We choose an empirical investigation as it puts special emphasis on the affiliated research leading to the development of a strategic risk management framework in terms of operational and organizational aspects (Islam ; Glaser and Strauss ; Luis et al. ; Mills et al. ; Pettigrew et al. ). The empirical investigation was carried out by applying a multi-method approach (combination of case study and survey methods), called triangulation, which provided a relatively potent means of assessing the degree of convergence, as well as identifying divergences, between the results obtained (Islam ; Brewer and Hunter ; Jick ). In the triangulation method, the survey results improved the authors’ understanding of the particular phenomenon (relationship between potential disturbances and their associated risks in this case). On the other hand, the case studies added to a more holistic and richer contextual understanding of the survey results. Thus, the multi-method approach is believed to be enhancing the credibility of the research results while reducing the risk of observations reflecting some unique artifact (Brewer and Hunter ; Denzin ).
Data collection methods and sample
For the empirical investigation, standard questionnaires were developed and verified by a panel of academic experts and subsequently by an industry focus group in a pilot study. The questionnaires were designed to explore the risk determinants (potential disturbances) and risk indicators (detrimental parameters to business performance) relating to existing practices in the studied organizations. The focal points of the questionnaire were (1) production-related activities associated with risks; (2) quality, reliability, and health- and safety-related issues of both assets and personnel; (3) major activities in the supply chain networks; and finally, (4) strategic issues relating to the current practices in risk management.
There were two phases in the data collection process. In the first phase, questionnaires were sent to 55 manufacturing SMEs (to 165 individual management personnel, to three tiers of management of each organization), and in the second, to 157 SMEs (to 417 management personnel). The respondents were given 1 month to return the completed questionnaires while an additional 3 weeks were allocated for telephoning and personal interviewing to acquire missing data in incomplete questionnaires. Out of 212 SMEs, 11 SMEs declined to participate in the questionnaire survey due to their organizational restructuring, busy scheduling of the management, absorption in other business sectors, or some other undisclosed reasons, though they mentioned their keen interest (in the response letters) to the research subject. Four sets of questionnaires were sent back to the researchers not finding the addressee. Five participating organizations provided partially completed questionnaires, which have been excluded in the analysis. Altogether, 96 usable responses from management personnel (top, middle, and front-line management), from 32 responding SMEs, were returned and have been analyzed, and presented in this paper. It is noted that the organization which returned three sets of completed questionnaire is only considered as responding SME. In this connection, the useful response rate of 18.27% from companies was considered satisfactory and representative of SMEs in New Zealand. The overall response rate of 23.08% from the selected SMEs indicates the substantial importance of the research topic, while past experience suggests that mail survey response rates are often low and appear to be declining among small business populations (Dennis ). However, before making any conclusive remarks on the survey findings, further verification was carried out by subsequent in-depth case studies involving five SMEs from among the participants in the mail survey. We choose the follow-up case study approach as ‘…an empirical inquiry that investigates a contemporary phenomenon within some real-life context and a methodology involving multiple sources of data which provides the fullest understanding of the phenomenon and improves the validity of research implications through triangulation’ (Scudder and Hill ; Yin ). The case studies were conducted longitudinally over an 8-month period. The findings from the mail survey enabled us to develop a deeper understanding of the existing strategies and underlying practices in typical SMEs in New Zealand. During the case studies, ten elements of the operation, namely premises product purchasing people procedures protection processes performance planning, and policy, that represent the main risk areas to the success of a business were considered (Jeynes ). An ethnographic approach, which involves the sustained participation in, and observation of, the practical business settings which cover the day-to-day incidents and practical phenomena occurring within the organization, was applied in the case studies (Yin ; Bowman and Ambrosini ; Charmaz ). Apart from direct observation, relevant documents and diagrams from the studied organizations were reviewed and verified. Supplementary data were collected through formal interviews (with key senior executives who shape the firms’ operations strategy) and informal discussions (with frontline managers, production supervisors, and some key employees on the shop-floor).
Validation of questionnaire
The mailed survey was carried out by the developed questionnaires. One questionnaire was designed for top management (senior executives), and the other was designed for middle and front-line management of each organization. The purpose of two separate questionnaires was to collect disturbance information from different areas of concerns of each management level. In total, 26 questions were formulated for the questionnaire of the top management and 34 questions were in the questionnaire for middle management. However, in the context of this paper, the questions that were directly related to the disturbances are presented in Additional file 1 for the clarity of the investigation. Most of these questions were of the ‘multiple choice’ kind. The answers of the questions comprised four-point rating scales for response. The four-point rating scale was chosen to prevent the occurrence of central tendency error.
