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JSBED
20,1 The development of SME
managerial practice for effective
performance management
28
Aylin Ates
Institute for Operations Management, University of Strathclyde, Glasgow, UK
Patrizia Garengo
Department of Innovation in Mechanics and Management, University of Padua,
Padua, Italy
Paola Cocca
Department of Mechanical and Industrial Engineering, University of Brescia,
Brescia, Italy, and
Umit Bititci
Institute for Operations Management, University of Strathclyde, Glasgow, UK

Abstract
Purpose – This paper aims to investigate the gap between theory and practice in performance
management in small and medium-sized enterprises (SMEs) and analyse it in the light of specific SME
characteristics and needs, to identify how SMEs can develop their managerial practice for effective
performance management.
Design/methodology/approach – The design of the study is based on literature review and
multiple case studies. Combining both approaches and investigating a spectrum of 37 European SMEs
through 232 semi-structured and face-to-face interviews with managers helped the authors to provide
theoretical and empirical evidence to offer a more effective performance management process for
SMEs.
Findings – The paper found that SMEs engage with a four-stage performance management process,
although there are some gaps between their practice and the complete process as recommended in
literature. SMEs seem to be more focussed on internal and short-term planning, whereas they pay less
attention to long-term planning. The main challenge for making performance management practice
more effective lies in an appropriate, balanced use of strategic and operational practices and relevant
measures. Therefore, managerial activities such as vision, mission and values development, internal
and external communication, change management and horizon scanning represent recommended
areas for improvement.
Originality/value – The paper suggests a number of ways to improve the SME managerial practice
to achieve a more balanced view of the whole performance process, which includes the mechanisms for
the development and implementation of good practice in performance management.
Keywords Performance management process, Organisational performance, Managerial practice,
Small to medium-sized enterprises
Paper type Case study
Journal of Small Business and
Enterprise Development 1. Introduction
Vol. 20 No. 1, 2013
pp. 28-54 Small and medium-sized enterprises (SMEs) are undoubtedly important to maintain
q Emerald Group Publishing Limited
1462-6004
strong economic growth; however, how to sustain their performance in the long term is
DOI 10.1108/14626001311298402 a big challenge. Sustainable and consistent high performance is depicted by healthy
performance management practices. For SMEs, the adoption of advanced managerial SME managerial
practices in the main business processes is key to the successful improvement of their practice
business performance and competitiveness (Cagliano et al., 2001). However, it is well
known from the literature that SMEs experience difficulties in adopting new and
innovative managerial practices (Cagliano et al., 2001). Therefore, there is a clear need
to stimulate the development of managerial capability in SMEs considering the factors
characterising these companies (Fuller-Love, 2006). 29
SMEs exhibit different managerial characteristics from larger organisations; as
Storey (1986) points out, the small firm is not a scaled-down version of a large firm and
we cannot simply look at the needs of SMEs by making small what was big. However,
the literature provides limited examples of in-depth case-study based empirical
research on performance management practice in the context of SMEs. Some authors
made use of surveys (Sousa et al., 2006; Wiesner et al. 2007; Cocca and Alberti, 2008),
while others conducted single (Vichitdhanabadee et al., 2009) or few case studies
(Hudson et al., 2001; Price and Erwee, 2006; Garengo and Bititci, 2007; Sharma and
Bhagwat, 2007). Moreover, all of the authors mainly focused on limited aspects of
performance management – for example operations management, manufacturing
management, service management, technology management, strategic management –
while none of the papers offers a broader and more comprehensive view of all the
managerial activities that are part of performance management practice in SMEs.
In order to provide SMEs with useful advice and tailored recommendations on how
to improve their performance management process, it is necessary to investigate
thoroughly the status of their current performance management practice. To
contribute to this research gap, this paper seeks to answer the following research
question: what are the areas of improvement for the development of SME managerial
practice in performance management?
In order to investigate the above broad research question, we should better
understand the gap between theory and practice in performance management (PM) and
the SME characteristics that may influence this gap. Consequently we have developed
two further research questions:
.
What are the main gaps between theory and practice in PM in SMEs?
.
What are the SME characteristics that may influence these gaps?

To investigate the above questions, we will review the PM literature to identify firstly
the managerial activities that constitute the performance management process and
secondly the SME characteristics that might influence their managerial practices in
performance management. Section 4 will provide an overview of the methodology
adopted, while in section 5 the findings of case studies carried out in 37 European
manufacturing SMEs will be presented and discussed in the light of the specialist
literature reviewed. Finally, we will outline some concluding thoughts, and draw
implications for theory and practice.

