Network Ties Change During Firms’ Tipping Points: Cases Of Smes In Malaysia

Siti Sarah Omar ,
Nurul Indawati ,
Nor Aziati Abd Hamid ,
Khadijah Md Ariffin

Abstract

SMEs play an important role in the expansion of the Malaysian economy. Scholars believe that network ties - whether strong or weak offer various advantages to the entrepreneurs at different stages of the business development that allows entrepreneurs to access various resources and opportunities eventually achieving growth and competitive advantages Recent studies has theorized firm growth and development based on the critical problems or the concept of tipping points. This study makes significant contribution to our understanding of the way how these entrepreneurs utilize networks during dynamic business situations and at these tipping points or critical problems. There are two objectives of the study that are: 1) To identify the tipping points faced by the small entrepreneurs and the roles of network ties throughout these problems. Secondly, 2) To explore network ties change during firms’ tipping points. This study is a qualitative study that involves eight firms of SME manufacturing-based in the Malaysian Southern Part. An in depth interview technique has been utilized to gather date for this study. There were eight owner-managers involved and their strong and weak ties each for the case. This study not only contributes to the network and growth literature which predominantly employs a quantitative approach; but also provides empirical evidence to Malaysia SMEs’ entrepreneurial network studies, hence offering recommendations for policy and practice in the field of entrepreneurial support in Malaysia and other developing countries.

Keywords: Networkchangetipping pointssmall firms

Introduction

SMEs play an important role in the expansion of the Malaysian economy (Porter & Kramer, 2019). Considering the speed of the development of these SMEs, the Malaysian government has instigated numerous initiatives, schemes and facilities to help boost the SMEs’ performance by the establishment of various agencies to facilitate their growths (Senik, 2010; Zeebaree & Siron, 2017). Among the various government support programmes are Business loans and grants, training and technical assistances and etc. Despite these facilities and initiatives, Malaysian SMEs are still facing a range of challenges and tipping points to enhance their business performance and sustainability (Saleh & Ndubisi, 2006). In his investigation of the challenges encountered by the entrepreneurs in the Asian countries that include Malaysia, Thailand and Philippines, Habaradas (2007) found that the array of challenges includes improving the product quality, intensifying the entrepreneurial activity, emphasizing the innovation and technological advancement, expanding the utilization of the government schemes and offers, and developing the human capital. These challenges can be addressed through networking activities and can be addressed by the changing roles of network ties.

Network Change

There are many reasons why network change and this is because of the need for getting more resources (Landqvist & Lind, 2017; Zimmer, 1986), the context and nature of business (Brass et al., 2004), and the connection with social classification and recognition (Johannison, 1987). Obtaining the required resources is becoming vital challenge of an organisation, therefore necessitate the change of network to adapt with the challenge (Ramadani et al., 2015). In similar vein, Hite (2005) asserted that the change and development in network ties influence firm development and their resources gain and possession.

Based on the network literature, many scholars have different contributions on the perspective of theoretical network. Basically, there are two prominent theoretical studies conducted by Larson and Starr (1993) as well as Hite and Hesterly (2001) that have made significant and strong contribution to network research. Larson and Starr (1993) proposes that a firm has to have a network model formation. This theory has been developed based on the theories of social and ‘socio-economic exchange’. The model delineates three stages of forming of an organization that include ‘single-dimensional dyadic exchanges, multi-dimensional exchanges and multi-layered inter-organisational exchange relationships’. There are three activities happen at each stage and they are discovering, making choices and adopting the ties. It is also argued that the firm strand all resources during business formation.

During the first stage, the scholar proposed that an entrepreneur or owner/manager will refer to ‘social/affective relations’. These relations are those who are among the family members, friends and/or friends from previous working place. The entrepreneur use this relations or network to acquire information, physical resources, financial capital, and also social support to change business ideas to become reality. Whereas during the second stage, it shows a change from transformational of one-dimension to two-dimensions exchange. It shows that the network ties that was initially considered as social/affective ties get evolved in socio-economic exchanges. ‘The stage three layers the exchanges into three; those are multiple functions, integration activities and organisational plus individual levels of exchange’. Lastly, the third stage was the importance of inter-organization element. This has been asserted by Rasmussen et al. (2015) as a change from personal network to an organizational network. The network relationship are now considered as organizational stakeholder network ties and no more a personal network.

Firms’ Tipping Points

The term tipping points is referred to the set of problems a firm needs to encounter in order for them to stay growing and sustained in a competitive and dynamic market. The term was proposed by Phelps et al. (2007); following Gladwell (2006) who was the first to introduce the term to explain the problems encountered by an organization. Phelps et al. (2007) affirmed, “Tipping points are encountered during growth or are the consequence of environmental changes, and will depend on the specific context of the firm in its environment” (p. 8). The scholars then improve the concept of tipping-points according to the organizational problems namely; “people management, strategic orientation, formalisation of systems, new market entry, obtaining finance and operational improvement” (Phelps et al., 2007, p. 8).

