Performance drivers of young high-tech SMEs

8/3/2019 Performance drivers of young high-tech SMEs

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Performance drivers of young high-tech SMEs

David Szedely

Nemocnicna 9, Bojnice, Slovakia

+421 911 139 119

[email protected]

090309

Master Thesis

Master of Science (MSc) in Entrepreneurship, major Finance

Graduate School

University of Liechtenstein

Tutor: Dr. Christian Hillbrand

Second tutor: Prof. Dr. Urs Baldegger

Processing period: 4.3.2011 - 27.8.2011

Date of delivery: 7.9.2011


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Table of content

Abstract 4

1 Introduction 5

1.1 Problem definition 5

1.2 Research status 5

1.3 Knowledge gap 7

1.4 Research question and objective target 8

1.5 Explanation of terms and abbreviations 9

2 Theoretical foundation 11

2.1 Historical development of performance measurement 11

2.2 Role of BSC among TQM-based performance measurement frameworks 14

2.2.1 About TQM 14

2.2.2 TQM-based frameworks 15

2.2.3 The balanced scorecard 16

2.3 TQM, BSC and PM in SME context 17

2.3.1 Specific characteristics of young technology SMEs 18

2.3.2 Advantages of SMEs in the process of implementation 20

2.3.3 Disadvantages of SMEs in the process of implementation 21

2.3.4 Benefits of TQM for SMEs 21

2.3.5 Disadvantages of TQM for SMEs 23

2.3.6 Suitability of existing frameworks for SMEs 23

2.4 Business rules now and then 25

2.4.1 Shift from product-centred to customer-centred development. 26

2.4.2 Shift from a static to a dynamic business model 27

2.4.3 Shift towards lean management 29

2.5 Measurement and TQM in the new reality 29

2.5.1 TQM is strategically linked to the business goals 30

2.5.2 Customer understanding and satisfaction are vital 31

2.5.3 Employee participation and understanding at all levels are required 31

2.5.4 The need for management commitment and consistency of purpose 31

2.5.5 The importance of processes and measures 32

2.6 Performance drivers and their role in managing a company 33

2.7 Ideal performance measurement system for high-tech SMEs 33

3 Research 37

3.1 Formulating hypotheses 37


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3.2 Identifying possible sources of bias 38

3.3 Developing the survey 39

3.3.1 General information 40

3.3.2 Performance drivers 41

3.3.3 Current controlling and strategy planning practices 41

3.3.4 Follow-up 42

3.4 Collecting data 42

3.5 Processing the results 48

3.5.1 Getting an overview 49

3.5.2 Detailed view 50

3.5.3 Learning and people 51

3.5.4 Processes 53

3.5.5 Customers 54

3.5.6 Finance 56

3.6 Split analyses 58

3.6.1 Split according to incubation 58

3.6.2 Split according to using external controlling services 59

3.6.3 Split according to venture financing 60

3.6.4 Split according to break-even point 62

3.6.5 Split according to both venture-financing and break-even 63

4 Research outcomes 65

4.1 Summary of the results 65

4.2 Implications for theory and praxis 67

5 Critical debate and conclusion 68

Bibliography 70

Attachments 76

Affidavit 88


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Abstract

Since Total Quality Management (TQM) has been introduced, much has changed in the way business-

es are managed. Both small and medium enterprises (SMEs) as well as large corporations have adopt-ed the principles of TQM and Balanced Scorecard (BSC), a performance management tool based on

its principles became broadly accepted. In the competitive environment of today, few middle-sized

and large companies can imagine surviving without at least rudimentary degree of strategic planning

and performance measurement (PM). However, the new economy is to an increasing extent being

shaped by small high-tech companies, which come with innovations in areas, which are too uninterest-

ing or risky for large companies. The environment in which these high-technology companies operate

is very different from what we have known decades ago. This paper summarises the traditional princi-

ples of TQM and performance management, looks at the ways they were translated into the SME con-

text, and whether they provide a viable solution for the high-tech companies of today. The research

analyses the performance drivers of these companies, sums up those, that are considered for most im-

portant, and fills a gap, which currently exists in the existing research about young technology SMEs.


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1 Introduction

1.1 Problem definitionBalanced scorecard (BSC) is a tool that became a hot topic of discussion in strategic management

shortly after its introduction. The combination of interlinked leading and lagging, internal and exter-

nal, financial and operational measures selected to be in alignment with strategy has been embraced by

many large companies and helped them increase control, improve results, and change the way of man-

aging the business. The effectiveness of BSC has academic validity (Norton and Kaplan, 2008), and

many companies consider balanced scorecard to be an indispensable part of their strategic planning

and management.

In BSC, we differentiate two types of indicators: outcome measures and performance drivers. The out-

come measures represent desired outcomes and often fit into a generic set of financial and operational

lagging indicators. While some outcome measures are generic, performance drivers tend to be unique

for a particular business unit. They reflect the uniqueness of the business unit is strategy. (Kaplan and

Norton, 1996b)

There is abundance of literature on the topic of building BSC and working with outcome measures andperformance drivers in large companies, but the literature about this topic concentrating on SMEs is

scarce. For the purpose of this paper, we would like to have a look at the counterpart of large compa-

nies - the young technology SMEs, often venture-backed and with need to grow fast as an imperative.

We would like to explore the ways in which they differ from their large counterparts, research what

drives their performance in current economy and suggest management tools reflecting their needs.

1.2 Research statusIn order to get an overview about the research that has already been made related to the topic of this

paper, we have used ProQuest ABI Inform database of scientific articles. We searched for full text

scholarly journals containing keywords like performance drivers, balanced scorecard, start-up,

SME, high-tech and technology. Table 1 shows different keyword combinations that were used

for the search, and number of documents found in total, as well as number of documents that were se-

lected as related to the topic of this paper. Further literature has been found mostly thanks to refer-

ences and quotations from the primary selection using EBSCO, WISO, ProQuest ABI Inform and

Google Scholar.


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Table 1: Research report from ProQuest

Keywords Results Filtered results

Performance drivers 37 14

BSC start-up 0 0

Balanced scorecard start-up 4 4

Balanced scorecard high-tech 2 2

Balanced scorecard technology 65 19

Performance technology SME 79 6

Source: Author

From the results above, it is possible to see, that while there is a lot of literature about balanced score-

card and performance drivers, only few articles relate directly to its usage in SME, young companies,

or specifically in technology SMEs.

The term performance drivers in its current meaning was introduced in 1992 in Harvard Business Re-

view in an article The Balanced Scorecard: Measures that drive performance (Kaplan and Norton,

1992). The authors have consequently published another article on the topic of BSC in 1993 (Kaplan

and Norton, 1993) and re-worked the concept into a book in 1996 (Kaplan and Norton, 1996a). These

are the entry-level works on the topic of BSC explaining its principles and application possibilities. In

1997, Swedish authors Olve, Roy and Wetter published a book Performance drivers: A practical

guide to using the Balanced Scorecard further developing the subject, relating it to other similar con-

cepts, addressing the topic of building and implementation of BSC in different types of enterprises, as

well as introducing several detailed case studies. (Olve et al., 1999)

While the logic of performance measurement frameworks can be generally applied to any company

regardless of country, size or industry; the objectives, performance drivers, measures and targets are

unique. Therefore, it is impossible to construct a list of performance drivers that would work for spe-cific objectives, let alone develop a one-size-fits-all performance measurement solution. Implementa-

tion of performance measurement needs to be tailored to the needs of a specific company, develop

ideally by all members or management and with participation of people from all levels of the organiza-

tion.

