexibility
dimensions includes the capabilities to make rapid design changes and/or introduce
new products quickly (design flexibility), to respond to swings in demand (volume
flexibility) and to deliver a broad product line. The delivery dimension includes the
capabilities to deliver products quickly (delivery speed), and to deliver on time (delivery
dependability). The service dimension includes the capabilities to provide after sales
service (after sales service), to distribute the product broadly (broad distribution) and to
advertise and promote the product (advertising). The price dimension includes the
capability to compete on price (low price).
The targeted competitive capabilities differ to certain extent depending on used
business model. European manufacturing firms should recognize that competition
through solely a value or cost advantage, in many situations, is unsuitable Manufacturing
(Al-Mudimigh et al., 2004; Hilletofth, 2011; Walters, 2008). They should instead pursue strategy in
a competitive advantage based on both value and cost, and focus on coordinating the
value creation and the value delivery processes. This will generate opportunities to
SMEs
avoid price competition from low-cost countries, maintain profit margins and, at the
same time, keep production in high-cost Europe (Hilletofth, 2011). Still, it is costly to
implement and these costs must be deducted from somewhere else. Thus, SMEs could 1009
have financial difficulties implementing it completely and need to find the right
components and competitive capabilities to focus on (Hilletofth et al., 2012). The current
research reported in the literature is mostly based on large manufacturing and service
firms (e.g. Hilletofth, 2011; Walters and Rainbird, 2004; Williams et al., 2002), however,
research also exists with regard to SMEs (e.g. Hilletofth et al., 2012; Wynn and
Olubanjo, 2012). It can be argued that SMEs are following the larger companies and their
management system implementations. For example, Wynn and Olubanjo (2012) reported
implementation of ERP system at packaging company and it shared characteristics with
the large ERP implementation wave taken place in the early 2000 in larger companies.
Similarly, Hilletofth et al. (2012) reported transformation of furniture wholesaler to sustain
in extremely difficult north European market, where it changed its production as China
based, redesigned its products to favour demand postponement and mass customization
as well as outsourced many distribution operations. This was the typical transformation
story in larger company a decade earlier.

3. Research methodology
Operationalization and measurement
To operationalize the manufacturing strategy construct, we draw on selected extant
research on the topic, namely on the work of Miller and Roth (1994). Table II shows
evolution of their items, and the reliance of the current study on the revised set of items
as suggested by Zhao et al. (2006), in which the original design flexibility of Miller and

Miller and Roth Frohlich and Zhao et al. Current

No. Competitive capabilities (1994) Dixon (2001) (2006) study

1 Low price X X X X
2 Design flexibility X X – –
2a Ability to make rapid changes to – – X X
products/services
2b Ability to introduce new products/ – – X X
services
3 Broad product line X X X X
4 Volume flexibility X X X X
5 Conformance quality X X X X
6 Performance quality X X X Xa
7 Delivery speed X X X Xb
8 Delivery dependability X X X Xc
9 After sales service X X X X
10 Broad distribution X – – – Table II.
11 Advertising X – – – Comparison of
Notes: aExact back-translation “superior quality”; bexact back-translation “short delivery time”; manufacturing
c
exact back-translation “correct timing of deliveries” strategy
Source: cf. Zhao et al. (2006) operationalizations
IMDS Roth (1994) is broken down into two separate items, and the marketing related broad
115,6 distribution and advertising are deleted.
In our study, each of the dimensions, and the corresponding item variables, are
measured in a 1-7 Likert scale. To the general question: “Please assess the current
significance of the following factors to the company”, the response options ranged from
“No significance” to “Critical significance”, and an eighth response option was provided
1010 as the “No response” alternative, eliminating the possibility of forced assessments.