2. Conceptualising the performance management process

The importance of a better understanding of organisational performance as a process
is that it shapes the way in which we manage and sustain it. This understanding in the
field has changed a great deal over time. In the last 30 years, the field of organisational
performance has developed from performance measurement – i.e. what to measure,
JSBED how to measure and how to report the results – to performance management – i.e. how
20,1 to use the measures to manage the performance of the organisation (Amaratunga and
Baldry, 2002; Neely, 2005; Folan and Browne, 2005; Bititci et al., 2011). The literature on
performance management is eclectic, diffused and confused (Smith and Goddard, 2002)
due to the absence of any generally agreed-upon definition of “performance
management” (Andersen et al., 2006). The diversity of views on what constitutes
30 performance management is reflected in the diverse disciplines that have sought to
make a contribution to the topic (Smith and Goddard, 2002). Management researchers
in areas as diverse as human resource management, operations management, strategy,
marketing, finance, accounting, organisational behaviour, industrial economics,
psychology, political science and operational research are all contributing to the field of
performance management (Smith and Goddard, 2002; Franco-Santos et al., 2007).
Therefore, “performance management” is a phenomenon that is collectively “owned”
by the management research community (Thorpe and Holloway, 2008) and a definitive
“general theory” of performance management struggles to emerge (Smith and
Goddard, 2002).
The purpose of this section is to identify the key activities included in the
performance management process, by reviewing different definitions of performance
management that exist in the literature. Management literature has been searched by
using keywords such as “definition of performance management”, “performance
management is defined”, “define performance management”, “performance
management is”. Literature addressing only the public and non-profit sectors has
been excluded because the objective of this paper is to focus on manufacturing
companies in the “design-make-serve” value chain. The selected sources were then read
thoroughly while searching for “performance management” definitions. Whilst
reading, some cross-references that could be relevant for the enhanced specialist body
of knowledge were identified and included in the review. Then, among all the
definitions reviewed, a subset of 20 definitions was extracted according to the
principles of assuring a good coverage of the disciplines involved and choosing the
definitions that were more frequently cited and that provide an overview of the
activities constituting the performance management process. Finally, in order to
identify the activities that take place within a performance management process, the 20
definitions selected (see Table I) were content analysed.
The definitions extracted from the reviewed literature demonstrate the complexity
of the analysed subject and provide different perspectives on the concept. The authors
with a human resource background (Lansbury, 1988; Hartle, 1997; Armstrong, 2000,
2009; Pope, 2004; Aguinis, 2009) consider performance management as a way for
managing people to increase the probability of achieving job-related success and place
more emphasis on activities connected with improving behaviours, motivating,
developing skills, training and rewarding. Definitions from the operations
management field (Lebas, 1995; Bititci et al., 1997; Busi and Bititci, 2006; Stiffler,
2006; Radnor and Barnes, 2007; Barnes and Radnor, 2008; Eckerson, 2010; Hagos and
Pal, 2010; Parthiban and Goh, 2011) emphasise that performance measurement is an
important part of the process, stressing the importance of all the activities connected
with developing performance measures, KPIs and reporting. Authors in the strategy
field (Otley, 1999; Verweire and van den Berghe, 2004; Moynihan, 2008) consider
performance management as a process that helps an organisation to formulate,
Reference Definition
SME managerial
practice
Lansbury (1988) “The process of identifying, evaluating and developing the work performance of
employees in the organisation, so that the organisational goals and objectives
are more effectively achieved, while at the same time benefiting employees in
terms of recognition, receiving feedback, catering for work needs and offering
career guidance” 31
Waldman (1994) “Performance management is defined broadly here as processes oriented
towards co-ordinating and enhancing work activities and outcomes within an
organisational unit”
Lebas (1995) “Performance management is a philosophy which is supported by performance
measurement. [. . .] Performance management precedes and follows performance
measurement, in a virtuous spiral and performance management creates the
context for measurement. Thus any attempt at separating the two processes is
bound to be vain”
Bititci et al. (1997) “The performance management process is the process by which the company
manages its performance in line with its corporate and functional strategies and
objectives. The objective of this process is to provide a proactive closed loop
control system, where the corporate and functional strategies are deployed to all
business processes, activities, tasks and personnel, and feedback is obtained
through the performance measurement system to enable appropriate
management decisions. In essence, the performance management process
defines how an organisation uses various systems to manage its performance.
These systems include, but are not limited to: strategy development and review;
management accounting; management by objectives; non-financial performance
measures – informal; non-financial performance measures – formal; incentive/
bonus scheme; personnel appraisal and review. At the heart of the performance
management process, there is an information system which enables the closed
loop deployment and feedback system. This information system is the
performance measurement system, which should integrate all relevant
information from the relevant systems”
Hartle (1997) “A process for establishing a shared understanding about what is to be
achieved, and how it is to be achieved, and an approach to managing people
which increase the probability of achieving job-related success”
Otley (1999) “It will be argued that there are five main sets of issues that need to be addressed in
developing a framework for managing organisational performance that are
represented as a set of questions. [. . .] The questions themselves appear to remain
constant, but organisations need to continually develop new answers to them. This
is because the context in which the organisation is set is constantly changing and
new strategies need to be developed to cope with new operating environments. The
questions are as follows: 1. What are the key objectives that are central to the
organisation’s overall future success, and how does it go about evaluating its
achievement for each of these objectives? 2. What strategies and plans has the
organisation adopted and what are the processes and activities that it has decided
will be required for it to successfully implement these? How does it assess and
measure the performance of these activities? 3. What level of performance does the
organisation need to achieve in each of the areas defined in the above two questions
and how does it go about setting appropriate performance targets for them? 4.
What rewards will managers (and other employees) gain by achieving these
performance targets (or, conversely, what penalties will they suffer by failing to
achieve them)? 5. What are the information flows (feedback and feed-forward
loops) that are necessary to enable the organisation to learn from its experience) Table I.
and to adapt its current behaviour in the light of that experience?” Performance
(continued) management definitions
JSBED Reference Definition
20,1
Procurement “Performance measurement information is used to effect positive change in
Executives’ organisational culture, systems and processes, by helping to set agreed-upon
Association (1999) performance goals, allocating and prioritising resources, informing managers to
either confirm or change current policy or programme directions to meet those
goals, and sharing results of performance in pursuing those goals”
32 Armstrong (2000) “Performance management is a strategic and integrated process that delivers
sustained success to organisations by improving the performance of the people
who work in them and by developing the capabilities of individual contributors
and teams. Performance management is strategic in the sense that it is
concerned with the broader issues facing a business if that business is to
function effectively in its environment, and with the general direction in which
the business intends to go to achieve its long-term goals. Performance
management is integrated in two senses: 1) vertical integration, linking or
aligning business, team and individual objectives with core competences; and 2)
horizontal integration, linking different aspects of human resource management,
especially organisational development, human resource development, and
reward, so as to achieve a coherent approach to the management and
development of people”
Pope (2004) “An on-going managerial process that consists of planning performance,
managing performance through observation and feedback (coaching), and
evaluating performance”
Verweire and van “A process that helps an organisation to formulate, implement, and change its
den Berghe (2004) strategy in order to satisfy its stakeholders’ needs. [. . .] Important aspects of
performance management are setting performance goals, developing strategies,
and translating them into concrete guidelines for action (i.e., making the
strategies operational). Performance management is also about creating
commitment and motivation to realise the proposed goals. Communication plays
an important role in this process”
Busi and Bititci “Managing performance involves a cycle of clarifying business goals and then
(2006) agreeing individual objectives and standards of performance. The supporting
performance management system would include the following key elements: a
structured methodology to design the performance measurement system; a
structured management process for using performance measurement
information to help make decisions, set performance goals, allocate resources,
inform management, and report success; a set of requirements specifications of
the necessary electronic tools for data gathering, processing and analysis;
theoretical guidelines on how to manage through measures (as [. . .] points out,
performance management systems are used to apply the information and
knowledge arising from performance measurement systems); and a review
process to ensure that measures are constantly updated to reflect changes in
strategy and/or market conditions”
Stiffler (2006) “In order to effectively manage the performance of the organisation, an
enterprise must: align the strategic objectives, plans and budgets of the various
groups or departments that make up the organisation; measure historical
performance with an orientation toward financial measures of organisational
performance; report organisational performance, especially gaps between
expected and actual performance; analyse what must change to optimize
strategy and maintain organizational alignment. The closed-loop process of
aligning, measuring, reporting and analysing is the essence of organisational
performance management”

