ENHANCING MANAGERIAL CAPABILITIES FOR ENVIRONMENTAL ANALYSIS: FRAMEWORK FOR ENTREPRENEURIAL DEVELOPMENT IN PAKISTAN

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1 ENHANCING MANAGERIAL CAPABILITIES FOR ENVIRONMENTAL ANALYSIS: FRAMEWORK FOR ENTREPRENEURIAL DEVELOPMENT IN PAKISTAN ABSTRACT Abdul Majid Department of Management Sciences, Hazara University, Pakistan Corresponding Author Muhammad Yasir Department of Management Sciences, Hazara University, Pakistan This study focuses on the intellectual development of entrepreneurs in SME sector of Pakistan. SME which is one of the major sectors in the economy of Pakistan is currently facing the drastic situation due to economic uncertainties. To cope with the existing situation, it is necessary to provide the entrepreneurs with enough knowledge to enhance their skills for the purpose of managing the effects of environmental complexities on small and medium enterprises. Cluster sampling technique has been used for this research in which detailed interviews have been conducted from eighty entrepreneurs to analyze their knowledge and capabilities. This study concludes with the suggestion of the major areas where entrepreneurs need improvements. Key Words: Managerial capabilities, SME, strategic development, entrepreneur, Pakistan 1. Introduction In the developing countries like Pakistan structure of most of the small and medium enterprises are characterized with one entrepreneur (most probably the owner of the business) with less than fifty workers and marginal use of advanced technology. One entrepreneur performs all the activities of the business and at the same time he is production manager, financial manager, marketing manager, human resource as well as risk manager. The success or failure of the business depends completely on entrepreneur. On the other hand, the environment of the developing country is rapidly changing due to which organization has to change in its basic elements like structure, technology, peoples and policies (Yasir, Majid & Abdullah, 2010). To develop the small and medium enterprises it is necessary to enhance its managerial capabilities that will not only facilitate the successful development but also helpful to execute the growth and change strategies (Boeker & Karichalil, 2002; Carlock & Ward, 2001; Flamholtz & Randle, 2000; Hoy & Verser, 1994). However, the analysis of the available literature reveals that most of the SMEs face difficulties to enhance its managerial capabilities (Dyer, 1989; Hoy & Verser, 1994). There are many reason behind the lack of managerial capabilities e.g. lack of professional management (Hoy & Verser, 1994), lack of financial resources (Fernandez & Nieto, 2005) as well as lack of effective management strategies (Sirmon & Hitt, 2003). In the developing countries like Pakistan, small and medium enterprises have to face the complex nature of business environment; therefore, the managers need special and context dependent capabilities to cope with the environmental complexities and achievement of goals for strategic development. As this research is specifically focuses on the environmental analysis, therefore, in this research those capabilities would be discussed that are necessary to analyze the business environment effectively. This research paper is organized in the three major parts. In the first part available literature on the managerial capabilities will be analyzed. In the second part methodology of the research would be discussed. As this study is conducted in the environment of Pakistan, therefore, the managerial capabilities of entrepreneurs have been analyzed. In the last and third part the context dependent deficiencies will be discussed keeping in view the special circumstances of Pakistan. COPY RIGHT 2012 Institute of Interdisciplinary Business Research 238