Basic differences between performance drivers of manufacturing and service companies influencing

productivity have been summarised by Vargas and Manoochehri (1995). Epstein and Roy (2004) have

undergone the challenge of developing suggestions for BSC-based performance measurement systems

that could be used for measuring performance of the CEO and corporate board and thus achieve an

increase in their internal governance and external accountability. Zigan et al. (2008) look at challenges


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connected with using intangible resources as performance drivers in European hospitals. BSC has also

been applied to franchisees (Murdock, 2009), joint ventures (Migliorato et al., 1996) or industrial clus-

ters (Carpinetti et al., 2008).

These articles illustrate the broad possibilities of application of performance measurement approaches

based on performance drivers and measures as means to achieving organisational objectives. But how

do these approaches withstand when applied to SMEs? Most of the articles concerned with BSC and

SMEs are case studies describing implementation of BSC or BSC-based framework for performance

measurement in one organisation. Applying a BSC-based framework in a new venture has been de-

scribed by Bigler (2010) and research related to performance drivers in SMEs is represented by an

article by Daniels and Burns (1997) who have tried to identify performance drivers of manufacturing

cells in a medium-sized UK-based manufacturer of automotive components. Rickards (2007) mapped

the development and implementation of BSC in a medium-sized e-commerce company. Few articles

concern themselves even with using BSC in not-for-profit SMEs. (Manville, 2007; Bull, 2007)

Besides providing detailed case studies, the above articles make a valuable contribution by providing

an extensive list of performance drivers (Bigler, 2010) and viewpoints on differences between large

companies and SMEs when implementing performance measurement in an SME context (Rickards,

2007). McAdam (2000) has chosen a broader research approach related to SMEs and performance

measurement. He has performed a qualitative research in which he studied 20 SMEs that have imple-

mented BSC. He takes a critical approach and questions the suitability of performance measurement

systems developed by and for large corporations like Business Excellence Model (BEM) and Balance

Scorecard in the context of SMEs. Another extensive, this time quantitative survey was performed by

Sousa et al. (2006) who have researched the knowledge about performance measures and their degree

of implementation in SMEs in England.

1.3 Knowledge gapMajority of the available journals describes qualitative research or presents case studies. Quantitative

research about performance management in SMEs is practically non-existent. At the time of writing,

we were able to find two quantitative studies. The first study asks: What performance measures are of

the greatest value to small and middle-sized (manufacturing) companies? (Neely et al., 1995) The

second study applies the same research question to a much smaller group of small technology firms.

(Laitinen, 2002) This study was the only article focusing specifically on small high tech SMEs. Ta-

ble2 illustrates the gap we perceive in the research about performance drivers.


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Table 2: Knowledge gap perceived in the area of research about performance drivers

SMEs Large companies

General

High tech X

Source: Author

According to Neely at al. (1995), measurement is a luxury for SMEs. This is especially due to its re-

source-intensive implementation and maintenance. Looking especially at young technology SMEs and

their need for a fast growth and flexibility, this assertion becomes an even heavier argument. But the

term luxury in this context should not mean something unnecessary. To the contrary, measurement is a

luxury companies must afford in order to outrun the competition and prosper.

Leading a young high-tech company without any measurement would be impossible and irresponsible.

Although complex performance measurement frameworks in their original form might be unnecessari-

ly complicated and too broad for technology SMEs, even a high-tech start-up needs to know what lev-

ers to pull in order to achieve the agreed objectives, and how to measure the impact of the decisions

made. This is especially true in the case of technology SMEs with the participation of an external in-

vestor that requires regular reporting and conditions issuing further funds by achieving specific mile-

stones. We perceive lack of research about performance drivers in technology SMEs to be a

knowledge gap and would like to contribute to filling it with this paper.

While Laitinens research analyses the performance measures, and concentrates only on Finnish com-

panies, we would like to broaden our sample geographically and instead of the already researched per-

formance measures, explore the drivers of the business performance of young European technology

SMEs.

1.4 Research question and objective targetIn our research, we would like to find answer to following question:

Which performance drivers can be generally considered as crucial for achieving the objectivesof young technology SMEs?

In order to answer this question, we will partially touch the topics described below. Although achiev-

ing a certain level of understanding of these problems is vital for answering the main research ques-

tion, we will not analyse these in depth, but can be perceived as suggestions for further research in this

area of interest.


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What are the specifics of early-stage technology SMEs that need to be considered when set-ting up a performance measurement system?

What are the most common objectives, goals and strategies of early-stage technology SMEs?Are there any significant differences when comparing the objectives, goals and strategies of

venture- and self-funded companies?

Do companies with same strategies attempt to pursue these with the same set of performancedrivers?

Answering the research question should throw more light onto the problems of managing young, fast

growing companies, summarise the most important factors that drive their performance and group

them into focus areas. These can be further used by managers of these companies as a foundation of

development of their own lean and easily maintained performance measurement systems, by venture

capitalists for development of rating systems of potential investments or help scientists in developing a

performance measurement framework that would be cut-to-measure for companies with little history,

goal of fast growth and operating in unknown and fast developing markets.

1.5 Explanation of terms and abbreviationsBalanced scorecard (BSC): a performance management system that helps top executives set corpo-

rate strategy and translate it into a coherent set of objectives, measures, and targets that the entire

workforce understands (Kaplan and Norton, 1993)

Strategic management: an on-going process that evaluates and controls the business and the indus-

tries in which the company is involved; assesses its competitors and sets goals and strategies to meet

all existing and potential competitors; and then reassesses each strategy annually or quarterly [i.e. reg-

ularly] to determine how it has been implemented and whether it has succeeded or needs replacement

by a new strategy to meet changed circumstances, new technology, new competitors, a new economic

environment., or a new social, financial, or political environment. (Lamb, 1984)

Performance: ability of an object to produce results in a dimension determined a priori, in relation to

a target. Thus it is necessary to have, first, an object whose performance is to be considered; second, a

dimension in which one is interested; and, third, a set target for the result. (Laitinen, 2002)

Performance measurement: process of quantifying the efficiency and effectiveness of action. (Sousa

et al., 2006)

Performance measure: a metric used to quantify the action measured. (Sousa et al., 2006)

Leading indicators: indicators that predict future change in other indicators.


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Lagging indicators: indicators that describe results of past actions. Also called outcome measures.

Performance drivers: indicators whose change has impact on other indicators. They can be measurable

and can be directly influenced.

Outcome measures: measures describing result of past actions. Also called lagging indicators.

Small and medium enterprises (SME): private enterprises outside of agricultural sector employing

fewer than 500 people. (European Commission, 2003)

Small company: company with less than 50 employees, no more than 25% of the capital or voting

rights held by enterprises which are not SMEs, annual turnover less than 7 million EUR or total bal-

ance sheet value less than 5 million EUR (European Commission, 2003). Companies with 09 em-

ployees are often called micro-organisations.

Medium-sized company: company with less than 250 employees, no more than 25% of the capital or

voting rights held by enterprises which are not SMEs, annual turnover less than 40 million EUR or

total balance sheet less than 25 million EUR. (European Commission, 2003)

Venture capital: Capital invested in a project in which there is a substantial element of risk, typically

a new or expanding business (New Oxford American Dictionary, 2010). While originally used as a

reference to early stage deals, nowadays, especially in Europe, it is often used as a synonym to private

equity.

High-tech company: Company with R&D costs not less than 4% of total net sales (OECD). A compa-

ny that develops, produces or uses new technological skills and spends money on R&D. (Laitinen,

2002)

Young company: for the purpose of this paper, we have considered all companies founded after the dot

com bubble burst (2001) as young companies.

Total quality management (TQM): TQM is variously described as a general philosophy of manage-

ment (Price and Chen, 1993), a system that puts customer satisfaction before profit, or an organisa-

tions strategic and operational commitment to the continual improvement of its services and products

to meet the needs of existing and potential customers, through the active involvement and empower-

ment of all staff (Holloway, 1993)


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2 Theoretical foundationIn the first part of this section, we would like to explore how performance measurement has evolved

historically, and how it was gaining on importance as well as usability from its first moments until thepresent day.