Table I. (continued)
 SME managerial
Reference Definition
practice
Radnor and Barnes “Performance management, based on performance measures and reporting, results
(2007) in improvements in behaviour, motivation and processes and promotes innovation”
Barnes and Radnor “A performance management system is one which provides information on the
(2008) matters of importance (communication), promotes appropriate behaviour
(motivation), provides a mechanism for accountability and control (control) and 33
creates a mechanism for intervention and learning (improvement)”
Moynihan (2008) “A system that generates performance information through strategic planning
and performance measurement routines and that connects this information to
decision venues, where, ideally, the information influences a range of possible
decisions”
Aguinis (2009) “Performance management is a ‘continuous process of identifying, measuring,
and developing the performance of individuals and teams and aligning
performance with the strategic goals of the organisation’”
Armstrong (2009) “Performance management is a systematic process for improving organisational
performance by developing the performance of individuals and teams. It is a
means of getting better results by understanding and managing performance
within an agreed framework of planned goals, standards and competency
requirements. [. . .] Performance management is concerned with: aligning
individual objectives to organisational objectives and encouraging individuals to
uphold corporate core values; enabling expectation to be defined and agreed in
terms of role responsibilities and accountabilities (expected to do), skills (expected
to have) and behaviours (expected to be); providing opportunities for individuals
to identify their own goals and develop their skills and competencies. [. . .]
Performance management is a planned process of which the five primary elements
are agreement, measurement, feedback, positive reinforcement and dialogue. It is
concerned with measuring outcomes in the shape of delivered performance
compared with expectations expressed as objectives (management by objectives).
In this respect it focuses on targets, standards and performance measures or
indicators. [. . .] It provides the setting for on-going dialogues about performance,
which involves the joint and continuing review of achievements against
objectives, requirements, plans. It is also concerned with inputs and values. The
inputs are the knowledge, skills and behaviours required to produce the expected
results. Development needs are identified by defining these requirements and
assessing the extent to which the expected levels of performance have been
achieved through the effective use of knowledge and skills and through
appropriate behaviour that upholds core values. [. . .] Performance management
focuses on future performance planning and improvement and personal
development rather than on retrospective performance appraisal”
Eckerson (2010) “Today, the industry seems to have settled on the generic term performance
management to describe the combination of processes and technologies that help
an organisation measure, monitor, and manage its business to optimise
performance and achieve goals. More succinctly, performance management is a
series of organisational processes and applications designed to optimise the
execution of business strategy”
Hagos and Pal “Corporate performance management consists of a set of management and
(2010) analytic processes, supported by technology, that enable businesses to define
strategic goals and then measure and manage performance against those goals.
Core business performance management processes include financial planning,
operational planning, consolidation and reporting, business modelling, analysis,
and monitoring of key performance indicators linked to strategy”
(continued) Table I.
JSBED Reference Definition
20,1
Parthiban and Goh “Performance management both precedes and follows performance
(2011) measurement. The effective conduct of PM is generally divided into two stages:
(1) performance measurement; and (2) performance improvement. Performance
improvement is the positive change which is brought about by process re-
engineering, reflecting the concern of the customer. Process improvement
34 identifies the redundant and missing performance measures, as well as identifies
potential conflicts between performance measures and targets for each
Table I. performance measure”