Data collection
The empirical data for this study was gathered by using a survey method by the means
of an www-based questionnaire in March to April 2014, the design of which was
considered earlier (the question set-up, as it appeared in the questionnaire, is presented
in Appendix). The population for this study comprised of SMEs and large companies
in Finland from 24 industry groups in manufacturing (SIC codes 10-33). Essentially,
non-manufacturing and micro-sized companies were excluded from the scope of this
research. According to the data of Statistics Finland (2014c), there were 2,541 SMEs
and large firms in the manufacturing sector in Finland in 2013 (population).
Contact information of companies was obtained from a commercial database
(i.e. a database containing information over 450,000 companies operating in Finland).
The chosen database was the preeminent possibility to get contact information
comprehensively about the whole population. The eventual distribution list created by
the means of the database for the questionnaire included 3,751 personal e-mail
addresses of CEOs, production and purchasing managers in 1,945 different companies
(i.e. covering 77 per cent of the population).
An internet-based survey was determined to be an appropriate and cost-effective
method in order to achieve the objectives of this study. A web-based questionnaire was
initially tested with a small group of practitioners. An invitation to participate in the
questionnaire was sent to all the email addresses in the list followed a week later by
a first reminder message. On the whole, reminder messages were provided to
participants, who did not respond, four times. For the eventual data set, if more than
one response were received from the same company, the most complete response was
chosen. In total, 244 valid questionnaires were collected, with a response rate of 12.6 per
cent. However, due to our focus on SME manufacturing strategies, we limit our analysis
only to the SMEs in the sample. The number of SMEs among the respondents was 191
enterprises. Table III presents the main characteristics of the sample companies.
The sample firms represent all manufacturing industries in Finland. Comparing
respondent frequencies as per industry with the population of manufacturing firms, we
observe our sample to be slightly biased towards the machine building (21 per cent of
sample) and electronic appliance manufacturing (13 per cent of sample), whereas metal
products manufacturing (18 per cent of sample) is underrepresented. In addition to

Turnover 2013 (M€) % No. of employees %

2-5 35 10-25 27
Table III. 5-10 20 26-50 36
Frequency 10-20 22 51-100 20
distributions of the 20-50 23 101-250 17
respondents (SMEs) Total 100 Total 100
those previously mentioned, the well represented industries in our sample are food and Manufacturing
drink processing (9 per cent of sample), and timber and wood products manufacturing strategy in
(7 per cent of sample). Considering the Finnish industrial landscape, the sample appears
therefore to represent it adequately. All SME respondents of the survey and their
SMEs
distribution within Finnish industrial classification system is shown in Table IV.
Assessing nonresponse bias is an essential part of the survey process. Non-response
bias refers to the bias that exists in the data as respondents are different from non- 1011
respondents with regards to important characteristics, and therefore generalization is
problematic. In this study the representativeness of the sample is based on comparison
between respondents and non-respondents on characteristics known a priori, which is a
technique to detect the existence of nonresponse bias (Wagner and Kemmerling, 2010).
Prominent differences between respondent and non-respondents, in terms of known
economic information, were not found. In the present study, the non-response bias was
approached via t-tests comparing key ratios (collected from the database prior to the
survey, e.g. turnover, operational profit, profit margin), between respondents and non-
respondents. Statistical significance was based on two-sided tests evaluated at the 0.05
level of significance. The results suggest that respondents tend to be at the larger end
of the SME size scale, both in terms of personnel and turnover.
In addition to comparison between respondents and non-respondents, we used
extrapolation to examine non-response bias (Armstrong and Overton, 1977; Wagner
and Kemmerling, 2010). Extrapolation is one of the most widely used techniques, and it
is based on the assumption that late respondents are similar to non-respondents and
if there is no difference between early and late respondents, generalization is possible.
By using this method, we conclude that there are no differences between early and late
respondents. Overall, however, we conclude that our sample is slightly biased (contains