In order to make a bridge from the performance measurement to performance drivers and performance

management in general, we have to look at the importance of Total Quality Management (TQM), the

TQM-based frameworks and Balanced scorecard in current business environment. This part deals with

TQM and BSC in general in the original context - applied to the reality of large companies.

The third subsection deals with TQM in SME context. At first, we explain why SMEs are different

from large corporations, and give reasons, why they need to be handled separately when speaking

about TQM and performance management in general. After specifying unique features of SMEs and

evaluating experience with usage of currently available TQM based performance management frame-

work, especially BSC, in SME context, we will have a look at how the business environment in which

start-ups operate has change during the last two decades and suggest a performance management

toolkit consisting of tools made with start-ups in mind.

In the last part, we match this toolkit with the TQM principles and explore, whether it can be helpful

for TQM implementation in an SME. After this theoretical introduction, we will look at the meaning

and role of performance drivers in managing of large corporations and suggest ways to use them in an

SME.

2.1 Historical development of performance measurementAgrarian age

Until the end of 18th

century, the society was mainly agrarian. Most of the working people were farm-

ers, rest of them craftsmen. The division of labour was almost non-existent, and where it was present,

it was due to capabilities or experience, not to make the production more efficient. People were mostly

independent and responsible for earning their own living. Performance measurement in this period

appeared only in its original sense - aimed at assessment of characteristics or capabilities of an indi-

vidual - which had nothing to do with its business meaning we know today.

Industrial age

Late 18th century brought about inventions announcing the coming of a new age and a new way of life.

With the inventions of The Spinning Jenny (1764), Steam Engine (1775), Power Loom (1784), Cotton


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Gin (1792), the mankind has moved through industrial revolution into an industrial age, which has

lasted until late 20th century. The role of an individual in the industrial age has greatly changed, and

so have the demographics in the countries, which have embraced the new possibilities. Partial automa-

tion of production led to inevitable creation of factories. The division of labour not only among peo-

ple, but also between people and machines increased the productivity and pushed down the prices.

Several professions formerly performed by independent craftsmen became obsolete as a result of in-

dustrial mass manufacturing, humans working in factories, had, to large extent, the role of a machine -

repeating the same small task over and over again. Adam Smith illustrates this in the Wealth of Na-

tions with his example about the makers of pins. With industrial production, the workers were no

longer independent, but employed in a factory. It became important not only coordinate the workers,

but also to measure their performance. H. James Harrington has explained the importance of meas-

urement: If you can not measure something, you can not understand it. If you can not understand it,

you can not control it. If you can not control it, you can not improve it. (OBrien, 1999)

And with increasing competition, the ability to improve has been gaining on importance ever since. In

the early twentieth century, the main interest of performance measurement was to achieve the most

efficient manufacturing possible. (Neely and Austin, 2000) This goal gave birth to the so-called scien-

tific management represented by Frederick Winslow Taylor and later by Frank Gilbreth. Efficiency

and effectiveness measures were in the spotlight and used by managers to control the company. Finan-

cial figures were used for planning, rather than control. Use of financial figures as a management tool

did not become popular until 1950s. (Johnson, 1992)

After the second world war, there was a gradual shift [...] from considering performance purely in

terms of cost and efficiency to one which also encompassed other performance concerns especially

quality, flexibility, timeliness, innovation, etc. (Radnor and Barnes, 2007). Although the importance

of these areas was obvious to many, the existing performance measurement systems were still based

solely on financial measures. It was not until 1980s when a performance measurement revolution oc-

curred - along with the advent of information age.

Information age

First attempts to create a measurement system going beyond financial measures can be traced as far

back as 1951 when the CEO of General Electric, Ralph Cordiner, created a task force, which came up

with timeless set of performance measures including market share, productivity, employee attitudes,

public responsibility and balance between short- and long-term goals. (Eccles, 1991) But it was not

until 1980s when measurement became more practical and allowed to address this problem not only inthe scientific circles, but also in management practice.

As inventions that enabled automation in the 18th century brought about the industrial age, the late


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20th centurys revolutionary development in the information technology has enabled efficient elec-

tronic data processing and calculations and gave birth to the new Information Age. What electricity

did for the light bulb, the information age is doing for performance measurement. (OBrien, 1999)

Tracking and data logging is in many cases almost effortless. Data collection is not a problem any-

more. The issue of the information age is finding the right data and interpreting them in a way that will

enable the management to make meaningful data-driven decisions. So-called white-collar workers

paid to think and improve are more and more often replacing labour workers, before often seen on par

with the machinery.

The new technology enabled the management to collect and process virtually any type of data about

the company. By the 1980s, many executives were convinced that traditional measures of financial

performance did not let them manage effectively and wanted to replace them with operational

measures. (Kaplan and Norton, 1992)

The disadvantages of traditional financial measures and traditional management control systems based

on these measures which have appeared in literature during the last three decades of 20th century have

been summarised by Neely (1999) and Olve (1999): They are criticised because they:

encourage short-termism, for example the delay of capital investment (Banks and Wheel-wright, 1979) (Hayes and Abernathy, 1980)

lack strategic focus and fail to provide data on quality, responsiveness and flexibility (Skinner,1974).

encourage local optimisation, for example manufacturing inventory to keep people and ma-chines busy (Goldratt and Cox, 1984) (Hall et al., 1983)

encourage managers to minimise the variances from standard rather than seek to improve con-tinually (Schmenner, 1988) (Turney and Anderson, 1989)

fail to provide information on what customers want and how competitors are performing(Camp and for Quality Control, 1989) (Kaplan and Norton, 1992)

are historically focused (Dixon et al., 1990) furnish misleading information for decision-making (Hoffecker and Goldenberg, 1994) fail to consider the requirements of todays organisation and strategy (Peters and Peters, 1987) play second fiddle to the requirements of financial accounting (Johnson and Kaplan, 1987) provide misleading information for cost allocation and control of investments (Johnson and

Kaplan, 1987)

furnish abstract information to employees (Govindarajan, 1993)


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pay little attention to the business environment (Eccles and Pyburn, 1992) may give misleading information (Smith, 1992)

The business world started to realise the importance of a new way of measuring and managing. A new

way, that would prevent the short-termism and narrow-sightedness and support a more balanced view

of the company. In the 1990s, measurement tools and improvement initiatives started mushrooming.

Their goal was to enable an organisation to succeed in new information age competition (Kaplan

and Norton, 1996a). Evidence, that orientation on customer satisfaction instead of financial perfor-

mance has positive effect not only on financial performance, but also on other areas of the company

has been provided by Anderson et al. (1994; 1997) and Fornell (1992) who have identified a signifi-

cant positive correlation between customer satisfaction and financial performance. (Olve et al., 1999)

Of the vast number of the new tools and techniques, only a small number has become widespread and

successful. Of these, few would dispute that [...] total quality management has been one of the most

pervasive. (Neely, 1999)

2.2 Role of BSC among TQM-based performance measurement frameworks2.2.1 About TQMThe second half of the 20

th

century could be described as a management revolution when improvement

initiatives started mushrooming. Some of them new, many of them brought along from Japan. Just in

time (JIT), Time-based competition, Kaizen, Lean production, Customer-focused organisations, Activ-

ity-based costing, Employee empowerment, Reengineering, Benchmarking, Business process redesign

to name a few that have survived until today. The complete list would be endless.

Total Quality Management (TQM) is a movement which spread to the world from then booming Japan

and put an end to the era best described by theories of Taylor and Fayole aimed on endless cost cutting

and performance improvement with the aim of never ending productivity race. Perhaps new economy

of the 1980s brought about also a new way of thinking, and created a place for a general philosophy

of management [...] that puts customer satisfaction before profit (Ghobadian and Gallear, 1997).