A typical example of the questions related to an internal disturbance is, Over the last 12 months, how often did you notice ‘absenteeism’ in your organization? (4 = often, 3 = sometimes, 2 = rarely, and 1 = never). A typical example of the questions related to an external disturbance is, To what extent does ‘skilled labor shortage’ impede your business performance (profit/growth)? (4 = to great extent, 3 = to some extent, 2 = a little amount, and 1 = not at all). A typical example of the questions related to a risk indicator is, Over the last 12 months, how often did you notice ‘lower than expected productivity’? (4 = often, 3 = sometimes, 2 = rarely, and 1 = never).
The questionnaires were designed in such a way that they were easy to understand and answer. They were pretested and carried out in two sequential stages. The first stage consisted of a review by a panel of academic experts and survey specialists who ensured that all necessary questions were included and ambiguous questions eliminated, and the categorization of the questions was set up properly to ensure that subsequent data analysis would provide the desired information. The second stage was a pilot study with ten participating SMEs. The responses from the pilot study allowed the authors to verify whether respondents were biased towards certain categories of questions or leaving questions unanswered. The study found that all respondents answered all questions and the responses on the ordinal scales were reasonably dispersed. Finally, the measuring scales were tested to verify the reliability of instrument with the help of Cronbach’s alpha (α) (Hinton ; Black ). The values of α were 0.701 and 0.716, and 0.721 for the questions of internal and external disturbances, and risk indicators (consequential effect), respectively, that ensured the reliability and internal consistency of the measuring scales.
Characteristics of studied SMEs
The significance of the SME sector in New Zealand has been increasing, with further opportunities presented by globalization and technological development (Ministry of Economic Development ). New Zealand is a small nation state of 4.3 million people, ethnically diverse, with a strong culture of self-help and independence underpinning business development (Ministry of Economic Development ). New Zealand’s size means that by international standards, its small businesses are very small but are the dominant sector in terms of employment, organizational structure, and social and economic cohesion. A recent report on SMEs states that in the context of policy consideration, the characteristics of small-sized businesses should typically include personal ownership and management, few specialist managerial staff, and not being part of a larger business enterprise (Ministry of Economic Development ). SMEs in New Zealand typically exhibit these characteristics, and it is in this context that our research has been designed to deal with companies with employment in the range of 10 to 100 employees (Islam ).
The list of SMEs selected for the mail survey and case studies was compiled from a variety of business databases; these were randomly chosen to represent a range of manufacturing groups. These groups covered the four sectors of (1) metal-based product and equipment manufacturers, (2) wood and wood-based product manufacturers, (3) paper- and plastic-based product manufacturers, and (4) textile and garment manufacturers. These groups were selected because of their economic importance to New Zealand. The characteristics of the participating SMEs in the mail survey are presented in Table 1.
Key findings and analysis
The key findings are categorized and presented in the following sections:
Two principal measures of corporate performance are profit rate and growth rate (Freel ; Geroski and Machin ; Wynarczyk and Thwaites ). Needless to say, there are a number of ways to measure growth rate and profitability which are substantially linked to several variables of operational activities. Several studies have overwhelmingly indicated that effective employee management, along with other strategic measures, can lead to a competitive advantage in the form of a motivated workforce, improved operational and business performance, reduced employee turnover, and improved productivity, which in turn improve the net profit of a firm (Batt ; Macduffie ; Virdi ). Moreover, growth of a business would appear to play an important role in its sustainability in a dynamic business (Barbara et al. ). We could, therefore, interpret that dissatisfaction with net profit and in business growth (assuming that the business plan is realistic), as well as significant employee turnover rates, could be the results of inappropriate or inadequate strategic allocation and utilization of resources and that these should be treated as primary indicators of potential problems for an organization. Our research approach, however, was not to verify the measures of these categories. Rather, it tried to identify whether there is any correlation between business growth rate and net profit, and the potential disturbances. The research finds that approximately 32% of the SMEs are dissatisfied with their existing ‘net profit’ (of which 10% are very dissatisfied) and about 40% are dissatisfied with ‘business growth’ (of which 10% are very dissatisfied). On the other hand, 9% of the organizations are very satisfied with both net profit and business growth. The study also finds that 30% of SMEs consider the existing ‘employee turnover rate’ as a substantial impediment to effective business operation, while 43% indicate the impediment from this factor to be small, and 26% indicate it to be negligible. These are apparently linked to operational risks of direct or indirect losses due to failures in systems, processes, and people or from external factors. Thus, dissatisfaction level with net profit and in business growth and employee turnover rate is considered as ‘risk indicators’ for our research. In addition to these three, 11 risk indicators which are linked to operational, occupational, and economic losses are identified from the study.Figure 1 shows the relative position of these risk indicators in terms of their emergence in the systems of the studied SMEs.
The risk indicators have potential linkages with day-to-day operational disturbances, which degrade business performance and the business environment. In consequence, the disturbances ultimately play a vital role in putting an organization at risk in terms of production, safety, and financial, resulting from both internal and external customer dissatisfaction (Islam ). These can lead to a loss of market share and eventually put the organization out of business, if they are not carefully treated. For this, a thorough investigation was conducted to identify key operational disturbances (in essence, driving risk factors) and their linkage to some risk indicators discussed in the previous section. We have identified a number of notable internal and external operational disturbances, which are summarized in Figures 2 and 3.