2 2. Theoretical Foundations Pakistan is situated in the most volatile area of this world. This area is one of the most disturbed are geographically sensitive as Afghanistan, Iran, India are all the neighbor countries of Pakistan. The disturbances in the external borders also affect the internal environment of Pakistan. The business organizations in Pakistan require extra capabilities to understand the environmental changes. As far as the SME sector is concerned, there is strong need to develop the managerial capabilities to analyze the business environment of Pakistan. Success and strategic development of business organization depends upon the managerial capabilities. Researchers like Zou and Stan (1998) have the same opinion that organizational performance and growth is under the control of its management. The growth and expansion strategy is suitable for those organizations which are under the control of effective management (Carlock and Ward, 2001). The initial foundations of the notion of capabilities enhancement is available in two fundamental theories: resource based theory (Penrose, 1959; Grant, 1999a) and learning theory of firm (Best, 1990; Dodgson, 1993; Grant, 1996). These two theories focused on the development of specialized resources and knowledge base to exploit any type of market opportunity. Specialized resources and development of capabilities both are necessary for strategic goals achievements. Chandler (1990) also argued that resources alone do not create value for organization. Learning theory of organization reveals that competencies can be developed by learning which includes knowledge that resides in organizational memory and process to learn new things (Sinkula, 1994). The renowned work of Argyris (1977) categorized learning into two types: single loop learning and double loop learning. Single loop learning is to develop understanding and knowledge about current organizational norms, values, procedures etc. while double loop learning is the learning of new methods, techniques that could be required in future. Management capabilities can be defined as the management capacities, expertise and management processes available to the firm for performing its activities. Management capacities mean the available human resource to perform managerial tasks, whereas managerial expertise refers to capabilities of managers, while, managerial processes include planning and control techniques (Graves & Thomas, 2006). Day (1994) defined capabilities in these words complex bundles of skills and collective learning, exercised through organizational processes that ensure superior coordination of functional activities (p. 38). This definition mostly focuses on the scope of the capabilities. Dyer and Singh (1998) defined capabilities as a phenomenon that exists at various level of the organization: strategic level, organizational level, and operational level. There are various researchers who have defined various types of competencies like core competencies (Plakoyiannaki & Tzokas, 2002), functional competencies (Verona, 1999), technological competencies (Plakoyiannaki and Tzokas, 2002), dynamic capabilities (Eisenhardt & Martin, 2000; Teece, Pisano & Shuen, 1997; Teece and pisano, 1994) etc. But majority of researchers agreed that three are three types of managerial capabilities. First type of capability is required to perform functional activities (Amit and Schoemaker, 1993; Grant, 1991a; Treacy & Wiersema, 1993). Second type of capability is required to perform dynamic nature of work like product innovation, manufacturing flexibility, organizational change, analysis of the market trends etc. (Amit and Schoemaker, 1993; Hayes and Pisano, 1994) and third type of capabilities comprises meta-physical strategic insights for the purpose of developing innovative and new strategies before competitors (Barney, 1992; Henderson & Cockburn, 1994; Lipmann & Rumelt, 1982). There is one another very unique type of capability which is called meta-capability i.e. a capability to develop other capabilities again and again (Hayes and Pisano, 1994; Anderson and Tushman, 1990; Bartlett and Ghoshal, 1989; Barney, 1986) In every decision making process, management needs capabilities and skills to make an appropriate decision. Normally, any manager has to take three types of rational decision: what went wrong; taking a decision; and what might go wrong. This rational approach is described by Kepner and Tregoe (1965). Capabilities not only help the management to take appropriate decision but also facilitate to build, integrate, interlink and reconfigure the internal and external organizational resources (Amit and Schoemaker, 1993; Fiol, 2001; Selnes and Sallis, 2003; Spender and Grant, 1996). Without developing the competencies it is impossible to achieve strategic organizational goals like customer satisfaction, market share, employees satisfaction etc. (Baker & Sinkula, 1999). In the developing countries like Pakistan the environment is continuously and unexpectedly changing. There is huge inflow of the foreign competitors, per capita income is continuously decreasing, customers are demanding for cheaper goods, intermediate market is increasing, and economic growth is at its minimum level. To cope with this COPY RIGHT 2012 Institute of Interdisciplinary Business Research 239

3 situation, managers and entrepreneurs of small and medium enterprises need special capabilities to analyze the environment accurately and integrate internal and external resources and capabilities to make optimum decisions. Teece (2007) said that the entrepreneurs need three types of capabilities at this situation, including, capabilities to sense opportunities; capabilities to exploit opportunities; and capabilities to avoid threats. 3. Research Methodology Exploratory research design has been used for this research because of the complex nature of the concept. This research design is recommended by Strauss and Corbin (1998) and Yin (2003). 3.1 Study Setting and Sampling Since this study explores the capabilities of entrepreneurs of small and medium enterprises to analyze the complex and dynamic environment appropriately therefore, those organization has been selected that are independently held and at least fifteen years old. In this research we relied on cluster sampling. Primary data was collected from four SME clusters which include: fan manufacturing cluster; light engineering cluster; cotton ginning cluster and electrical fitting industrial cluster. Twenty organizations were selected from each cluster and all firms of our sample are located in Punjab province. 3.2 Data Sources Primary data was collected through unstructured interviews. In total 103 interviews were conducted from entrepreneurs and managers of 80 firms. If firms had been managed by more than one person, then we conducted additional interviews in as many cases as possible to find out their views about the issue. 4. Discussion This research intends to analyze the capabilities of the entrepreneurs in SME sector of Pakistan. As we already discussed that the environment of Pakistan is unique in its nature there are various unique variables that do not exist in any other organizational environment. The literature available in the field of environment analysis is not sufficient to understand the dynamics and characteristics of variables existed in the environment of Pakistan. Some of these variables include: terrorism, energy crisis, and geo-political disturbance etc. To understand these variables and to measure their effects on the business organization requires special capabilities and skills. Development of these skills and capabilities is the basic objective of this research. The data was collected from entrepreneurs and managers of eighty firms of SME sector. In the interview, detailed discussions have been made regarding the environmental issues, managerial approaches, strategic planning and some other important dimensions. After the discussions, the data was analyzed qualitatively. The important findings of the interviews included the following: 1. Most of the entrepreneurs in SME sector of Pakistan do not have formal education that is required to run an enterprise properly. Formal education mean any degree, certificate, training or diploma in the field of entrepreneurship; 2. There is lack of established practices for environmental analysis in SME sector of Pakistan; 3. Most of the entrepreneurs are reactive in nature. They do not have any plan to meet the environmental contingencies; 4. Most of the entrepreneurs were made their decision without any consultation or scholarly advice; and 5. Most of the managers were not ready to accept that there is any need for training or formal education for them. The major problem for the entrepreneurs in Pakistan is their unconscious ignorance. That they do not know what they do not know. The most important factor in the current scenario is to remove their unconscious ignorance. To remove above mentioned deficiencies separate strategies are required. In the following paragraphs we will discuss each point in detail. The results of current survey reveal that the most of the entrepreneurs in Pakistan do not have formal education. The major reason behind this problem is the structure of enterprises that most of the enterprises are family businesses. In family businesses, especially in Pakistan, it is common practice that the elder son of the entrepreneur (who is the COPY RIGHT 2012 Institute of Interdisciplinary Business Research 240