There is no single universally accepted definition of TQM. It is a concept, a quality improvement tool,

a philosophy, a movement, a set of rules and practices that have revolutionised the Western manage-

ment thinking of the late 20th

century. Although often being criticised for the increased bureaucracy

that comes along with implementation and maintenance of TQM, it has captured the attention of prac-

titioners, politicians and academics. While managers started with implementation of TQM in their

companies, politicians were providing incentives for companies that decided to implement TQM, and


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academics and consultants were busy building implementation models in order to make TQM broadly

accessible.

Ghobadian and Gallear (1996) define TQM as a structured attempt to refocus the organisations be-

haviour, planning and working practices towards a culture, which is employee driven, problem solv-

ing, customer-oriented, and open and fear-free. Furthermore, the organisations business practices are

based on seeking continuous improvement, devolution of decision making, removal of functional bar-

riers, eradication of sources of error, team-working, and fact-based decision making.

The key generic principles of TQM have been summarised by Jamal (1998) as quoted by McAdam

(2000):

TQM is strategically linked to the business goals. Customer understanding and satisfaction are vital. Employee participation and understanding at all levels are required. The need for management commitment and consistency of purpose. The importance of processes and measures.

These days, following these principles is a matter of survival for most of the companies who want to

operate sustainably on an open, competitive market.

2.2.2 TQM-based frameworksFollowing the widespread success of TQM, a plenty of management and performance measurement

frameworks have emerged that build upon these principles:

Business excellence model (BEM) Balanced scorecard (BSC) Maisels Balanced Scorecard ISO 9000 Investors in People Business process improvement Performance pyramid Performance prism Results and determinants matrix Integrated dynamic PM systems (IDPMS) Integrated PM framework (IPMF)


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Integrated PM systems (IPMS) Cambridge PM process (CPMP) Integrated measurement model (IMM) Consistent PM systems (CPMS) Framework for small business PM (FSBPM) Effective progress and performance measurement (EP2M)

A comprehensive comparison of most of these frameworks has been performed by Hudson et al.

(2001). Each of these frameworks covers different performance areas and different steps on the way

from strategy formulation to detailed planning and measurement. Selection of a certain framework can

be very individual depending on the needs and requirements of the company.

One of the oldest, and most popular of these frameworks is Balanced Scorecard. The reasons can be its

early onset and popularisation through Harvard Business Review popular not only among academics,

as well as comprehensively described implementation process.

2.2.3 The balanced scorecardBalanced Scorecard was first introduced in 1992. It was a tool needed to facilitate the shift to the age

of information. It put strategy and vision into the spotlight and stressed the need of using both leading

a lagging, internal and external, financial and operational measures and understanding the relation-

ships between them in order to maintain control and optimise both short and long term results. Every

measure selected for a balanced scorecard should be an element in a chain of cause/ and/effect rela-

tionships that communicates the meaning of the business unit is strategy to the organisation (Kaplan

and Norton, 1996a)

It redefined the way strategy was perceived by all levels of a company. It turned strategy from somedocument into a framework company uses to plan, operate and measure. A framework that explains

everyones contribution towards its fulfilment. It has been quickly embraced by large companies and

in a couple of years managed to gain widespread acceptance. Nowadays, it is obvious that BSC has

not been just a fad (Green et al., 2002), but a critical linchpin in the history of management as a sci-

ence just like few years younger Management by objectives or Process management.

BSC is used to accomplish critical management processes:

1. Clarify and translate vision and strategy2. Communicate and link strategic objectives and measures


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In this section, we will be discussing the appropriateness of TQM, BSC and PM in the context of

SMEs. In order to explain the tight relationship between these three terms, we understand TQM as a

management philosophy, BSC as a framework designed for the implementation of its principles, and

PM as an integral part crucial for implementation of BSC as well as realisation of the principles of

TQM.

Performance measurement may function on its own, and is, to certain extent being used by all compa-

nies that measure the outcomes of their actions. It does not necessarily have to be implemented as a

part of BSC or TQM. However, in this paper, we understand performance measurement as quantifica-

tion of outcomes of actions related to the fulfilment of strategic goals, and therefore, we assume their

alignment with strategy as required by the principles of TQM.

As many other management techniques, TQM was primarily designed to meet the needs of large or-

ganisations and multinationals (Ghobadian and Speller, 1994). As is the case with BSC, "most of the

published literature describes and discusses the application of TQM concepts in large organisations

(Moreno-Luzon, 1993)

Drilhon and Estime (1993) argue, improving competitiveness is now an imperative for small and

large businesses alike. In todays crowded markets firms cannot afford to stand still, waste resources

by adopting a trial-and-error approach to formulating a strategic direction, and deliver poor quality

products or services and Ghobadian and Gallear (1996) concluded that the concept of TQM could be

used by SMEs with considerable success.

Although small businesses are no less concerned with quality than their larger company counterparts

(McTeer and Dale, 1994), they have been slow to adopt TQM (Ghobadian and Gallear, 1997) in a

formalised manner. In order to understand, why SMEs are reluctant to adopt new frameworks and

techniques, in spite of their benefits, it is necessary to understand the differences between large and

small enterprises.

2.3.1 Specific characteristics of young technology SMEsWelsh and White 1981) suggest, that a small business is not a little large business. Small- and me-

dium-sized enterprises (SMEs) exhibit distinct characteristics that differentiate them from the majority

of their larger counterparts. (Storey, 1994)


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Following points summarise the most important differences of SMEs in comparison to large corpora-

tions, as well as some differences with regard to strategy formulation and controlling practices:

lack of organizational layers and bureaucracy (Hale and Cragg, 1996) limited management structures (Szyszka, 2003) involvement of top management in daily operations (Rickards, 2007) managers regularly deal with risks (Henschel, 2003) closeness to customer (Hale and Cragg, 1996) more limited financial resources (Szyszka, 2003) natural degree of flexibility and change orientation (Hale and Cragg, 1996) typically only two-year planning horizon (Rickards, 2007) strategic component of controlling systems is less well developed (Legenhausen, 1998) concentration on hard short-term financial data and neglecting soft, long-term non-financial

variables in controlling (Rickards, 2007)

strategy style is more emergent and dynamic (Hudson et al., 2001)

As a result, not all the techniques designed for corporations are directly transferable to small business-

es. Although direct transfer of these techniques might be possible, it might not be the most efficient

solution that will bring the same benefits as in case of large corporation.

While SMEs in general exhibit distinct differences from large enterprises, they are not quite the oppo-

site. If we were to find the counterpart of large enterprises, these would be the technology SMEs that

became widespread and talked-about in the new fast-developing economy of the late nineties and in

the early years of 21st century.

Ackroyd (1995) presents special features of technology SMEs, especially of dynamic IT firms as fol-

lows:

Very small staff numbers (average UK staff in sample = 30) High turnover and value-added (therefore high earnings per employee). Variety of legal forms (holding companies common). Small working teams as basic operating team (and much movement between teams) Lack of orthodox structure (all matrices to varying degrees) Organizational boundary indeterminate (movement of staff across organizational boundaries) Informal affiliations and alliances crucial (outside and inside the company) Few owned by or affiliated to, larger companies (few spinoffs or spinouts)


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Organization strategy and design follows staff competences and interests (absence of formalor separate managerial function)

Staff multi-skilled knowledge workers (formal qualifications relatively unimportant) Highly orientated towards customers (but selective-enacted environment) High adaptability and mobility (size, number of teams and geography) Growth by replication (not by increases in scale).

From these features, which relate also to our sample, it is obvious that financial constraints might be

problematic to a smaller extent than personal constraints and resistance against formalism, bureaucra-

cy, systems, hierarchies and rules that result from adaptation of formal planning and measurement sys-

tems inside these companies.