Classification (TOL2008) Industry Frequency %-share of total

25 Metal products 39 20
28 Other machines and equipment 38 20
10 Food 17 9
16 Timber and wood products 15 8
26 Computers and electronic/optical products 13 7
22 Rubber and plastic products 11 6
27 Electrical equipment 11 6
23 Other non-metallic mineral products 8 4
31 Furniture 8 4
29 Motorized vehicles and trailers 6 3
32 Other 6 3
20 Chemicals and chemical products 5 3
18 Printing 3 2
30 Other vehicles 3 2
15 Leather and leather products 2 1 Table IV.
17 Paper and paper products 2 1 Respondents (SME
13 Textiles 1 1 manufacturers) of
14 Clothing and apparel 1 1 the manufacturing
21 Pharmaceuticals 1 1 strategy survey and
24 Metal refining 1 1 their respective
Total 191 100 industrial
Note: n ¼ 191 classification
IMDS more of the larger SMEs, as well as SMEs from technology-intensive manufacturing
115,6 industries), and that interpretation and comparison of results with other research
results should take this into account.
In addition to the collection of a primary data set by the means of a survey, we
collected corresponding financial data from commercial secondary sources, including
full income statements and balance sheets of Finnish firms. The contact list acquired
1012 from the database contained additional firm specific data, such as the official
identification codes of the firms. As each respondent was given an individual response
link to the survey, we were able to control response as per each firm, and finally
establish a connection between the responses in the primary data set (survey-based)
and the firms’ financial data for year 2013.
In terms of data analysis, regressions analyses were completed with a backward
elimination procedure, starting with all possible independent variables (see Appendix).
Alternative dependent variables include revenue, profit and loss and employment.
Revenue and employment are typically followed performance measures in European
Commission (2015) based company classification system and to evaluate company
growth. This classification is commonly agreed and used throughout this continent,
including Finland. In turn within accounting and management discourse, revenue
growth and profits achieved are followed closely as performance objective at company
level (Mabin and Balderstone, 2003; Gupta, 2012; Haslam et al., 2013). If an independent
variable was detected to be statistically significant in the initial model, or very close to
the limit of 0.05 level p-value, then it was included in the consecutive regression model.
The objective was to specify as small as possible models. In addition, intercept was
tested, in order to determine whether or not it would be significant. In all models, fixed
intercept was not taken to be a part of the final regression model and all accepted and
statistically significant models were forced to start from zero.

4. Empirical findings
Key findings from the manufacturing survey
Manufacturing strategy prioritizations or importance among Finnish SMEs was
consistently high in some dimensions, whereas in others, differences could be detected.
The importance of some items was unexpectedly low. As shown in Figure 2, volume
flexibility, conformance quality and delivery punctuality are all prioritized to have
high importance, with both average as well as median values close to each other.
In other words, respondents feel that these particular dimensions are important,
and furthermore, the distribution is not heavily skewed. Similarly, to these three
dimensions, low price, ability to make product changes, performance quality and
delivery time are indicated to have high importance for the respondents. However,
the response is not consistent, as the averages appear to be so considerably below the
median values. This suggests that some companies value these much less.
What is interesting to note in the responses is the overall low importance of after
sales service activity as well as the low prioritization of broad product line and ability
to introduce new products. These appear strikingly low in comparison to the other
dimensions, although these have been argued to be among the key competitiveness
attributes according to the literature as well as the leading management practice. New
products and product lines may surely be suggested to improve sales and profitability,
and after sales services business is often the most profitable in many companies.
However, it could be so that SMEs are not able to significantly influence these
dimensions of manufacturing strategy. Perhaps larger companies do this, as their
 7
Average Manufacturing
Median strategy in
6 SMEs

5
1013

Figure 2.
Manufacturing
1 strategy dimensions
among SME
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Note: Scale from one (no importance) to seven (critical significance) values (n ¼ 191)

customers operate on these dimensions, and what is left for SMEs is to fulfil the role of
prompt, short lead time and high quality supplier. In addition, the lack of capital for
enabling investment into these dimensions could be another reason for low prioritization.
All the manufacturing strategy dimensions were analysed with ANOVA single-
factor analysis, showing that the dimensions do not form a single factor, suggesting
that the responses differ across the ten dimensions. Also the manufacturing strategy
dimensions ranked lower (i.e. ability to introduce new products, broad product line and
after sales) differ between each other, so companies are not responding similarly in
terms of these three items (in other words, companies value these factors differently).
However, in terms of the three most highly ranked dimensions among the respondents
(i.e. volume flexibility, conformance quality and delivery punctuality), ANOVA
analysis shows these to be similarly prioritized to each other. This suggests that
companies that rank volume flexibility high, will do so also regarding conformance
quality and delivery punctuality.