implement and change its goals and objectives and translate them into actions, while
quality-focused definitions focus on the improvement of processes and performance
which is brought about by process re-engineering.
Trying to accommodate and integrate the various perspectives and inputs provided
by the different disciplines involved, performance management can be described as an
iterative closed-loop process aimed to manage and improve individual and corporate
performance through continuous adaptation to the changing operating environment.
As it comes out from the definitions synthesised in Table I, the performance
management process starts with strategy development, which requires the
development of vision, mission and values and the definition of business goals and
objectives both at the corporate and individual or team level (Bititci et al., 1997; Otley,
1999; Procurement Executives’ Association, 1999; Verweire and van den Berghe, 2004;
Busi and Bititci, 2006; Armstrong, 2009; Hagos and Pal, 2010). In order to deliver these
objectives, specific business action plans should be developed (Procurement
Executives’ Association, 1999; Armstrong, 2000; Pope, 2004; Verweire and van den
Berghe, 2004; Busi and Bititci, 2006; Hagos and Pal, 2010). Resource requirements are
considered both at a company level, in terms of financial and human resources, and at
an individual level, in terms of training and development needs (Lansbury, 1988;
Armstrong, 2000, 2009). Then strategy execution phase, which consists of
implementing the planned actions and changes, takes place (Verweire and van den
Berghe, 2004; Eckerson, 2010). In order to monitor the progress towards
implementation of the strategy and the achievement of the objectives, a performance
measurement and monitoring process needs to be in place (Lebas, 1995; Busi and
Bititci, 2006; Stiffler, 2006; Radnor and Barnes, 2007, Moynihan, 2008; Parthiban and
Goh, 2011). A set of key performance indicators (KPIs) should be developed, and both
short and long-term targets for each measure needs to be planned (Otley, 1999; Busi
and Bititci, 2006; Stiffler, 2006; Armstrong, 2009). The individual targets should be
connected to individual responsibilities and aligned with the strategic goals in order to
promote appropriate behaviours (Otley, 1999; Aguinis, 2009). The set of measures
should be balanced in the sense that it should contain financial and non-financial
measures, internal and external measures, and efficiency and effectiveness measures; it
should include both measures which quantify what has been achieved (monitoring past
performance/lagging KPIs) as well as measures that are used to help predict the future
(planning future performance/leading KPIs) (Bourne et al., 2003).
The performance, both at corporate and individual level, should be regularly
checked and compared to the planned targets in order to inform managers to either
confirm or change current action plans to meet strategic goals and define improvement SME managerial
activities (Bititci et al., 1997; Otley, 1999; Procurement Executives’ Association, 1999). practice
Performance information should be used to make decisions based on measures and to
provide feedback to enable the organisation to learn from its past experience and adapt
its current behaviour (Bititci et al., 1997; Otley, 1999; Procurement Executives’
Association, 1999; Barnes and Radnor, 2008; Moynihan, 2008). At an organisational
level, this means challenging and reviewing current strategy in order to adapt to the 35
changing business environment and emergent needs (Otley, 1999; Busi and Bititci,
2006; Stiffler, 2006; Parthiban and Goh, 2011). As the strategy changes, there is the
need to review also the performance measures to keep them relevant and aligned to the
company objectives (Busi and Bititci, 2006; Parthiban and Goh, 2011).
Appraisal and feedback at the individual level offer a mechanism for accountability
and rewarding and are intended to motivate employees towards achieving goals and
promote appropriate behaviours (Lansbury, 1988; Otley, 1999; Armstrong, 2000; Pope,
2004; Radnor and Barnes, 2007; Barnes and Radnor, 2008; Armstrong, 2009). Finally,
communication plays an important role along the whole performance management
process, and using appropriate and effective communication means (i.e. what to
communicate and how) is particularly vital in order to create commitment and
alignment (Otley, 1999; Procurement Executives’ Association, 1999; Verweire and van
den Berghe, 2004; Barnes and Radnor, 2008).
Having identified a set of activities that companies should do to manage
performance, in the next section we will synthesise the characteristics that differentiate
SMEs from larger companies in order to investigate how SME characteristics may
influence the enactment of PM in SMEs.

3. Characteristics of SMEs influencing their managerial practices

A group of researchers, having examined and explored performance measurement
from an SME perspective, concluded that the majority of performance measurement
projects, although theoretically valid, do not take into consideration the fundamental
differences of SMEs, thus resulting in a poor adoption of performance measurement
practices in SMEs (Cook and Wolverton, 1995; Turner et al., 2005; Garengo et al., 2005;
Hudson-Smith and Smith, 2007; Garengo and Bititci, 2007; Wiesner et al., 2007). A key
message that emerges from this literature is that, despite the availability of various
models and methodologies supporting the implementation of performance
measurement practices, their adoption in SMEs is still low, and it is necessary to
identify approaches that meet the specific needs of these companies (Garengo et al.,
2005; Hudson-Smith and Smith, 2007). The above performance management
definitions and their constituent activities do not consider company size. However,
managing performance within the context of SMEs requires a deeper understanding of
SME characteristics. Therefore, we have reviewed the literature and identified eight
inter-related main characteristics influencing SME managerial practices.

3.1 Short-term priorities

The literature highlights that SMEs usually behave in a reactive manner; the level of
strategic planning is poor and the decision-making processes are not formalised
(Laverty, 2004; McAdam, 2000; O’Regan and Ghobadian, 2004a; Hudson-Smith and
Smith, 2007). This behaviour is coupled with an absence of dedicated resources, thus
JSBED leaving SME managers juggling multiple short-term and long-term priorities at the
20,1 same time. While they may have good intentions to set aside time to devote to strategic
long-term activities, it is all too easy to let it slip when “urgent” day-to-day operational
issues and customer needs take hold. SME managers immediately address to respond
these “priorities”, whilst long-term strategic planning slips onto tomorrow’s to-do list
( Jennings and Beaver, 1997).
36
3.2 Internal operational focus and lack of external orientation
Managerial practices in SMEs emerge mostly in response to internal operational needs,
which present themselves mainly at the start-up of the business. Improvements are not
planned, but rather are made only in response to contingent and emerging problems
and often offer short-term solutions (Jennings and Beaver, 1997). The focus on
technical aspects and operational issues seems to emerge from a conviction that the
only real determining factor for competitive success is the technical excellence of the
product and production processes. In these companies managerial tools and techniques
are perceived as being of little benefit to the company. Besides, in SMEs planning is
usually absent or limited only to the internal operational levels where performance is
measured (Cagliano et al., 2001). Internal orientation is associated with improving
short-term performance, whereas external orientation is associated with improving
long-term performance in SMEs (O’Regan and Ghobadian, 2004b). Successful SMEs
are more externally oriented and they actively scan general economic and business
conditions, technological trends and capabilities and regularly analyse their
competitive position in the market (Daft et al., 1988; Day and Schoemaker, 2005).