Phelps et al. (2007) study is being gradually acknowledged by latest research. It is definitely worth taking up this framework/model on board given that, so far, none has entrepreneurship study explored the changing roles of network ties during firms’ tipping points. If there is, the particular study was a theoretical paper that focuses on the review of the element of tipping points (Omar et al., 2015). Therefore, this study would fill the gap to address the necessity to investigate the different functions of network and change and/or development of entrepreneurial networking ties during the tipping points. Even though Phelps et al. (2007) study of main tipping points are incorporated, this will not bound only to the variations of tipping points that may appear from this current study; so, indicating the nature of exploratory study.

Problem Statement

Athukorala (2017) found that networking is vital for the Malaysian SMES to venture into the international market. They also found that, through networking, Malaysian SMEs are better able to gain access to the sets of support and assistance provided by the government agencies to penetrate the international exportation market. Scholars believe that network ties - whether strong or weak offer various advantages to the entrepreneurs at different stages of the business development that allows entrepreneurs to access various resources and opportunities eventually achieving growth and competitive advantages (Omar, 2015; Reese & Aldrich, 1995).

Even though many studies have been investigating network change in entrepreneurial perspective (such as, Adler & Kwon, 2002; Jack et al., 2008; Schutjens & Stam, 2003), they concluded that the life cycle process based on stages offers worthy explanations for network change, however there is an absence of rich understanding of network change in corresponding to the tipping points of firms. Thus, this current study is embracing the challenge to attend to this issue; by exploring the characteristics of the network change through exploration of the following questions: why, when and how ties change.

Research Questions

Specifically, the research questions of this study are:

Research Question 1

What are the tipping points faced by the small entrepreneurs and the roles of network ties throughout these problems?

Research Question 2

How network ties change and develop during specific tipping points of the firms?

Purpose of the Study

This study took into account the social context of the Malaysian Bumiputera entrepreneurs and their relational embeddedness in the relationships between the entrepreneurs and the social networks of various parties such as family, friends, suppliers, customers, employees, banks, government agencies and so forth. This study adapt the similar stance with the work of McKeever et al. (2014) on the importance of context and community in entrepreneurial networking study. The purpose of this study is to examine the changes of network ties during firms’ critical problem or their specific tipping points.

Research Methods

This present study is a qualitative in nature that involves eight SMEs in the Southern region of Malaysia. These SMEs are all eight manufacturing firms, which are adequate to elucidate the rich data in qualitative study (Omar, 2015). The in-depth interview technique was used and have been conducted with the owner-managers of the firms. A purposive sampling was conducted, which includes SMEs, manufacturing companies, and food industry in Johor. The interviews were analysed through the method introduced by Miles and Huberman (1994). Thematic analysis was employed for identifying, analysing and reporting themes within data. Reflexivity has also been carried out to ensure that the analytical process is performed correctly (Corbin et al., 2015). The data triangulation has been performed by questioning and/or interviewing the network relationships who are regarded as strong and weak ties. It has presented the analysis of in-depth interviews with 48 respondents of eight entrepreneurs, and their strong and weak ties that range from the spouses, family members, customers and suppliers, government agencies clubs/associations as well as cooperatives.

Findings

Objective 1: The Tipping Points of the Cases and the Roles of Strong, Weak and Dormant Ties

These cases undergone various types of tipping points while managing their businesses. They could be categorised into four major tipping points; namely, financial problem, export failure, competition, and environmental-related problems such as economic recession, flash flood and shop burning. Table 1 below shows the matrix of the cross-case tipping points, the main roles of the network ties and the effects of the tipping points on the performance and/or growth of the firms. The discussions are grounded on a priori themes identified earlier while adapting new emergent themes in exploring the change in entrepreneurial network as below.

Table 1 -
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Objective 2: The Network Change during the Tipping Points of the Cases

Theme 1: Financial Difficulties

The firm experiences several financial difficulties/problems, and they are classified into three, namely internal financial problem, external financing problem, and financial problems resulted from previous incidents. Burns (2016) asserted that managing finances and looking for financial funding are precarious issues to entrepreneurs. The findings have shown that all cases suffer the same concerns.