Performance implications of manufacturing strategy

Influence of manufacturing strategy on financial performance was analysed by linking
survey responses to the annual financial reports of respondent companies. For this
analysis we used only those annual reports, which had been audited. For analysis we
selected three basic indicators: revenues (absolute, EUR), profits/losses (absolute, EUR)
and employment (absolute, head-count). As companies have accounting periods of
different length (typically 12 months from January of each year to the end of December,
but also six to nine months long as well as up to 18 months), revenue and profit/loss
IMDS data were converted to monthly amounts (by dividing the respective performance
115,6 value with the number of months in the accounting period of each firm). The three
performance measures were taken from the most recent audited annual reports, which
in most cases were from 2013 (170 firms), while for a minority of companies we had to
rely on data from 2012 (nine firms).
All the three financial data performance measures were run one-by-one first with all
1014 the ten manufacturing strategy dimension variables, and thereafter the backward
elimination procedure was conducted to reduce model size to include only the variables,
which were of statistical significance. After the procedure and some iteration, three
models, one for each financial performance measure, were specified and selected as
final models. These are shown in detail in Table V. The suggested cause and effect
relationships of three regression models are shown in Figure 3.

Coefficients SE

Revenue (dependent)
n ¼ 184 MANSTR_PRODCHANGE −129.4* 57.6 R2 0.587
MANSTR_SUPERIORQUAL 208.6*** 54.3 Adjusted R2 0.577
MANSTR_SERVICE 139.9** 47.7 SE 928.8
Profit and loss (dependent)
n ¼ 184 MANSTR_NPD 13.6* 6.0 R2 0.165
MANSTR_VOLFLEX −23.0** 6.7 Adjusted R2 0.150
MANSTR_SUPERIORQUAL 18.2** 6.6 SE 106.4

Table V. Employment (dependent)

Regression models n ¼ 184 MANSTR_SPECQUAL 10.1*** 0.6 R2 0.580
for revenue, profits Adjusted R2 0.575
and loss, as well as SE 51.5
employment Notes: *,**,***Statistically significant at 0.05, 0.01 and 0.001 levels, respectively

Revenues Profits Employment

–
+ +
– +

+ +

Volume flexibility

Providing Superior Managing Quality

Ability to Manage
Quality in Products According to
Changes in Products
and/or Services Specifications
Figure 3. and/or Services
Causes and effects
as suggested by the
three regression After Sales Service Ability to introduce new
models products through New Product
Development
As is shown, after sales service has positive impact on revenues. What is interesting in Manufacturing
Figure 3 is the apparently double positive effect we may detect from performance strategy in
quality (superior quality). Furthermore, the ability to introduce new products through
new product development process seems to be connected to higher profits among
SMEs
respondent companies. Rather unexpectedly, priority in introducing changes in
products and services was analysed to have negative effect on revenue. Also profits
appear to decline, if volume flexibility is increased among manufacturing SMEs. 1015
Socially and macro-economically important employment development was only found
to be dependent on conformance quality, suggesting that companies meeting the
specifications set by customers for products and services, are able to grow and
maintain operations and employment.
Based on these three regression models, it can be stated that the revenue model in
Table V, together with employment model, show quite good explanation level as R2 value
is approaching 60 per cent. Profit and loss regression model on the other hand is
performing in somewhat lower R2 level, i.e. below 20 per cent, suggesting that despite
statistical significance of the model, it explains to a limited extent the variation in profit
and loss. Another goodness of fit criteria used in statistically significant regression models
is standard error. In the revenue and employment models, it is just roughly below 90 per
cent from the entire respondent group average performance. This means that variation in
sample exists in both directions, and good R2 value could be result of high negative and
positive values, which compensate each other. However, this standard error is somehow
acceptable in these two models. However, in profit and loss regression model it is very
high, i.e. above 300 per cent as compared to entire respondent group average. This makes
profit and loss regression model questionable as R2 value is also very low.