3.3 Tacit knowledge

In SMEs knowledge is mainly gained through experience, and it is often absorbed by
means of tacit learning (Chaston et al., 2001; Honig, 2001; Ward, 2004). A review carried
out by Thorpe et al. (2005) recognises that in SMEs, knowledge is gained through the
experience and associated tacit learning of specific individual. In contrast to the
common existence of tacit knowledge in SMEs, some recent research highlights the
importance of knowledge sharing explicitly to strengthen communication between
customers and the organisation (Reychav and Weisberg, 2009). In spite of many
researchers investigating the difficulties in moving from tacit to explicit knowledge
(Darby and Zucker, 2003; Chaston et al., 2001; Honig, 2001), some authors (Wong and
Radcliffe, 2000; McAdam and Reid, 2001; Pillania, 2008) argue the need for the adoption
of processes to minimise tacit knowledge by encouraging knowledge sharing across
management functions to gain competiveness and cost efficiency.

3.4 Looking for flexibility

Flexibility and responsiveness, opportunity creation and risk taking are common
characteristics of SMEs (Margi and Philip, 1998; Aloulou and Fayolle, 2005). This is
related to SMEs having processes that are not very structured or “engineered”. In large
companies, it is a common practice to design and implement formalised processes to
manage operational and managerial activities, whereas SMEs adopt less structured
systems and processes when decision making and managing the whole business. This
SME pattern of behaviour may be explained by the flexible nature of SMEs. However,
the lack of “codified knowledge” generates difficulties to transfer know-how quickly SME managerial
(Eriksen and Mikkelsen, 1996, p. 68), especially if the staff turnover is high. practice
3.5 Poor managerial skills
Many researchers underline that SMEs invest less in training and management
development than large companies (Mangham and Silver, 1986; Curran et al., 1996). In
these companies management practices are closely linked to the individual’s skills and 37
the characteristics of the entrepreneur. Usually they are multi-tasking while holding
multiple roles and are in charge of both operational and strategic functions. However,
they usually do not have the necessary time and heterogeneous skills, and usually
neglect the managerial issues (Fuller-Love, 2006). Therefore, entrepreneurs rarely
expand their business beyond the stage at which they can personally manage
everything themselves (Gray, 2002) and the lack of management skills obstructs
business growth and it contributes to the business failure. As Fuller-Love (2006) points
out, in SMEs management development can be seen as improving the skills of
managers rather than developing organisational capabilities.

3.6 Entrepreneurial orientation

SME managers might have good personal networks and relationships to gather
information (Lipparini and Sobrero, 1994); however, these entrepreneurs often do not
perceive the need for well formalised structures to manage performance (Hussein et al.,
1998; McAdam, 2000; Bourne, 2001; Bititci et al., 2006). For many owner-managers, the
business is basically an extension of their own ego and the decision making process is
often influenced by the will to maintain their lifestyle rather than growing or
improving the business (Banfield et al., 1996). However, this entrepreneurial orientation
should also be a positive trait. Filion (1996) studied the differences in managerial
systems that are managed by professional managers and owner managers. They found
that entrepreneurial managerial style could encourage engagement, idea generation,
and opportunity seeking as well as organisational learning and process improvement.

3.7 Command and control culture

It seems that in SMEs, success is generally credited to the individual’s and the leader’s
skills (usually the entrepreneur) rather than to any specific managerial processes or
practices (Hudson-Smith and Smith, 2007). Many SMEs are owner-managed with
entrepreneurs acting as dominant leaders who set the direction and run the business on
the basis of their experience and common sense, which generally results in a command
and control management style (Ates and Bititci, 2011).

3.8 Limited resources

Since SMEs have limited resources in the form of human resources, finances and time,
they are often overloaded with short-term cash and payment problems (Thakur, 1999;
Savioz and Blum, 2002; Qian and Li, 2003a, b; Martine, 2003; Hudson-Smith and Smith,
2007). Often, SMEs do not have the resources required to scan the environmental
aspects of their business, carrying out market research and testing of products and
services (Alon, 2004; Burke and Gaughran, 2006). As a result, this resource scarceness
restricts SMEs’ capability around external orientation. The amount of the resources
needed to develop a managerial system and managerial practices is proportionally
JSBED more onerous in SMEs than in big companies. Managers are occupying different
20,1 positions at the same time – the entrepreneurs are in charge of both operational and
managerial functions and they usually neglect the managerial activities. All of the staff
are involved in the activities of managing daily work and have no extra time for
additional activities like implementing a suitable managerial system or strategic
planning (Hudson et al., 2001).
38 In contrast to the above insights into SME characteristics, Cagliano et al. (2001)
point out that there is a need for facilitating the adoption of advanced and more
systematic management practices in SMEs to manage performance more effectively.
The firm’s ability to manage its processes, which primarily affects the way
management operates when making decisions and exercising control, determines how
well competitive advantage is sustained (Teece et al., 1997; Dyer and Singh, 1998;
Fuller-Love, 2006). SMEs seeking high levels of sustainable performance must also
demonstrate the ability to carry out a purposeful set of systematic managerial practices
in such a way that their full potential can be realised. However, the literature is falling
short in explaining what those specific managerial practices are in order to achieve
effective or satisfactory performance within SMEs, which we aim to address as a
contribution to theory and practice in this paper.
In the previous section we identified, based on definitions of PM, a set of activities
that companies should do to manage performance that are consistent with the activities
identified by Bititci et al. (2011). These include, but are not limited to:
.
developing employees;
.
coordinating operations;
.
developing and measuring financial and non-financial KPIs;
.
personnel appraisals;
.
developing and implementing strategy;
.
providing feedback;
.
change;
.
resource allocation;
.
coaching;
.
action planning;
.
communication; and
.
motivation.

We also identified the characteristics that differentiate SMEs from larger companies. In
order to answer our research questions, the next section will explore what SMEs do to
manage performance and how this compares to SMEs’ characteristics, and if so how
managerial development in SMEs could be better supported.

