CHAPTER II

REVIEW OF RELATED LITERATURE

Small and medium-sized enterprises (SMEs) make up 99.6 percent of all registered

businesses in the Philippines and employ over 70 percent of the working population. All types of

businesses require some sort of strategy in order to be successful; otherwise their efforts and

resources will be spent haphazardly and likely wasted.

According to James Brian Quinn, Strategy Process: Concepts and Contexts, "a strategy is

the pattern or plan that integrates an organization's major goals, policies, and action sequences

into a cohesive whole. A well-formulated strategy helps to marshal and allocate an organization's

resources into a unique and viable posture based on its relative internal competencies and

shortcomings, anticipated changes in the environment, and contingent moves by intelligent

opponents." Although strategy formulation tends to be handled more formally in large

organizations, small businesses too need to develop strategies in order to use their limited

resources to compete effectively against larger firms.

Quinn also believed that formulation of an effective business strategy requires managers

to consider three main players—the company, its customers, and the competition—according to

Kenichi Ohmae in his book, The Mind of the Strategist. These three players are collectively

referred to as the strategic triangle. "In terms of these three key players, strategy is defined as

the way in which a corporation endeavors to differentiate itself positively from its competitors,

using its relative corporate strengths and weaknesses to better satisfy customer needs," Ohmae

explained.
 Quinn noted that an effective business strategy should include three elements: first a

clear and decisive statement of the primary goals or objectives to be achieved; then, an analysis

of the main policies guiding or limiting the company's actions; and lastly a description of the

major programs that will be used to accomplish the goals within the limits. In addition, strategies

should attempt to build a strong yet flexible position for the company so that it may achieve its

goals whatever the reaction of external forces. Strategic decisions are those that determine the

overall direction of an enterprise and its ultimate viability in light of the predictable, the

unpredictable, and the unknowable changes that may occur in its most important surrounding

environments.

The strategic choices available to a company are not unlimited; rather, they depend upon

the company's capabilities and its position in the marketplace. There are four key factors that

determine the limits of what a company can successfully accomplish according to Michael E.

Porter in his classic book Competitive Strategy. Two of these limiting factors are internal, and the

other two are external. The internal limits are the company's overall strengths and weaknesses

and the personal values of its leaders. The company's strengths and weaknesses are its profile of

assets and skills relative to competitors, including financial resources, technological posture,

brand identification, and so on, Porter stated. The personal values of an organization are the

motivations and needs of the key executives and other personnel who must implement the

chosen strategy. The external factors limiting the range of a company's strategic decisions are

the competitive environment and societal expectations under which it operates. Industry

opportunities and threats define the competitive environment, with its attendant risks and

potential rewards, Porter noted. Societal expectations reflect the impact on the company of such
things as government policy, social concerns, evolving mores, and many others. These four

factors must be considered before a business can develop a realistic and implementable set of

goals and policies.

Once a company has analyzed the four factors, it may then begin developing a strategy to

compete under or attempt to change the situation it faces. The approach to strategy

development recommended by Porter involves identifying the company's current strategy;

revealing underlying assumptions about the company's position, its competitors, or industry

trends affecting it; analyzing the threats and opportunities present in the external environment;

determining the company's own strengths and weaknesses given the realities of its environment;

proposing feasible alternatives; and choosing the one that best relates the company's situation

to its environment.

Each distinct organization must develop a strategy that best matches its internal

capabilities and its situation with regard to the external environment. Still, many of the numerous

strategies pursued by businesses can be loosely grouped under three main categories—cost

leadership, differentiation, and focus. Porter termed these categories "generic strategies," and

claimed that most companies use variations of them, either singly or in combination, to create a

defensible position in their industry. Companies that fail to target their efforts toward any of the

generic strategies risk becoming "stuck in the middle," which leads to low profitability and a lack

of competitiveness.

Cost leadership it can enable a company to earn above average profits despite the

presence of strong competitive pressures. But it can also be difficult to implement. In a company
pursuing a low-cost strategy, every activity of the organization must be examined with respect

to cost. In addition, a low-cost strategy requires a company to implement tight controls across

its operations, avoid marginal customer accounts, and minimize spending on advertising and

customer service. Of course, a low-cost strategy—like any other strategy—also involves risks.

Differentiation companies that pursue a strategy of differentiation try to create a product

or service that is considered unique within their industry. The idea behind a differentiation

strategy is to attract customers with a unique offering that meets their needs better than the

competition, and for which they will be willing to pay a premium price. They may attempt to

differentiate themselves on the basis of product design or features, brand image, technology,

customer service, distribution, or several of these elements. This strategy is intended to create

brand loyalty among customers and thus provide solid profit margins for the company.

Companies undertaking a focus strategy direct their full attention toward serving a

particular market, whether it is a specific customer group, product segment, or geographic

region. The idea behind the focus strategy is to serve that particular market more effectively than

competitors on the basis of product differentiation, low cost, or both.

Each of the three generic strategies identified by Porter requires a company to

accumulate a different set of skills and resources. For example, a company pursuing a low-cost

strategy would likely have a much different organizational structure, incentive system, and

corporate culture than one pursuing a differentiation strategy. The key to successful

implementation of one of the three generic strategies is to commit to it fully, rather than take

half-measures that do not distinguish the company in any way.

 Employee participation in the strategy process is not only to helps the company to

develop a more responsive strategy, but also improves employee morale and commitment to the

organization. Companies that encourage such participation are creating a more knowledgeable

workforce, which is particularly important for small businesses since intellectual capital is often

one of their most valuable assets.