5. Discussion and implications

The period after the GFC of years 2008-2009 has been extremely difficult for Finnish
manufacturers. Typical pre-crisis revenue levels have been affected by a 20-30 per cent
drop in the time period of 2008-2013. It is quite surprising that so many companies have
survived this severe crisis through downsizing and cost control. However, this is
not the case in all companies. Even after our survey, conducted in March to April 2014,
some respondent companies have faced bankruptcy or significant loan restructuring
negotiations with banks and other creditors. Considering the case of a small
manufacturing company, which ended up in bankruptcy, is good illustration of the
earlier presented regression models, which were based on the entire SME
manufacturing sample. In the following, this company is referred to as Beta.
In the media, Beta argued that the main reason for their bankruptcy was significant
product development spending, which did not produce desired results, in terms of
significant improvement of revenues and profits. This appears to be an accurate
analysis as the company’s revenues were significantly declining (from year 2010 by
some 60 per cent), while other expenses in profit and loss statement continued to
increase (by approximately 40 per cent from year 2008), and in terms of assets, the total
amount of R&D expenditure increased significantly. In the final full accounting year,
Beta brought in significantly less revenue and ended up making loss. This appears to
have been too much for the cash reserves as well as in terms of the ability to continue
operations. The case illustrates the danger of blindly trusting on the potential from the
R&D spending, and that new products may not bring success and do not necessarily
serve as the magic formula for recovery. It is very risky to invest heavily on tangible
and intangible assets as the operating environment in terms of revenue is in significant
IMDS decline. This adds to previous research (Minguela-Rata et al., 2014), with notions in
115,6 support of the idea that R&D activity should be controlled (e.g. in terms of project
size and scope) and done in collaboration with customers and other stakeholders.
These ought to avoid over-spending on R&D as being compared to an organization
acting alone (vs collaboration with numerous external bodies). This collaboration of
course delays development activity, but gives proper focus and scale for work going to
1016 be accomplished (Naqshbandi and Kaur, 2014).
In its survey response, Beta emphasized all other manufacturing strategy aspects as
important, but indicated that its prioritization and ability to introduce new products
was considerably lower than average. It also did not perceive superior quality as
priority in its strategy. It should be noted that these responses should be interpreted
through failed R&D and big investment during several years. As size of this one
product development effort was so significant, it constrained further development after
the recently experienced new product introduction failure. Maybe because of this
reason, capability in terms of superior in quality is not perceived as a priority either.
This gives a further argumentation point to discussion of the earlier regression
analyses. For example, revenue and profit/loss are affected by other different factors,
and only superior quality has positive impact on both of the desired financial outcomes.
Strategic moves in terms of only focusing on R&D or just concentrating on after sales
services do not serve as recipes for success. However, taking all of these factors in to
account in a balanced manner, good results can be achieved. This adds support for
earlier discussion on value creation and delivery, as well as cost on competitiveness
(Al-Mudimigh et al., 2004; Jüttner et al., 2007; Walters, 2008; Hilletofth, 2011), which
suggests that all competitive dimensions should be emphasized simultaneously in
order to have sustainable business performance.
The period after the 2008-2009 and caused changes in the economy has been
extremely difficult for Finnish manufacturers, as they typically have served sizable
engineering projects, which have been difficult to fund after GFC. In addition, cost
competition has been harsh and high cost manufacturers have suffered in tenders. For
these companies our research suggests an approach that balances a set of dimensions.
In the forthcoming years, significant economic growth and investments may be
improbable. Therefore, companies need to concentrate more on quality and particularly
superior quality as valued by customers in terms of the offered products and services
(to stay in the market), but also to assure that after sales services are offered and taken
seriously. Based on our survey findings, this point a direction for higher revenues, and
also with proper management, this suggests also an opportunity for profitable
business. However, it should be emphasized that regression models did not identify
profit increase, but every time there is revenue increase due to services, there is an
opportunity for profits (if managed correctly). Also, based on our regression models,
new product development activity should be maintained, giving further opportunities,
if linked to superior quality experience of customers and the ease receiving after sales
service later on in the product life-cycle. Also in terms of new product development
activity, it should be ensured that the superior quality experience is being achieved as it
has double impact on both revenues and profits.
The operational flexibility and agility related dimensions of ability to make product
changes and volume flexibility were identified in regression models independent
variables with negative ones effects on the dependents (first one negative effect on
revenue and second one on profit). This makes sense in the context of shrinking
revenues and markets since the GFC. It may be on one hand being flexible and agile,
has meant for some companies that they have been able to continue operations and Manufacturing
survive, but on the other hand, revenues and profits have declined. This suggests the strategy in
challenges in managing flexible operations, as for example, making numerous product
changes may lead to difficulties in the management of after sales function as product
SMEs
variants and amount of purchased items increases (over the service life-cycle of several
decades). This without a doubt limits the ability to serve customers in after sales as
inventories of spare part items cannot be used extensively. 1017
From the larger society and macro-economic perspective, this research has several
implications. First of all, it is worrying that employment is only connected to
specification quality. Of course, employment after the GFC has decreased in
manufacturing companies, but more dynamics and connection of employment to
revenue and profits is needed. In developed economies inflexibility exist regarding
employment, and more could be done in terms of enhancing weekly or monthly
flexibility in working hours, as well as on lowering the vast responsibility of employer
for health benefits, sick/parental leave and vacations. Also hiring people for shorter
time periods should be made easier. Regression modelling shows that manufacturing
SMEs with priority in volume flexibility demonstrate lower profits. This may suggest
that the costs of flexibility in developed countries, such as Finland, are too high. Put
simply, in order to maintain profitability, demand should be stable and not fluctuate,
enabling longer-term planning and to pay all the obligations to society and employees.
However, in the global manufacturing market, this is not a realistic demand, as
countries operating with higher costs should be able to offer higher flexibility and
quality in order to stay competitive. The constraints for flexibility should be addressed
in order to facilitate the competitiveness equation and make it work for manufacturing
SMEs in high-cost countries. In addition to operational issues, society should extend
support for new product development that involves collaboration of different actors
such as research institutes, universities and the public sector.