2.3.2 Advantages of SMEs in the process of implementationStrategy formulation and linkage to operations is a very dynamic process in SMEs. (Gunasegaram et

al., 1996). It might seem, that implementing TQM is a massive undertaking for SMEs when compared

to large corporations, but in fact, SMEs exhibit several strengths when it comes to the implementation

of TQM in comparison with their larger counterparts. Following list summarise these advantages

found in the available literature:

if top management is convinced of the need for a TQM approach, then it is easier for manag-ers to inspire and motivate others in the organisation; (Lee and Oakes, 1996)

because organisational structures and systems are generally simple, the process of implement-ing improvements can be made visible more easily and defined in a holistic way; (Lee and

Oakes, 1996)

the people dimension is easier to tackle on face-to-face relationships, because of the low num-ber of employees; (Lee and Oakes, 1996)

flexibility of SMEs is linked to rapid decision making which aids quick implementation ofTQM related decisions; (Wiele and Brown, 1998)

visibility of leadership and improvement teams is easier; (Ghobadian and Gallear, 1996) employees are closer to the products and services and thus feel more responsible for the prod-

ucts and services of the organisation; (Ghobadian and Gallear, 1996)

natural tendency for cross functional training; (Ghobadian and Gallear, 1996) decision making processes are more simple; (Ghobadian and Gallear, 1996) you need only one internal catalyst; (Ghobadian and Gallear, 1996) less resistance to change from employees; (Ghobadian and Gallear, 1996)


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These advantages suggest, that implementation of TQM in an SME could be a pretty quick, straight-

forward, and easy to manage process. Flat structures, informal relationships and lack of processes

cause, that implementation of any change is easier to put through in an SME, than in a large organisa-

tion with fixed processes and impenetrable hierarchies. However, SMEs exhibit also disadvantages

with regards to the implementation process when compared to large companies.

2.3.3 Disadvantages of SMEs in the process of implementationAccording to Lee and Oakes (1996), and Ghobadian and Gallear (1996), if we compare SMEs to larg-

er companies, SMEs exhibit following disadvantages:

It is more difficult to prove that TQM is an effective basis for a business strategy; (Lee andOakes, 1996)

Investment in training, for which financial resources are necessary and also the need to free uppeople from their normal work without disturbing on-going processes; (Lee and Oakes, 1996)

The knowledge base within SMEs is more problematic; it is difficult to develop expertise ontheir own with the available manpower; (Lee and Oakes, 1996)

Financial resources for bringing in a consultant or the resources for hiring experts are usuallylimited; (Lee and Oakes, 1996)

Small management team; each team member has different responsibilities, and there is no orlittle backup; (Ghobadian and Gallear, 1996)

Dependent on all employees, a small number of demotivated or uncommitted staff can dispro-portionately affect the quality outcome; (Ghobadian and Gallear, 1996)

SMEs do not have many resources (knowledge expertise, management time, external infor-mation, capital); (Ghobadian and Gallear, 1996)

Inflexibility and rigidity of the outlook of the owner or chief executive, because they dominatethe culture and have little formal management training. (Ghobadian and Gallear, 1996)

The implementation process is markedly more taxing for SMEs than larger companies due to both

financial and non-financial costs connected with the implementation, especially their high demands on

the management time, resource-intensiveness and its strategic orientation (Hudson et al., 2001).

2.3.4 Benefits of TQM for SMEsBesides the literature summarising advantages of TQM, BSC and PM in large corporations, a few au-

thors analyse these techniques especially in the context of SMEs. We have shown, that TQM princi-


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ples bring benefits to companies that implement them. But what is the role of TQM, performance

measurement and its strategic alignment in the context of an SME?

According to Argument et al. (1997), SMEs, which link operations to their business strategies, outper-

form the competition. One of the benefits [when implementing TQM] is gaining a quality edge in

comparison to the competitors. A quality edge boosts performance in two ways: in the short term, su-

perior quality yields increased profitability via premium pricing; in the long term, superior or improv-

ing quality should result in increased market share. Higher volumes of output result in improved scale

economies that in turn should give the organisation cost advantage over its competitors, leading to in-

creased market share. (Ghobadian and Gallear, 1997)

According to Brown (1996), measuring right variables has a lot to do with the likelihood of future suc-

cess. Building on this information, we can conclude, that having a correctly set up, and strategically

aligned performance measurement system has a lot to do with companies chances to succeed against

competitors who do not adopt these techniques.

Positive effects of BSC implementation include increased productivity, manufacturing efficiency, cost

decrease, profit and free cash flow growth, increased market share, usefulness of reports, or transpar-

ency for the shareholders. (Gumbus and Lussier, 2006) Its implementation allows companies to unveil

hidden opportunities, better understand the company and reveal inefficiently used money allocated to

strategically insignificant projects. (Rickards, 2007)

A key benefit from using the BSC [especially in high growth SMEs] was found to be better organisa-

tional alignment with customer needs. (McAdam, 2000)

Bigler (2010) separately lists improved productivity, efficiency, effectiveness, improved communica-

tion thanks to common understanding, improved image towards external investors, and increased in-

trinsic value as benefits of BSC-based frameworks for new companies. Further points were provided

by Ghobadian and Gallear (1996):

It is easier to create an atmosphere for personal growth Employees will have a better understanding of the overall profitability of the organisation Functional integration is easier to attain

According to Neely (1999), performance measurement is a luxury for SMEs because the failure orsuccess of the company is obvious. This claim can cause a lot of controversy if placed out of context,

but does not actually contradict the aforementioned conclusion. Performance measurement is not


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something that would be decisive for commercial viability of an idea, product or service, and therefore

might not be crucial in the early stages, however, it can get the company an competitive edge and in-

crease the chances of successfully getting through he growth and outperforming the competition.

2.3.5 Disadvantages of TQM for SMEsBesides the numerous advantages, implementing TQM in an SME brings also certain drawbacks. The-

se are added layer of bureaucracy, and increased formalisation, which conflict with the flexibility and

emergent nature of SMEs. However, these disadvantages are mostly the matter of a selected frame-

work and tools, not problems of TQM as a whole. If the management wants to implement an existing

framework, follow the rules, and is not aware of the possible disadvantages, this can cause problems

especially in the early stages of young high-tech SMEs, where adaptability of the company with re-

gards to market development and external influences is vital for its survival. One of the biggest threats

is basing a TQM implementation, i.e. in form of a BSC on wrong, or out-dated assumptions, or unwill-

ingness to make changes to a selected strategy.

Implementation in companies with history is, to a great extent based on experience - experience about

the industry, the market, the customers, as well as the internal processes in the company. This experi-

ence builds the foundation necessary for building the cause-and-effect relationships between the indi-

cators and successfully planning their target values.

The Balanced Scorecard requires diversity of skills and experience across many different functions

(Willmott, 1995). However, new companies, are unlikely to have this breadth of experience and

knowledge (Raymond et al.,1998) which may complicate the implementation. What is more, particu-

larly in newer industries, hypotheses - as opposed to experience - will play a larger part in the score-

card process, which will also have a more strategic focus." (Olve et al., 1999)

If the system is based on hypotheses, and company is operating in a new, dynamically evolving indus-

try, hypotheses have to be tested again and again as the environment changes. The model of BSC,

thanks to the interlinked indicators, which make it so useful in the context of large enterprises in estab-

lished industries, makes is near to impossible to adjust on the fly, as one change in an underlying as-

sumption might easily prove the relationships faulty.

2.3.6 Suitability of existing frameworks for SMEsWhile the available literature lists countless examples of companies that have successfully implement-

ed BSC, and praises the positive effects of the induced changes, the resource- intensive, lengthy and


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complex implementation process remains a fact. The question arises, whether the benefits brought

along are greater than the costs of the implementation and maintenance of the system, and whether

having a system, that would be designed especially for SMEs would not allow the SMEs to yield

greater benefits with smaller implementation costs.