4. Methodology
As recommended by Johnson et al. (2003), this study is taking an activity-based
perspective as a theoretical basis that focuses on the detailed practices and activities
that relate to performance outcomes for the business. We consider Davenport and
Short’s (1990) definition of a process in order to understand the performance SME managerial
management process in SMEs: practice
. . . a process is a group of interconnected, purposeful set of activities and practices explaining
actions of individuals and organisations in order to achieve an outcome.
Subsequently, given the specific characteristics affecting SME managerial practices
listed above and the growing need for advanced and codified managerial practices, we 39
adopt a multiple case study methodology to explore this topic in real life settings.
Thus, the research design (Figure 1) adhered to those advocated by Eisenhardt (1989)
to increase the reliability of retrospective case studies (e.g. interviews conducted
following a protocol, informants selected from different organisational levels, all
responses probed extensively).

4.1 Case study selection and data collection

Case studies were carried out in 37 SMEs across Europe, i.e. Scotland, Northern
Ireland, Italy, Poland, Turkey, Germany, Malta and Czech Republic. The selection
process aimed to give insights from a spectrum of SMEs in the manufacturing sector
across Europe in order to explore the patterns of behaviour that emerged.
Using a research protocol across the research team allowed the researchers to gather
data in a coherent and consistent way (Eisenhardt, 1989; Yin, 2003; Easterby-Smith
et al., 2004). Case study data were collected through 232 semi-structured face-to-face
interviews with senior managers (i.e. MD/GM and direct reports) employed in the 37
SMEs involved in this study. These face-to-face interviews, conducted at multiple sites,

Figure 1.
Research methodology
and research process
JSBED lasted 1-1.5 hours each. Researchers toured the manufacturing plants and conducted
20,1 follow-up interview sessions as necessary to ensure comparable information across all
cases. The interviews were intended to allow free-flowing conversation between the
manager and the researcher about their roles and responsibilities within the
organisation and the practices they carried out in managing performance. When the
free-flowing conversation ceased, the protocol provided a list of open “prompt”
40 questions, such as:
.
What do you think are the biggest challenges to the business over the next few
years?
.
What does success for the business look like?
.
How do you manage your area of the business ongoing?
.
What performance management practices are used?
.
What sort of performance information is used? (link with success)
.
How do you identify the performance measures?
.
How often do you review performance measures for accuracy/appropriateness to
current needs?
.
How do you use these measures to help you to do your job?
.
Where do the data come from?
.
Who is the information communicated to and how?
.
How do you improve performance of individuals? Staff appraisal, etc.?

Throughout the interviews the emphasis was on capturing what the managers did
(i.e. the practices) and to what purpose they undertook these practices (i.e. the outcome).
Based on the conceptual framework as presented in Figure 2, we created a SPSS
database that included binary coding (1 if the managerial practice was mentioned in
the interview, or 0 if there was no mention of the managerial practice). The coded
activities are, for example, Check KPIs, Check staff performance, Communicate change,
Plan improvement activities and so on. We have used descriptive statistics
(i.e. frequency of occurrence) and qualitative pattern searching (i.e. cognitive
mapping) as data analysis techniques that lead the findings presented in the following
section (Jick, 1979).

5. The main gaps between theory and practice and their relationship with
SME characteristics
A great amount of qualitative data were analysed and used to study SME performance
management practices in the companies investigated. The frequency of occurrence for
individual practices is summarised in Figure 3 and the assessments are based on
frequency of occurrence in coding of interview data.
PM is an ongoing, cyclical process. It should be a continuous process that is very
much impacted by the operating environment with the sole purpose of facilitating
various managerial practices and activities directed towards achieving the
organisational goals and objectives (Kaplan and Norton, 1996). As a consequence it
should evolve over time according to the changing needs of business (Bititci et al., 2000;
Garengo et al., 2005), to support the firm in adapting to its competitive environment.
 SME managerial
practice

41

Figure 2.
Generic SME managerial
activities within the
performance management
process

When we compare the SMEs activities identified in practice with the activities that
emerged from theory, we find that the four phases of the PM process described in the
literature exist in SMEs. In fact, all the activities constituting PM according to the
literature are present in the list of activities cited by companies as part of their PM
practice. However, it seems that the PM process as enacted in SMEs is incomplete and
some key activities as recommended in the literature are not adequately emphasised. In
fact, there are certain activities within the PM process that are carried out in less than
half of the SMEs investigated. Figure 4 shows these gaps between the SME practices
and the theory as well as the SME characteristics influencing these gaps.
As discussed before, it can be said that the core of any PM process is a combination
of certain steps/phases, which do the work of planning, execution and review (i.e. PDCA
cycle; Figure 4). The central idea behind any PM process is that the phases form the
core of any PM process and the absence of even one of these phases will lead to the
failure of the whole PM process. Our study showed that there is evidence that SMEs
follow formally or informally all the steps in the PM process. Now we will discuss each
stage in detail, highlighting the gaps.

5.1 “Plan” phase

This stage involves analysing the strategic direction of the company together with
setting goals and objectives that should be based on both internal and external
environmental analysis. Another important feature of this stage is that it also
incorporates the planning for the whole PM process. How well this stage is completed
will determine the effectiveness of the remainder of the PM process ( Jennings and
JSBED
20,1

42

Figure 3.
Performance management
practices in the
investigated SMEs
SME managerial
practice