The findings found that cases faced insufficient working capital (happened in most cases, severe to Cases 1 and 3). Besides, they lack understanding in managing their money (All cases except to 1, 3 and 4). The second problem is the complexities and the deferment in acquiring the external finance (faced by Case 1). The loan application was submitted to SME Bank; however, due to red tape, it was delayed being approved. Eventually, this has caused countless more problems for the entrepreneurs who involved in factory renovation development process. The final/third problem was the effects of external events occurred and immediately need to be solved by the entrepreneurs, i.e shop burnt down (Case 2), flash flood struck (Case 8) and economic downturn (Cases 4, Case 6 and Case 8). Most of these problems encountered by the entrepreneurs were triggered by the environmental factors.

Almost all cases rely on close familial and close friends in their early business commencement. Findings of this study reveal that reliance on these close relationships was due to the incapacity to offer a collateral when pursuing the bank loan, and this is supported by Cassar (2004). These cases after some time turn their dependence from closed contacts to banks for a huge amount of money, but due to red tape it took longer process thus encumbering the entrepreneurs seriously. Therefore, the mixed functions of ‘strong ties’ (close friends) and ‘weak ties’ (employees and outsiders) are manifested. This is consistent with the bootstrapping strategy as in Brush et al. (2008) and Anderson et al. (2005).

With regard to the deferment in getting loans from banking institutions, it has kindled a connection with the bank officer. This was due to the recurrent contact requesting about loan endorsement, so signifying a new network formation. Case 1 mentioned that the bank officer is a kind hearted person and so much willing to help until the he received the loan approval. As he said,

‘I was so relieved that the guy who works in the bank that I came to see often was willing to help me to speed up the loan approval process and released the loan in less than six months…’ (Case 1).

Theme 2: Entering New Market

The study found that there are two issues in entering new market. Firstly, failure of exporting goods and products and the endeavour of the cases to enlarge the market via business development programs. Secondly, the identifying new locations for new market penetration.

Two cases (Case 3 and Case 5) narrated that the export failure was the most tipping point situation they encountered. Findings revealed that these cases/firms make the most of an exporting agent/representative to export their products. Case 5 failed was due to the incompetent of the agent to obey the Brunei’s packaging policies and requirements. While Case 3 failed because of his incompetence to fulfil the volatile regulations and environments of the Vietnam government as he expressed the struggle as below:

‘My export to Vietnam failed; at that time, everything was ready, but my products could not enter the country for the policies are inconsistent, and the people there practiced bribery enormously, it is difficult to get an authorisation to get through the border. For example, today they ask us to pay RM10,000, then another day they ask for RM20,000’ (Case 3).

Theme 3: Strategic/Tactical Orientation

The findings of study reveal that four cases (Case 1, Case 2, Case 4 and Case 6) have committed to strategic/tactical planning and development of the business, thus revealed in the change and revolution of network ties. It also shows that for Case 1 and Case 2, the network ties development and regression are apparent in two conditions that are: during the business in the developing stage, and due to the maturity level of the entrepreneurs. They always find mentor to get new knowledge and skills to develop business strategies. Changes happen in entrepreneurs in dynamic nature in terms of learning, experiences, capabilities, and emotions intelligence. Subsequently, network ties change that he selects is corresponding to the strategic/tactical demand of the firm to make sure that the firm continue growing. This scenario is happened to Case 1, his wife declared that

‘…I can see the change in my husband as the business grows, he is much more knowledgeable and puts more thought into the strategic ways to increase the sales of the firm, including finding the best individuals to implement those strategies…’ (Strong Tie of Case 1).

This finding is consistent with findings of Hite (2005) who asserted that the nature of change and development of network actors/entrepreneurs is a strategic stimulus of a firm. Hite (2005) contended that change and development happen in themselves the entrepreneurs as they learn, repilicate and what is important when they make adjustment and modification on their network strategies and plans to become accustomed with both the internal and external situations and/or environments. Findings also reveal that, Cases 4 and Case 6, have proven that network changes happen when they initiate the price comparison and judgement strategy. They start new affiliations and dealings with other business owners and dealers, as Case 4 spelled out;

‘If we are alone and we don’t share information among our friends and other entrepreneurs, we will be cheated on the price of the supplies; this is related to the story that I told you about the Malay-Chinese barrier, that’s why it is important to have a relationship with a few suppliers to compare the prices…’ (Case 4).

Theme 4: People Management

Findings reveal that a conflict with a partner (Case 1) who rejected his own family member (uncle) who played a role as his business partner for a year) is dealt with people management. This due to the dispute among them in making decisions (process of decision making) on specific matter that is the business’s production and operations. Though many studies found that family ties/members are considered strong and convincing in many situations, this uncommon situation/scenario shows that family is not all the time becoming the key for business growth, because they can turn out to be a hindrance to business success. The end of the partnership was taken deliberately. This was recorded below when entrepreneur of Case 1 and his previous business partner revealed that,

‘The business sharing lasted for only a year, we could not work together anymore, and lots of issues arose such as conflicting ideas. I decided to end it’ (Case 1).