McAdam (2000) questions the appropriateness of existing frameworks for the use in SMEs. He argues,

that adopting existing models lead to unnecessary consumption of large amounts of scarce resources

(Wiele and Brown, 1998). Implementation of a performance measurement system alone is more taxing

for SME than for a large company (Hudson et al., 2001) and unless the management concepts that

work in large organisations are modified by SMEs, their adoption often produces adverse results (Mi-

tra and Pawar, 1991).

The first question is the usefulness of the models in the form as they are built in the context for SMEs,

asking whether they would have the same criteria and quadrants if they would have been built based

on SMEs instead of corporations. (McAdam, 2000)

The second question is the suitability of the implementation guidelines for these frameworks in the

context of SMEs. As these were designed for large corporations, they are lengthy and contain few in-

formation that SMEs really need for their implementation in the environment where hierarchies, func-

tional teams or initiative groups do not exist or are represented by one person each.

The third question is lack of flexibility of these models. With iteration periods of 6 months to one year

designed to fit one year operational planning period and 5-year strategic plan, these clearly can not

meet the requirements of technology SMEs which need to respond to dynamically changing markets.

(Ahire et al., 1996).

Out of the TQM-based performance management frameworks, BSC has been identified as the most

suitable one for the use in SMEs (McAdam, 2000). McAdam (2000) states that some organisations

who participated in his research have preferred BSC to BEM as they felt, that it was more helpful in

setting the strategy what led to high correlation of the operational and strategic plans. According to

Wiele and Brown (1998) exactly this correlation is vital for success of SMEs. Besides the helpfulness

in setting the strategy, the respondents have identified BSC as more effective and straightforward.

Although BSC was not intended for the use in SMEs, several companies have implemented it, and

there exists available evidence in the form of case studies (Gumbus and Lussier, 2006; Rickards, 2007;Manville, 2007). These case studies confirm, that while there are substantial differences between


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SMEs and large companies, a skilful and professionally supervised implementation of BSC can have

beneficial influence.

However, it remains a fact, that it cannot be used unadjusted. While typical planning period of SMEs

is two years (Rickards, 2007), Kaplan and Norton outline a process extending over two years to estab-

lish an annual cycle for planning and control with the help of the balanced-scorecard concept. The

process is gradual and cascades from the top management through middle management level to em-

ployees. It is well described and useful for companies with hierarchies and lots of projects whose con-

tribution to the strategic goals might be dubious. The implementation process as described by Kaplan

and Norton with the large enterprises in mind is of little use for SMEs, often in their early stages.

The high-tech SMEs, which are the subject of this paper, operate in dynamic environments where the

surroundings are changing rapidly. Whether it is biotech, IT or green energy, they are not established

based on a fixed framework of rules and guidelines, and the iteration times are much shorter than in

the case of SMEs operating in established industries. Therefore, it would be advisable for high-tech

SMEs to choose a more flexible framework, as we will discuss in a later section of this paper.

2.4 Business rules now and thenAlthough the basic principles of business are still valid, the rules and tools start-ups use to operate

nowadays differ dramatically from those used a decade ago. This change happened as a result of

changes in global economy and resulted in changes in the way businesses are planned, founded and

managed.

Bigler (2001) says strategic challenges of the new economy are following:

Globalization Industry convergence Electronic commerce Innovation and growth Disruptive technology Fickleness of customers

As a result, the competitive environment brings moderate to extreme uncertainty, break-neck speed,

shorter and shorter windows of opportunity, and more knowledgeable and demanding customers

(Bigler, 2001) .


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The outcomes of these changes are companies, which have adapted in order to prosper. Their impera-

tive is to cooperate quickly and efficiently, with minimal costs in cooperation with potential customers

in order to craft a product best suited to their needs.

This shift is one of the reasons, why the entrepreneurial team is probably the most decisive criterion

when VCs are deciding whether or not to invest. Ability to work with customers, cooperate inside the

team and relentlessly iterate to create a product perfectly addressing the needs is much more important

than having a great-looking product.

Understand, how todays market and operating principles differ from those from a couple of years ago

is crucial for understanding what drives their performance, and why it is necessary to re-think old

planning and performance measurement practices.

2.4.1 Shift from product-centred to customer-centred development.Looking back, the involvement of customers in the product development process has been gradually

increasing. In the industrial age, production was pre-planned to achieve low costs and delivering a

functional and affordable solutions. Examples that can serve as an illustration are Ford or IKEA. This

model was possible in the past when the demand was much higher than the supply and the competition

in the markets was low.

At the beginning of the information age, the competition was rising and there was abundance of goods

to choose from. Low price was not the only competitive advantage anymore, and people wanted prod-

ucts that would optimally satisfy their needs and tastes. The companies, in order to satisfy the needs of

their customers, started listening to them and involving them into the design and development process.

Eric von Hippel stands behind the concept of user innovation and introduced the term lead user. He

has also written several papers on the subject on involving the lead users in the process of developing

a product. (Herstatt and Von Hippel, 1992; Von Hippel, 1986; Von Hippel, 1978) He deals with the

problem, that in case of high-tech products, most potential users will not have the real-world experi-

ence needed to problem solve and provide accurate data (Von Hippel, 1986), and therefore, tradition-

al market research techniques will not provide useful answers. Instead, he suggests identifying lead

users - subjects who have needs that will become common in the future. These can provide valuable

feedback and help with improving the product. This was a large step towards empowerment of the

consumer applicable both in high-tech and low-tech fields, but the paradigm of product-centrism re-mained still in place.


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Revolution came along in 2005 with Steve Blanks book The Four steps to the Epiphany (Blank,

2005), which suggests a full transition from product-centric approach to a fully customer-centric ap-

proach. Analysing the customer needs and problems, before even thinking about the product to satisfy

them: by listening to potential future customers, by going out into the field and investigating potential

customers needs and markets before being inexorably committed to a specific path and precise product

specs - the difference between the winners and losers - and that is the Customer Development Process

(Blank, 2005)

The information age has brought the customer-centric development to a new level, with web-based

services as for example Quirky letting the customer specify his problem, build a critical mass of peo-

ple with the same problem, and have virtual teams of people working in order to find a solution. The

customer today has plenty of choices. Therefore, only companies, which work with the customers, can

be competitive.

When we see how this shift has impacted the way companies are managed, we can see, that companies

are built around their competences, not their products and the strategy is not given but built together

with customers who are now at the core of the company and responsible for both its orientation and

success.

2.4.2 Shift from a static to a dynamic business modelCompanies of the past used to define themselves by what they did. Disney was making animated mov-

ies, Apple made personal computers for creative professionals, Hilti was manufacturing drills. With

growing competition, most companies who wanted to survive needed to change their models. Several

of them more than once. It was important to get beyond what they do into what they need to do in or-

der to please their customers.

While large companies building on their brands and image that was built up over decades or centuries

can afford quite a long period of time before reinventing themselves, small high-tech companies oper-

ating in fast changing businesses like IT, biotechnology or nanomaterial must be flexible enough to

stay cutting edge with the latest developments. Unlike the corporations, they have no safety nets in

form of the brands and large reserves in cash and assets and are thus susceptible to failure if they fail

to innovate at-par with their competitors.

Managing a small innovative business today is about maintaining an up-to-date business model thatallows the best traction. In todays climate, it is best to assume that most business models, even suc-

cessful ones, will have a short lifespan. (Osterwalder and Pigneur, 2010)


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Osterwalder and Pigneur furthermore stress the importance of continuous environmental scanning be-

cause of the growing complexity of the economic landscape, greater uncertainty and severe market

disruptions (Osterwalder and Pigneur, 2010) and considers regular assessment of business model and

its consequent adaptation vital for the health of the market position of the business.