Among the internal disturbances, absenteeism, machine malfunction, machine breakdown, and material handling disruption were found to be the most significant disturbances, and unexpected major hazards, unexpected accidents/injuries, and tool shortage were found to be the least significant ones, while the other disturbances were found to fall between these extremes. Among the external disturbances, competition, delayed supply by the regular supplier, and skilled labor shortage were found to be the most significant ones, while financial obstacle was found to be the least significant in terms of their influence on the operational system. However, despite the minimal influence of some disturbances, they were still considered for further analysis to find out their consequential effects.
All disturbances presented in Figures 2 and 3 were considered for further analysis to determine whether they should be treated as risk determinants. The analysis included some statistical methods of parametric and non-parametric testing such as t test the Friedman test, and the Spearman correlation coefficient tests (Hinton ) at two significant levels: α = 0.01 (99% confidence level) and α = 0.05 (95% confidence level). The results of the t test are presented in Table 2.
On the basis of their comparative occurrence in practice, the disturbances are assigned with relative scores. The disturbance which occurs most frequently is assigned with the highest score, while the disturbance which occurs least frequently is assigned with the lowest score. Thus, among the internal disturbances, ‘absenteeism’ scores the highest number of points, and ‘tool shortage’ and ‘unexpected major hazard’ jointly score the lowest.
The relative positions of the internal disturbances, based on their scores, are shown in the second column of Table 3. The final test results (based on Spearman’s correlation coefficient, r
) confirm the positive correlation between internal disturbances and risk indicators; the results are presented in Table 4. Based on the positive correlation of disturbances with a number of risk indicators, scoring is performed. The highest scorer is correlated with a maximum number of risk indicators, while the lowest one is correlated with a minimum number of risk indicators. Thus, all disturbances are assigned with scores and are presented in the third column of Table 3. Finally, on the basis of the product of two scores (one for appearance or occurrence and the other for correlation), final ranking is performed for the risk determinants. The determinant which scores the maximum value is assigned with the highest rank (1), and the determinant which scores the minimum value is assigned with the lowest rank (14). Accordingly, the relative ranking for all risk determinants is established and is shown in the fifth column of Table 3. According to the final ranking, ‘absenteeism’ becomes the most important (number 1) risk determinant among the internal disturbances, while ‘malfunctions of measuring equipment’ becomes the least important one. Similar tests were conducted and relative measures were performed on the external disturbances, the results of which are summarized in the second and third columns of Table 5.
Discussion and evaluation
The findings from the mail survey have been presented in the previous section. Most of the findings have strongly been supported by the findings from case studies. Both investigations confirm that there are some typical internal and external operational disturbances, which expose SMEs to operational risks. Comparative findings from the two investigations are depicted in Figures 4 and 5. The comparison for disturbances is made on an extended scale of 1 to 10 in terms of their frequency of occurrence (for internal disturbances) and of their detrimental effects on operational performance (for external disturbances). Figure 4 shows that both investigations identify ‘absenteeism’ as the most frequently occurring internal disturbance and ‘tool shortage’ as the least frequently occurring in the SMEs studied, while the others fall between these two extremes. Figure 5 shows that ‘delayed supply by regular suppliers’ (very closely followed by ‘demand fluctuation’ and ‘competition’) is the most detrimental external disturbance, and ‘financial obstacles’ is the least detrimental to the SMEs. Both investigations further confirmed a set of risk indicators, which can be used as the consequential effects resulting from the disturbances (Figure 6). These risk indicators are linked to operational, occupational, and economic losses. The findings of both investigations again converge on the same conclusions, in terms of the overall ranking of the disturbances, even though there are slight, statistically insignificant variations in some cases.
The research study reveals that SMEs have, in general, inadequate measures and planned strategies in place to deal with such risk determinants. Thus, the identified set of internal and external risk determinants found from this study will play a vital role in ensuring that SMEs realize the strengths and weaknesses in their ability to cope with the identified internal factors, as well as the threats and opportunities arising from the identified external factors, while assisting them in formulating and implementing strategic measures to deal with the resulting operational risks. It is obvious that some disturbances are more detrimental than others. Moreover, the nature of the disturbance is found to be dynamic and idiosyncratic in nature. The dynamic behavior of a disturbance in different organizational settings and in different time frame leads us to a common understanding that the appearance of a particular disturbance varies from organization to organization and time to time. Moreover, the same disturbance produces different consequential effects to different organizations based on its time of occurrence and the duration of its existence in the system. An organization, therefore, needs to identify the characteristics of the various disturbances and their consequential effects over time, to develop a proactive strategy for managing operational risks.