43

Figure 4.
The gaps between theory
and practice in PM and
their relationship with
SME characteristics
JSBED Beaver, 1997; Simons, 2000). Notwithstanding the relevance of this phase, we have
20,1 found that SMEs put less emphasis on setting high-level vision, mission and values,
and on horizon scanning as well as planning for required change projects.
The empirical evidence is consistent with the literature summarised in the previous
paragraph. “Short-term priorities” and “look for flexibility” are key SME
characteristics and they obstruct the development of effective mission vision and
44 values. The focus on short-term priorities leads to short term-vision in SMEs that
generates a managerial control disconnected with company strategies (Brouthers et al.,
1998). Planning activities are perceived by entrepreneurs as cause of bureaucratisation
and an obstacle to the flexibility of SMEs, particularly if they are formalised using
managerial systems (Hussein et al., 1998; McAdam, 2000). Technical excellence in
products and operational processes is often perceived as the only critical factor in
SMEs and, consequently, all the efforts are on internal operational activities at the
expense of the analysis of external factors affecting the business. However, as
suggested by O’Regan and Ghobadian (2004b), internal orientation leads to short-term
performance, and external orientation to long-term performance.
It is largely accepted that SMEs are burdened with an entrepreneurial orientation,
where performance measures are considered as constraints to change ( Jennings and
Beaver, 1997; Ghobadian and Gallear, 1997; Brouthers et al., 1998; McAdam, 2000;
Jarvis et al., 2000; Franco and Bourne, 2003; Fuller-Love, 2006; Garengo, 2009). As the
literature underlines, SME managers and entrepreneurs do not have enough skills to
manage strategic functions, thus obstructing their managerial development
(Fuller-Love, 2006; Gray, 2002).
Based on the gaps between SME practices and the expert literature, we recommend
that the external operating environment should be scanned regularly to identify and
monitor factors that may have an impact on SME businesses (Porter, 1985; Daft et al.,
1988; Camillus, 1996; Choo, 1999; Day and Schoemaker, 2005; Martin et al., 2009).
External orientation should be implemented through effective internal/external
communication plans. Regular and appropriate cross-functional communication of
change projects, strategic objectives, performance results and their implications should
be established by using a variety of channels to reach all stakeholders. This integrated
approach will also help to motivate and enable the organisation’s members to develop a
common understanding and to work towards common goals (Kotter and Cohen, 2002;
Scholes, 2005; Zhang et al., 2006).

5.2 “Do” phase

A sound knowledge of the SME’s operational environment, strategic objectives, its
strengths and weaknesses are prerequisite for this stage, and these requirements
should be fully taken care of in the planning stage. Because of the ever-changing
operating environment, planning for PM and executing the plans are a continuous
process that involves continuous communication with stakeholders. This
communication acts as an early warning signal to update plans in a timely manner
so as not to jeopardise targeted performance results.
The literature suggests that high performing SMEs generally use some form of
internal customer/employee and supplier networks, have very open communication
systems, have company-wide discussions of customer needs and problems, have
cross-functional meetings, have monthly meetings with the entire company, and set up
performance measurement systems that are designed to initiate and reward SME managerial
market-oriented behaviours among employees (Martin et al., 2009). However, practice
effective communications in SMEs can be obstructed by tacit knowledge, i.e. in
SMEs knowledge is mainly gained through experiential learning and it is often
absorbed by means of tacit knowledge without any formal communication process
(Chaston et al., 2001; Honig, 2001; Ward, 2004).
For example, more than half of the SMEs investigated in this study demonstrated 45
that their PM practices were lacking effective management of communications with
internal and external stakeholders. One manager said that:
. . . the main challenge we have is providing channels of communication to prevent technical
decisions and the progress of our projects to be interpreted personally. We don’t have any
visual display of performance in the factory and the general consensus is that it doesn’t lead
to higher motivation among the workers. Our workers are used to being told to have a job
completed within a set period of time and for the most part this is achieved [. . .]
communication across our company is more hit-and-miss, often there is confusion and tasks
are repeated unnecessarily. The priorities are not clear regarding finishing an existing project
or beginning work on new orders.
Similarly, regular wide-ranging interaction, both formal and informal, with current or
potential customers and suppliers should be established as appropriate (Macpherson
et al., 2004; Martin et al., 2009). There should also be controlled interaction with
competitors and trade unions where it benefits the business, e.g. collaborative lobbying
of government, avoiding trade union activity, memberships in trade organisations
(Lavie, 2006; Teece, 2007).
The empirical data confirm that the traditional command and control management
style still affects many SMEs, as a result adversely affecting their performance
management practices. As is commonly seen in hierarchical and command and control
organisations, centralisation of control is managed top-down without any standard
process (Davenport, 1998), thus obstructing SME managerial growth. Also, poor
communication of change initiatives and strategic objectives to stakeholders hinders
operational effectiveness. The absence of communication of strategy is consistent with
SMEs’ internal operational focus (Tallon et al., 2000). This behaviour is also reinforced
by facing financial and human capital constraints that limit SMEs’ ability to manage
change. Also, the managers of some SMEs are risk-averse, especially as their
companies mature; they become unwilling to introduce major changes because of
preferred life style and family considerations (Gray, 2002).

5.3 “Check” phase

This stage involves qualitative and quantitative checking, monitoring and evaluations
of the results of the PM execution. It is this stage that gives us a real understanding of
how firms are performing against set objectives. KPIs should give a clear indication of
progress towards achieving goals and objectives and should help to identify the
priority areas that require immediate attention. This stage should cover checking a
balanced set of KPIs that are both internally and externally facing and not only based
on financial performance (Bititci et al., 1997). For example, Ledwith and O’Dwyer (2009)
highlight that SMEs should keep a closer eye on their competitors to improve their
understanding of what competitors are offering, why customers do or do not buy
JSBED competitors’ products, how they attract customers and how satisfied customers are
20,1 with competitors’ products.
Managerial practices such as checking KPIs and monitoring suppliers and
customers have no meaning if they are not closely linked with a systematic monitoring
of competitors and the macro environment. As the literature points out, the success of
SMEs in today’s turbulent markets depends largely on their ability to engage in
46 environmental scanning activities in order to understand the behaviour of external
stakeholders and trends (Beal, 2000; Qiu, 2008).