Hilka Pelizza Vier Machado in her study “ Growth of small businesses” said that growth is

an important phenomenon in small enterprises. Because their survival essentially depends on

the power to participate in the market with other big companies. Growth helps the business to

decrease the possibility of closing it. A company’s growth is essentially the result of expansion

of demands for products and services. Growth results in sales and consequently in investments ,

production factors to adopt itself to new demands.

Brush et. al (2009,p.482) define growth as geographical expansion, increase in number

of branches, inclusion of new markets and clients, increase in the number of products and

services, fusions and acquisitions. According to the author, growth is above all a consequence of

certain Dynamics built by entrepreneurs to construct and reconstruct constantly based on the

assessment made on the firms and on the markets. Entrepreneurs are not the sole vectors since

there are many other agents involved, such as clients, suppliers and others.

Guihulngan City in 2010 has reached up to 93,675 population. It has a total land area of

388.56 km ( 150.02 sq. mi.) comprising mostly of hills and mountainous places. It also has a body

of water where some of the people rely for a living. Guihulngan has large forest lands and vast

agricultural areas. Rice, corn ,sugar and coconut are the main products of the city. Fishing is also
one of the works especially for the barangays near coastal areas. The city has a thriving livestock

and poultry raising industries. Guihulngan has the potential to become an agro-industrial center.

Investors can put up commercial farms for the production of high value crops such as malunggay

and other fruits and vegetables. Small and medium industrial plants for the production of

processed foods, furniture, organic fertilizer, feeds and other consumer goods can become

winners in the town.

Berner, Gomez, and Knorringa (2008) asserted that in developing countries such as

Philippines micro and small enterprises comprise the largest part of the industrial fabric and are

among the most important development agents in the society. It offers millions of poor people

the possibility of earning money, training, work experience and employment.

The Philippine is an excellent place to explore the dynamics of enterprise upgrading in

Southeast Asia. The MSME Development Plan (2011) shows that MSEs comprise 99.3 percent of

all enterprises in the country, which makes the source of most Filipinos' livelihoods. However,

Philippine MSEs contribute only around 25 percent of the country's total gross value added

(GVA). This means that despite the numbers of MSEs in the private-sector ecosystem because of

the low productivity they do not significantly contribute to the economy. Yet many MSEs may be

stagnating in the size categories because the owners lack the knowledge to upgrade the business.

Exploring the dynamics of enterprise upgrading in the Philippines will only shed light on the

success factors for business growth but also provide insights about how these factors help the

upgrading process.
 There are four main ways in which this process can take place. Recombining resources,

the most skillful entrepreneurs recombine their resources to solve new problems and are able to

imagine new possibilities for what they already have. Exploiting contingencies, contingencies—

events that are unpredictable and somewhat random—are often part-and-parcel of what

entrepreneurs have to deal with. Innovative entrepreneurs turn lemons into lemonade by

converting challenges into new opportunities. Willingness to cannibalize existing investments,

those companies that are more willing to cannibalize existing investments are able to more

effectively exploit new contingencies. Generating options, while researching ideas,

entrepreneurs may develop ones that are not immediately useful, but might be worth

considering in the future.

So while the Philippine government moves to support future credit growth and stronger

connections to regional and international supply chains, there is a more immediate opportunity

to boost SME growth through the exploitation of their key defining feature: nimbleness. It doesn’t

really matter if a person can only start a micro or small business. What matters is how will start

it right and honest. When planning to start a small business, there are many ideas and

opportunities that will come. However, a business person should also take great consideration

on the things that will come from the heart.

There are ways and solutions that can help small companies become victorious in the

business and market rivalry. Be unique. Create goods or services that have not yet offered to the

market. Don’t concentrate on the crowded market, explore the blue ocean market and find

untapped opportunities that can be turned into unique products. Be the market leader. Be the

first to offer a new kind of products. Have a creative mind. Be the friendliest. True friendship is
priceless; it can’t be purchased by money. Hence, whether your company is big or small, the fight

is fair and square when it comes to customer relationship. Have the biggest touch, small business

owners have the advantage in reaching their customers more personally than the big bosses of

big corporations. Implement the best policy – honesty. Investing to achieve honesty doesn’t need

to invest millions of dollars. Small business owners can gain the biggest trust and confidence from

consumers if they become honest. Remember, that the most convincing marketing words and

phrases are of course those that are true. Therefore, avoid lies and deceit. Build love; build trust.

Be the best leader, whether big or small, organizations need a great leader. In this ground,

overcome the competitors by being a greater leader than they are. Besides, small businesses

have the advantage of managing a small organization. The bigger the organization the harder to

manage. Be a great teacher. People love knowledge and wisdom, especially those that can

change their lives. Educate an individual, but make sure to avoid promotional talks – talks about

the product. Lastly, cooperate—the actual business and marketing competitions is in terms of

profit and sales. But behind this is a business cooperation that all business persons, whether

small, medium or big, must cooperate – the goal to provide solutions and satisfaction to

customers and other stakeholders like the workers, and the community. The truth is that both

the competition and cooperation can actually co-exist. In fact, the competitors who are winning

are those who are giving the greatest cooperation.

Small businesses in the Philippines can be defined according to the size of assets, size of

equity capital, and number of employees. But growth is the most important for the survival of

businesses.