4 owner of the enterprise as well) becomes entrepreneur after his father. That is the major reason that the life cycle of most of the enterprises are very short and most of the enterprises are unable to survive after the death or retirement of its capable entrepreneur. To develop the enterprise strategically it is necessary that formal education should be provided to coming entrepreneurs in the family businesses and in the other case well qualified and capable managers should be hired for managerial activities. Most of the entrepreneurs in Pakistan do not care about the environmental conditions. That is the major reason that most of the entrepreneurs in Pakistan are proactive. There is a lack of policies to handle the environmental complexities or proactive analysis of the variables of business environment. This lack of environmental analysis is totally against the three most important theories of environment analysis: contingency theory, resource dependence theory and population ecology theory. According to contingency theory organizational structure depends upon the types of environment. In static environment, there is homogeneity of activities and stability of structures in the organization, and in changing environment organization tends to adopt the flexible structures with heterogeneity of activities. This phenomenon is the basic theme of contingency theory that different environmental conditions called for different styles of organizing (Burns & Stalker, 1961). It means that the effective way to organize small and medium enterprises is contingent upon the conditions of the environment. Therefore it is necessary for entrepreneurs to understand the environment of Pakistan and develop their policies accordingly. Resource dependence theory was developed by Pfeffer and Salancik (1978). It argues that the organization is managed and controlled by its environment. This theory concentrates on inter-organizational relations, identifying various types of players in the environment e.g. suppliers, buyers and mediators, etc. and the dependence of one organization over the other to obtain its desired resources. Therefore an organization develops the power to influence the other organization in various ways. By using this power, the players in the external environment make demands on other organizations in different ways like competitive prices and desirable goods and services. Practically resource dependence analysis is a highly complex and challenging task, because it is very difficult for the organization to identify all the sources of its desired resources. Therefore to solve this problem it is essential for entrepreneurs to sort sources and resources out according to their criticality and scarcity. In population ecology theory, organizational environment is assumed to have the power to select the organizations from a pool of competitors which best serve its requirements (Hannan & Freeman, 1977; Aldrich, Mindlin & Karpik, 1978). This theory is the extension of the resource dependence theory, in which organizations have the power to select the other organizations to obtain and to share the scarce pool of resources (Aldrich & Pfeffer, 1976). The adopted patterns of interdependence of different environmental players affect the survival and success of individual members. Therefore, the basic argument of this theory is based on the concept of survival of the fittest that is, organizations compete for their survival (Hatch, 1997). To understand the environment, this theory concentrates on the pool of organizations, or population of the organizations, rather than individual organization. This theory attempts to predict various issues like organizational birth, death, coordination, competition, organization success and organizational failure. Therefore to analyze the environment there is a need to develop proactive and appropriate policies that are compatible with organizational environment. As already discussed in above section that the entrepreneurs have made their decisions without any consultation and one person is responsible for making decision in all the major areas. Most of the manager considered themselves capable for making decision in all fields and are not ready to accept that they need any sort of training or special skills for making such decisions. This practice of entrepreneurs gave huge loss to SME sector of Pakistan during the last ten years. There is a strong need to develop the entrepreneurial capabilities through effective training and capacity building program that would hopefully help entrepreneurs to make appropriate decisions. 5. Conclusion SME sector of Pakistan is a major contributor in the economy of Pakistan. Currently this sector is one of the major loss bearers because of the environmental turbulence that exists in business environment of Pakistan. Entrepreneurs need special skills and capabilities to understand the organizational environment. To develop the appropriate strategies they are required to analyze the environment of Pakistan and develop proactive strategies along with contingencies planning through consultation and expert advice. COPY RIGHT 2012 Institute of Interdisciplinary Business Research 241

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