6. Conclusions
Manufacturing industry in advanced economies is in many cases undergoing
significant transformation, and in the case of Finland, the economy is in the middle of
continuous economic hardship. In the operating environment there also exists some
hindering factors and additional costs as manufacturers are asked to pay for additional
compensation for employees (sick leave, maternity leave, vacations and part of the
healthcare) and society (in the form of various payments and taxes). However, these
could be justified to belong to the social responsibility and external costs of any for-
profit organization.
Based on our results, low prioritization is often given to after sales activity, broad
product line and ability to introduce new products. Two of these three attributes are
included in the regression models, after sales service seems to increase revenues and
the ability to introduce new products improves profits. It is also interesting to note that
our study emphasized the importance of quality: specification quality improves
employment, whereas performance quality (superior product and/or service) improves
both revenue and profit. Manufacturers should give further attention to achieving
superior quality formation, as it appeared that the mean value was considerably below
the median value. In other words, some manufacturers perceive superior quality to
bring very small benefits for them, or superior quality is otherwise out of reach. In terms
of the former, our study shows that this is not the case and among manufacturing SMEs,
superior quality drives two important financial indicators.
IMDS There is perhaps a consensus on regarding SMEs having in earlier crises beat the
115,6 difficult situation with bold investments in either tangible or intangible assets (or both).
However, we find little evidence in our sample of this sort of success. As for revenue the
low growth mode may persist for years, the priority will be given for survival and for
developing long-term competence through balanced prioritization of developing new
products, providing after sales service and offering superior quality. This has been
1018 reported to serve as a success recipe for German manufacturers, suggesting that other
advanced country companies should follow this strategy.
As further research, we suggest replicating our research design in other advanced
European countries. Some of these suffer from poorly performing manufacturing
activity, such as France and Italy. Successful countries such as Germany and Sweden
could also be targeted. Consequent enhanced understanding about other countries and
their manufacturers would facilitate the increase of competitiveness of European
manufacturing in the global market.

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Corresponding author
Dr Olli-Pekka Hilmola can be contacted at: [email protected]
 Appendix

Please assess the current significance of the No Somewhat Somewhat Critical No

following factors to the company significance Negligible negligible Moderate considerable Considerable significance response

Price based competition □ □ □ □ □ □ □ □

Ability to make rapid changes to products/ □ □ □ □ □ □ □ □
services
Ability to introduce new products/services to □ □ □ □ □ □ □ □
the market
Broad product line □ □ □ □ □ □ □ □
Flexibility in terms of production volume □ □ □ □ □ □ □ □
Quality in terms of conformance to □ □ □ □ □ □ □ □
specifications
Quality in terms of superior quality □ □ □ □ □ □ □ □
Short delivery time □ □ □ □ □ □ □ □
Timeliness of deliveries □ □ □ □ □ □ □ □
Maintenance and product support services □ □ □ □ □ □ □ □

manufacturing

related question
1021

strategy construct
in terms of the
SMEs

Finnish)
Questionnaire set-up

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Table AI.
strategy in
Manufacturing
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