‘The partnership ended due to no understanding. But that’s okay for me…because since then, I made contacts with other entrepreneurs in the industry and joined in the Halal Hub Network in Melaka to develop my own factory in making kebab’ (Case 1’s ex-business partner).

Theme 5: Rivalry and/or Competition

Almost all firms studied faced stiff and vigorous competition from many parties, such as, competitors in the same context of the industry, the Chinese or Malay businesses, hypermarkets and importers. Without doubt in Malaysia, the Chinese businessman are more reputable, established and competitive than the Malay businesses. Due to the fact that, the Chinese owns robust network system, called a ‘Guanxi Network’ or ‘Bamboo Network’, they are collaborating and cooperating with each other to conquer the market (Omar et al., 2016). This stiff competition was encountered by Case 3, Case 4 and Case 6. The network ties play their roles to face these challenges.

Theme 6: External Events/Environments

Cases 2 and 8 enhanced their network ties when they faced ‘shop burnt’ (Case 2), ‘flash flood struck’ (Case 8), and ‘economic downturn’ (Case 1, Case 3, Case 4 and Case 8). To illustrate, the daughter of Case 2 (the strong tie) asked help from many agencies including the government, previously these agencies were considered as ‘dormant ties’. Relationships with these agencies were after that being stimulated and instigated due to that particular tipping point and/or critical problem, and the network relationships afterwards getting even closer. Besides that, the ‘flash flood’ that struck the business location in 2007 for Case 8 has triggered the entrepreneur to hunt for external help and also has began relationships and networking with many other network ties. As the daughter of Case 2 said,

‘During the perilous time of the business, I saw my father was so stressful and worried, I became so worry about his health condition and that is basically one of the reasons I get involve in the business, to help out the business to walk out from the sufferings and disorganizing (Strong Tie 1, Case 2).

Table 02 shows the summary of themes.

Table 2 -
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Conclusion

The findings presented distinctive evidence concerning Malaysian Bumiputera entrepreneurial network change and development and the tipping points that trigger their evolutions. As argued earlier, taking up tipping points framework would offer profound analysis of how, why and when network ties develop and change. The findings of the study discovered that the financial difficulties/problems, entering new market, strategic and/or tactical orientation and people management as propositioned by previous scholar are the tipping points/critical problems that prompt or trigger network evolution as experienced by all of the cases. Two new emerging themes that have been identified are the rivalry and/or competition and external/environmental factor. All in all, this study not only contributes to the network and growth literature; also contributing to the methodological robustness of using the triangulation of data collection (taking the entrepreneur, strong ties and weak ties as interviewees) but also provides empirical evidence to Malaysia SMEs’ entrepreneurial network studies. Hence, this study is offering recommendations for policy and practice to Malaysia and other developing countries in the field of entrepreneurial support especially during specific tipping points/critical problems. This study proves that it is inevitability for the government of Malaysia especially the Ministry and other agencies to give more focus and educate the knowledge of the value and implications of network relationship towards these Bumiputera entrepreneurs. Despite the fact that government agencies have provided significant support programmes to these entrepreneurs, more significantly, ministry and government agencies have to work on the platform for networking and coach them with necessary skills including building and maintaining relationships with key ties in their business and take into deliberation completely about their network actors, its change and development and finally the reasons of progression and regression of these network. It is hope that with the awareness, knowledge and nurturing network relationship skills to these entrepreneurs allow them to manage their entrepreneurial network efficiently and effectively thus utilising them systematically in enhancing their business growth.

Acknowledgments

We would like to express our greatest gratitude to the Research Management Centre Fund H097 of Universiti Tun Hussein Onn Malaysia, Batu Pahat Malaysia for funding the publication.

References

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About this article

Publication Date

06 October 2020

Article Doi

https://doi.org/10.15405/epsbs.2020.10.53

eBook ISBN

978-1-80296-087-7

Publisher

European Publisher

Volume

88

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-

Edition Number

1st Edition

Pages

1-1099

Subjects

Finance, business, innovation, entrepreneurship, sustainability, environment, green business, environmental issues

Cite this article as:

Omar, S. S., Indawati, N., Abd Hamid, N. A., & Md Ariffin, K. (2020). Network Ties Change During Firms’ Tipping Points: Cases Of Smes In Malaysia. In Z. Ahmad (Ed.), Progressing Beyond and Better: Leading Businesses for a Sustainable Future, vol 88. European Proceedings of Social and Behavioural Sciences (pp. 604-613). European Publisher. https://doi.org/10.15405/epsbs.2020.10.53

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