The implications of this development on managing a dynamic high-tech start-up are obvious. Tradi-

tional business plan slowly loses its function as an implementation guide and management handbook.

In order to serve these functions, it would have to be adjusted on a daily basis, and for these reasons is

being replaced by more flexible tools like Business model canvas (Osterwalder and Pigneur, 2010) or

Lean Canvas (Maurya, 2010) that allow quick iteration even of most crucial components of the busi-

ness model while enabling the user to maintain a birds eye view on all the relationships between the

crucial parts.

Figure 1: The Business Model Canvas

Source: Business Model Generation (Osterwalder and Pigneur, 2010)


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2.4.3 Shift towards lean managementA significant event which influenced todays high tech start-ups was the building up of the dot com

bubble followed by its burst in 2000 and 2001. The reason behind the bubble was over-financing of

start-ups which were enable to reach profitability before burning the cash raised from the investors. At

its peak, IPOs before the break even point and creative accounting practices were not an exception. In

many cases, goal of the investors was bringing the company to an IPO and exiting the investment be-

fore the company ran out of the cash reserves and declared bankruptcy. Companies being financed

almost solely with debt and foreign equity were no exception.

After the bubble burst, investors became cautious and it was hard to obtain debt, let alone equity fi-

nancing. This was the period, when entrepreneurs started to look for different ways of financing their

ventures. Fast growth fuelled by foreign equity was replaced by organic growth with own funds and

reasonable amounts of debt. The dot com bubble burst was a valuable lesson for both investors and

entrepreneurs.

This is the period, when the lean start-up methodology was born. It builds upon customer-centric de-

velopment introduced by Steven Blank, agile software development and prototyping, as well as use of

free and open source software. It advocates low cost product development, and gradual improvement

of the product. The term was first used by Eric Ries and is mostly used in connection with Web 2.0start-ups.

The implications of the start-up methodology for management of a company as explained in the book

Running Lean (Maurya, 2010) are resource-efficient customer-driven product development until the

point when there is a valid fit between the product and the market and promoting this as the single

most important thing to achieve before scaling the product or worrying about other, formal activities

of management as planning and measurements.

2.5 Measurement and TQM in the new realityThe desire to get beyond solely performance measurement tools towards more sophisticated manage-

ment tools and frameworks has been visible also in the area of IT start-ups. The founders of these

start-ups together with consultants in this area have quickly recognised, that although BSC has been a

cure for large companies, and many SMEs operating in established industries have managed to im-

plement it to their benefit, it is not the best tool for the needs of high-tech SMEs, and completely un-

acceptable for the use in their early stages.


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Often founded on the principles of customer driven development described by Steve Blank in his book

Four steps to epiphany (Blank, 2005), these companies iterate not only their product but also their

business model to the point of finding a fit between the product and the market. In the world of prod-

uct-driven development, this would mean rewriting the business plan from its core again and again

with every new information.

To address this issue, a more flexible business planning approach had to be developed for the use in

customer-centric companies. This tool, called simply Canvas has been described in the book The

business model generation (Osterwalder and Pigneur, 2010) and functions both as a business plan, a

roadmap and a performance measurement and review tool.

It allows the company to change core elements of the business quickly, without loosing track of the

relationships between the key parts of the business making iteration meaningful and involving the

business model in the day-to-day decision making process.

If we want to look at these tools as a way to implementing TQM in a high-tech start-up, we have to

look at the key principles of TQM one by one, and explore how this proposed management toolkit

falls into this framework.

2.5.1 TQM is strategically linked to the business goalsThe linkage of operations and strategy is a crucial part of TQM. It ensures, that actions taken are in

accordance with the strategic goals, and that all projects undertaken contribute to strategic success of

the company. Osterwalder (2010) characterises the relationship between business model and strategy

in a following way: The business model is like a blueprint for a strategy to be implemented through

organisational structures, processes and systems. What is more, he states, Strategy drives the busi-

ness model. - What is in the strategy should be contained also in the business model.

In this context, the Canvas, visualisation of the business model, should be seen as a management tool,

rather than a business plan. Thanks to its simplicity and legibility, it is best suited for this task. When

Canvas is used as a management tool, business models and strategy are used as a framework for day-

to-day decisions, and strategic alignment of operations and strategy is achieved.

If we compare the way strategy and operations are aligned in the context of BSC with the way this

alignment occurs with the use of Canvas, there are some apparent differences. Canvas provides 9 areaswith fixed basic logic that are elements of a business model that will lead to fulfilment of the strategy.

In BSC, there are four perspectives, inside which measures, drivers, and relationships can be defined


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and their impact on fulfilment of strategy analysed. While BSC might be more versatile, adaptable,

adjustable, and complete in its coverage, Canvas is easy to understand, use, and adjust.

2.5.2 Customer understanding and satisfaction are vitalCustomer understanding and satisfaction are vital for the success of any company operating in a com-

petitive environment. Using the customer-centric product development process serves as a basis for

achieving that the product is aligned with the needs of the customer, and that it addresses customers

problems.

The process furthermore allows to test the product in real life setting and gives advice on how to turn

the potential customers who have participated in the process to real paying customers which often

leads to first income a new company generates.

The ways satisfaction of customers is achieved is captured in the right-hand side of the canvas whose

sections Channels and Customer relationships are aimed at reaching customers, creating dialogue,

and maintaining their trust. The Value proposition part being central element of the Canvas is a

proof, that Canvas has been built with customers in mind and the proposed toolset can be used as a

way to achieve the condition of customer understanding and satisfaction.

2.5.3 Employee participation and understanding at all levels are requiredAs already described, some specific features of high-tech SMEs include very small staff numbers,

small working teams and lack of orthodox structure (Ackroyd, 1995). As a result in such environment,

the information flow is much easier.

Therefore, regardless of the tools used, we do not perceive lack of employee participation and under-

standing to be a problem that could easily arise in this context. To address this issue, the authors of

The Canvas encourage users to work on its elements in groups: Business Model Canvas works best

when printed out on a large surface so groups of people can jointly start sketching and discussing.

(Osterwalder and Pigneur, 2010) and describe several tools how to fill the sections of The Canvas us-

ing group design techniques.

2.5.4 The need for management commitment and consistency of purposeIn the context of young high-tech SMEs, under management, we most often understand a single per-

son being the founder, CEO and majority owner of the company, which is the case in almost all micro-


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enterprises and many small companies. Even in case the management comprises from a group of peo-

ple, the owner or CEO might be a dominant figure.

The possible inflexibility and rigidity of outlook (Ghobadian and Gallear, 1996) of the leading per-

son of a company, which has been identified as one of the disadvantages of SMEs when it comes to

making the decision about implementation of TQM in a company can actually have positive impact on

the commitment to put the change through once the decision is made.

The special features of SMEs as limited management structures, involvement of top management in

daily operations, and high influence of the leading personality on the employees make this criteria a

lesser concern than in large corporations with several management levels.

2.5.5 The importance of processes and measuresProcesses and measures are necessary for keeping the management system up-to-date and therefore

useful at any point of time. To address this issue BSC suggest periodic reviews and reporting on se-

lected measures of performance, key performance indicators (KPI) connected to critical success fac-

tors (CSF). BSC recommends a marking system using the colours of traffic lights to mark the fulfil-

ment of the specific goals.

The Canvas, on the other hand advices to set up the management structures to continuously monitor,

evaluate and adapt or transform your business model, and provides a non-exhaustive set of questions

that are helpful in helping the user to assess the strength and weaknesses of each of the business

model building blocks(Osterwalder and Pigneur, 2010). Users are encouraged to use these questions

to assess validity of each building block through SWOT analysis and acts on its outcomes.

Where Canvas does not provide any guidance is an objective method of planning and measurement

similar to that used in balanced scorecard, where the building blocks would be used as a framework

for setting up measures and planning goals. Such extension of the Canvas would then enable to make

it more useful as a simple performance management tool for high-tech SMEs. We feel, that this is the

only area where Canvas fails to comply with the principles of TQM, and where lies the potential for a

further extension of this tool.