5.4 “Act” phase

The PM process phases as discussed above provide a well-defined path for an effective
PM process in SMEs. In the final stage, followed by reviewing progress and KPI
results, priority actions should be acted upon. The required corrective actions and
improvement initiatives should be in place. In the SMEs investigated, we have found
that KPI results are not used effectively to review and update the strategy, vision and
mission of the company. For example, a manager highlighted that:
. . . we collect only financial information using our balance sheet. This information is used by
our General Manager to monitor the profitability and the cash flow. Profitability is checked
monthly but it is rarely used to change operational activities or business strategy.
Consequently, our findings confirm the tendency of SMEs to dedicate most of their
attention to financial and operational activities within the PM process with the
expectation of gaining short-term financial benefits. They often neglect external and
internal communications, identifying and scanning external factors that may affect
their business.

6. Conclusions
The increasing significance of SMEs for macro-economic stability, coupled with
growing interest in improving short- and long-term performance, provides the ideal
opportunity to investigate good practices within the PM in a SME context.
This research study confirms the need for more effective performance management
based on SME practices and competencies that are influenced by their characteristics.
SMEs seem to be more focussed on internal and short-term planning, whereas they
spend less effort in possessing a long-term view on internal and external issues, such
as communication, competition, sustainable competitive advantage, strategic market
positioning and horizon scanning. SME managers should become more conscious that
development on the path to short-term performance does not lend itself simply to
changing at a later stage to the long-term path.
In order to support the development of managerial practices to improve
organisational performance, we have identified some key areas of intervention for
SME support agencies, advisors and consultants. Planning seems to be the most
crucial phase of the identified closed-loop process. SMEs show difficulties in
developing effective mission, vision and values, and most of them have never
formalised their strategies. However, reference frameworks available in the literature
for the implementation of a performance management system are based on a top-down
approach, i.e. they establish performance measures starting from the identification and
formalisation of the company’s mission and vision (Cook and Wolverton, 1995; Hudson
et al., 2001; Garengo et al., 2005; Turner et al., 2005; Hudson-Smith and Smith, 2007; SME managerial
Wiesner et al., 2007) without considering that SMEs have difficulties in managing practice
concepts such as mission and vision. To support the development of managerial
practices first of all, we should support SMEs to unveil their strategy without forcing
SMEs to adopt the same complex methodologies used by large organisations, but
proposing an approach that complies with characteristics and managerial culture of
SMEs. The literature is developing in this direction; see, for example, the bottom-up 47
approach proposed by Garengo and Biazzo (2012) to guide entrepreneurs and
managers to unveil mission vision and strategy. However, further research should be
carried out to develop an SME-friendly, visual strategic framework for guidance.
A second key barrier that SMEs should tackle to develop their managerial practice
is the difficulty in managing the internal and external communication process. How
can firms develop their performance practices without communicating with employees,
customers and suppliers? It is clear that this is an internal contradiction that it is
sometimes determined by distorted performance management practices, i.e. the
collection of information to blame employees for negative performance, instead of
improving the overall company performance. This also means to tackling the
traditional command and control management style. There is a clear need to reinvent
the management style in SMEs to move towards empowered and information-based
organisations, similar to the recommendations made by Gary Hamel (2009). However,
given the large diffusion of command and control approach in SMEs and the difficulty
in changing that behaviour in the short term, the entrepreneur’s commitment to the
continuous development of managerial practices becomes crucial.
Thirdly, special attention should be given to the planning and communication of
internal and external change initiatives. If top management does not pay attention to
managing change effectively, the PM process will inevitably be affected. The main
challenge is that critical change steps, particularly the soft aspects of change, are
omitted. SMEs should take a more strategic and long-term view of change rather than
seeing it as project management only. Changes should be driven proactively rather
than waiting until change is imposed by external forces such as customer complaints
and changes is legislation (Gray, 2002; Burnes, 2004; Ates and Bititci, 2011).
It is essential to note that the suggestions presented in this paper are intended to be
neither exhaustive nor absolute. Rather, they are offered in an attempt to stimulate
thought and discussion regarding a past and emerging body of research on the
organisational development and performance management of SMEs. Since the main
limitation of this study is the small size of longitudinal samples involved, a first
direction of future research should be the investigation of a smaller sample of SMEs in
more detail over a period of time in order to be able to understand how SMEs can
overcome the barriers arising from their context to be able to implement a complete,
effective performance management process.

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About the authors

Aylin Ates is an industrial engineer and has worked in large electronics and pharmaceutical
companies in the areas of supply chain and process management. She completed her PhD in
strategy management in manufacturing SMEs. She has extensive R&D and consultancy
experience gained through working in several major international projects funded by the
European Commission FP7 Programme and Engineering and Physical Sciences Research
JSBED Council (EPSRC) in the UK. Aylin Ates is the corresponding author and can be contacted at:
aylin.ates@strath.ac.uk
20,1 Patrizia Garengo is an Assistant Professor at the University of Padua. She holds a PhD in
Industrial Engineering and she has wide practical experience gained through working with
several Italian SMEs. Currently, her research is focused on performance management as a means
of supporting improvements in organisational capability in SMEs. She has made a significant
contribution to the field of performance measurement and organisational development in SMEs,
54 publishing over 50 papers in international journals and conferences.
Paola Cocca is a Research Fellow at the Department of Mechanical and Industrial
Engineering, University of Brescia. She is an industrial engineer and holds a PhD in Performance
Measurement in SMEs. Her research focuses broadly on operations management, in particular on
performance measurement systems, waste management and risk management. She is author of
several publications in international journals and international conference proceedings.
Umit Bititci is the Professor of Technology and Enterprise Management at the University of
Strathclyde and Director of the Strathclyde Institute for Operations Management. As an
academic, consultant and practitioner, he has over 25 years of experience in performance
management, business process management and change. His work is published extensively in
leading international journals as well as practitioner-focused publications.

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