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2.6 Performance drivers and their role in managing a companyRegardless of performance management system used, there are always two types of measure in a com-

pany. First group are the outcome measures. These are measures, that are important to observe, how-

ever, cannot be influenced directly, such as profit, customer satisfaction, etc. It is possible to assign

them desired values, but achieving the goals requires further breakdown of the factors that are influ-

encing the value of the outcome measure.

Performance drivers, on the other hand, stand lower in the chain of impact, and have therefore influ-

ence on the outcome measures. The performance drivers can, but do not have to be measurable. The

main difference is, that a company is able to directly influence them. While mastering the science of

prioritization, building a superior business model, or finding customers that appreciate your val-

ue might not be directly measurable, these things have strong impact on the outcome measures and

fulfilment of strategic goals of the company.

The relationship between outcome measures and performance drivers and their importance for com-

pleteness of a balanced scorecard has been described by Kaplan and Norton (1996): Outcome

measures without performance drivers do not communicate how the outcomes are to be achieved.

They also do not provide an early indication about whether the strategy is being implemented success-

fully. Conversely, performance drivers [...] without outcome measures may enable the business unit toachieve short-term operational improvements, but will fail to reveal whether the operational improve-

ments have been translated into expanded business with existing and new customers, and, eventually,

to enhanced financial performance.

If we speak about performance measures, we understand under this term both outcome measures and

measurable performance drivers. Utmost care should be given to selection of proper measures, as only

the right measures allow the management to use them as a management dashboard informative enough

to reveal whether the company is on the track, and what are the areas where adjustments need to be

made. Only relevant performance measures can lead a company to a sustainable business success.

(Royal Society of Arts and Commerce, 1994)

2.7 Ideal performance measurement system for high-tech SMEsBuilding a performance measurement system is a task that is arduous, and beyond the scope of this

paper. However, this part should summarise key principles, which a performance measurement system

should meet.


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One issue is the problem of performance measure selection. There is abundance of available measures,

and many companies fall into the trap of selecting too many, which inevitably leads into generation of

thick reports with plenty of data, but little relevant information. Brown (Brown, 1996) states following

rules with regards to the selection of measures:

Fewer is better: Concentrate on measuring the vital few key variables rather than the trivialmany

Measures should be linked to the factors needed for success: key business drivers Measures should be a mix of past, present, and future to ensure that the organisation is con-

cerned with all three perspectives.

Measures should be based around the needs of customers, shareholders, and other key stake-holders

Measures should start at the top and flow down to all levels of employees in the organisation

Furthermore, Brown (1996) defines six categories that should be considered and covered when finding

the correct metrics:

1. Financial performance2. Product / service quality3. Supplier performance4. Customer satisfaction5. Process and operational performance6. Employee satisfaction

With regards to characteristics of the metrics, Hudson (Hudson et al., 2001), with SMEs in mind, pro-

vides following criteria:

clearly defined have explicit purpose relevant easy to maintain simple to understand and use

More detailed information, about developing performance measures can be found in the work by

Neely et al. (1997). The experience has shown, that important part of the introducing performance

measurement system to SMEs is the process of implementation. Hudson et al. (2001) who have ana-


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lysed existing performance measurement systems for the use in an SME has following recommenda-

tions with regards to a performance measurement system implementation process for SMEs:

well designed clearly focused accompanies by effective project management resource effective should produce notable short term as well as long term benefits dynamic flexible iterative implementation process

To-date, there is no performance measurement system or management framework, which would be

designed to address the characteristics and suit the needs of high-tech SMEs. In order to understand,

why even a system developed for SMEs might be of little use for SMEs operating in new, high-tech

industries, it can be useful to compare this difference to difference between established SMEs which

function with the prospect of a long-term survival, and young SMEs in their early phases, whose can

not yet be sure about their future prospects. Based on the requirements of the latter SMEs, an ideal

performance measurement system suitable for their needs should have following characteristics:

Flexible

A PM system for high-tech SMEs should be first and foremost flexible as lack of flexibility in a dy-

namic environment is detrimental for companies success. It should count with possible adjustments of

underlying assumptions and strategy, and consequently with changes in the success factors, measures,

and relationships between them. This can be achieved by providing a framework based on validated

assumptions about elements of a business and their interrelationships (as is the case of Canvas) and

relying more on relationships between these elements than on relationships between the individual

measures.

Balanced

The concept of balanced coverage of all dimensions of the company has, thanks to BSC, proven suc-

cessful in maintaining long-term sustainable growth and healthy development of a company. Alt-

hough, under certain circumstances, short-term violation of the principles of balanced development

can be beneficial for a high-tech start-up, the framework should point out the need for balanced

growth.


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Easily implemented

Resource-intensive implementation is a problem most often quoted in relation with the usage of exist-

ing PM systems in SMEs. We assume, that the reason why so few companies use formalised PM

frameworks might be mere vision of the massive undertaking implementation of such system involves.

Therefore, a solution should be a simple, non-exhaustive system, which would be easy to understand

and cover only the most important measures.

Such framework, based on the aforementioned requirements, would not be able to reach the extent and

coverage of BSC and similar frameworks, as it would inevitably conflict with the flexibility and easy

implementation, but it would keep in focus the few variables which are necessary to observe regard-

less of their relationships, assumptions underlying the model or current strategy. Furthermore, compa-

nies could in this way get accustomed to the idea of having a strategically aligned performance meas-

urement system, and extend it further in case they find it beneficial.


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3 ResearchIn order to answer the research question, we will have to gain a deeper understanding about perfor-

mance measures and performance drivers in young high-tech SMEs. We will base our research about

performance measurement on an article by Hudson et al. (2001) who provides a list of performance

measurement areas in a company, which he uses to check the completeness of several performance

measurement approaches. In order to quantitatively test the importance of performance drivers for the

respondents, we will use a framework by Bigler (2010) as a foundation. This framework contains a list

of 30 performance drivers with impact on different areas of the company.

3.1 Formulating hypothesesLooking at performance drivers, performance measures and possible strategies, we can see a relation-

ship that should ideally exist between them. Choice of strategy is a choice about the direction of the

enterprise and its goals. Determining performance drivers means selecting actionable ways of success-

fully achieving the strategic goals (arrow number 1). Performance measures are indicators that should

tell us whether the enterprise is heading in the right direction and according to plan (arrow number 2).

Figure 2: Relationship between strategy, measures and drivers

Source: Author

Having formulated the meaning, it should be obvious, that there should be connection not only be-

tween drivers and strategy and measures and strategy, but also between the drivers and measures

(number 3). This is especially important in the case of young technology SMEs where the controlling

systems should be lean, flexible and easy to use. If a company wants to increase its cash flows in order

to finance a growth through acquisition, it makes little sense to measure innovation activity or attempt


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to decrease the lead time as long as problems in these areas do not interfere with fulfilling the main

goal. Therefore, choice of performance drivers should be dependent from choice of strategy, and per-

formance measures used should reflect the chosen performance drivers.

Based on Bigler, and an ideal relationship between drivers, measures and strategy, I would like to

formulate following hypotheses and investigate their relevance:

H1: There are certain perspectives or dimensions, which companies consider to be less im-portant than the others.

H2: There are certain performance drivers inside each perspective, which are significantlymore important than other drivers inside the same perspective.

H3: There are differences in performance drivers of venture-backed and self-financed compa-nies.

Furthermore, I would like to inspect relevance of performance drivers, and determine which areas as

well as which distinct performance drivers are given more relevance by the surveyed companies.

Combining our research and research results by Laitinen (2002), I would like to inspect the gap be-

tween p

Documents

Performance drivers of young high-tech SMEs