Business excellence (BE) models for MSMEs: the contemporary art and science of Improving national economy

The issues confronting Micro, Small and Medium enterprises MSMEs on the need to streamline its processes and to improve the delivery of its services have never been outdated, and in fact

Business Excellence (BE) Models for MSMEs:

The Contemporary Art and Science of Improving National Economy

Ceazar Valerei E Navarro

University of the Philippines, Philippines

Carlene Mae N Jadap

Ortigas Center, Philippines

Abstract

The interest on the role of MSMEs already had resurgence as early as 1990 The issues confronting Micro, Small and Medium enterprises (MSMEs) on the need to streamline its processes and to improve the delivery

of its services have never been outdated, and in fact, are becoming more imperative as its business continues

to expand This challenges remain and is highlighted even more as the call for globalization from various international actors get sturdier

Based on the foregoing, it is thus, a fact unarguably stronger than the wall of Gibraltar that MSMEs play a vital role in keeping the ball rolling for various economic activities of any state down to its every single household With these vital roles, it is expected that harnessing their business capabilities could significantly contribute to higher business growth which could lead to an enhanced level of national productivity and competitiveness The role of MSMEs is even more crucial for developing countries as the same is a potential source of income and employment, and a potential solution to poverty alleviation as well as rural growth and development

This study reviews how MSMEs across Asia fared in adopting and institutionalizing the Business Excellence (BE) framework for performance excellence It will also look into how BE affected the MSMEs which have adopted the framework Capping off the paper, is a propose program which will help MSMEs adopt and institutionalize the BE framework to build a culture of excellence This would highlight the need for organizational self-assessment and action planning deployment as a tool to identify one's strength and opportunities for improvement and eventually addressing the same to improve productivity and quality, and

eventually contributing to national economy

Keywords: Micro; Small Medium Enterprises; Productivity; Business Excellence

Habaradas (2008) summarized the most important contributions of MSMEs as follows: (a) they address poverty by creating jobs and by increasing incomes; (b) they disperse economic activities in the countryside, and provide broad-based sources of growth; (c) they serve as suppliers and providers of support services for large enterprises; (d) they stimulate entrepreneurial skills among the populace; and (e) they act as incubators for developing domestic enterprises into large corporations

The role of MSMEs is even more crucial for developing countries as the same is a potential source of income and employment (Tambunan 2008), and a potential solution to poverty alleviation and to rural growth and development In fact, a certain study shows that economies with higher income per capita tend to have more MSMEs per 1,000 people (World Bank/IFC 2010) Moreover, it is frequently argued that MSMEs are flexible, making it more adaptable to rapidly changing market and resilient to unpredictable sharp economic downturn However, in spite the great contributions of MSMEs to economic growth and development of every state, MSMEs faced numerous impediments, which require immediate attention from policy makers, economic planners and other stakeholders More often, particularly among developing countries, these MSMEs received insufficient support from the government in terms of financial resources, possessed inadequate managerial expertise and competent personnel, and bounded with several bureaucratic restrictions

Through the years, the national government has been trying to formulate ways to help small and medium businesses in keeping up with the fast changing economy Legislations, national policies, institutional infrastructure, formal as well as non-formal relationships, have been forged in order to support this growing business sector The primary goal is to empower small businessmen in pursuit of financial stability However, there is a need to determine if these policies, whether national or local, formal or informal, are realizing its designed intents

It is of paramount importance to address the challenges confronting the MSMEs as failure to do so may cause the collapse of any economy brought about by any movement in global market This even becomes more imperative as globalization knocks the door of every country, which though may offer wide opportunities for growth and expansion for MSMEs, would also exposed them a higher degree of threats as they have to compete with MSMEs across the globe Thus, over the years, several business excellence models have been conceptualized in search of a framework for performance improvement that will yield superior results Thus, this study was conceptualized to formulate a BE program for MSMEs, and at the same time, develop

a program implementation framework that will help them in the adoption and institutionalization of the BE framework

2 Research Problem

This research aims to investigate and assess the capability of the MSMEs to adopt the business excellence model, the Malcolm Baldrige Criteria for Performance Excellence, which is the model adopted by the Philippines for its National Quality Award – the Philippine Quality Award From the foregoing, the researcher seeks to develop a program implementation framework that will help MSMEs in the adoption and institutionalization of the business excellence model

2.1 Scope and Limitation Of Study

The focus of this research revolves around the capability of the MSMEs to adopt the business excellence model for performance improvement It will look into the different issues and concerns of MSMEs in the adoption of the business excellence model and will fill in those gaps from a practical perspective

The MSMEs tap for this study were all from Metropolitan Manila, Phiippines The Metropolitan was chosen

as the research locale for this study because of the fact that it houses a big chunk of MSMEs being the center

of trade and commerce in the country MSMEs in the area are very accessible, which made it easier to administer the survey questionnaire as it has a good composition of MSMEs, from different sectors and sizes Moreover, Metro Manila was considered as the study sites owing to its proximity to the researcher

2.2 Definition Of Terms

For better appreciation of this research, the following terms are defined:

Micro-, Small and Medium Enterprises - most commonly referred to as MSMEs, is a relative term, which

means that it varies from one state to another Even among Asian countries, the term MSMEs does not have a standardized definition To complicate it further, the definition of MSMEs in certain countries also varies depending on the purpose or its use, either for statistical or policy purposes On this ground, there are several measures used to distinguish large, micro, small, and medium enterprises from one another Commonly, to make a distinction between and among large-, micro-, small-and medium-sized enterprises, the number of employed people and monetary measures, such as initial capital, are considered

In the Philippines, there are two operational definitions of Large, Micro, Small and Medium enterprises, which are enshrined in the National Statistics Office and Small and Medium Enterprise Development Council Resolution No 1, Series 2003 The most commonly used definition in the country is based on the number of people employed, which different size categories are classified as follows:

 Micro enterprises: 1-9 employees

 Small enterprises: 10-99 employees

 Medium enterprises: 100-199 employees

 Large enterprises: 200 or more employees

The other operational definition of MSMEs is based on assets, which are distinguished as follows:

 Micro enterprises: P3 million or less

 Small enterprises: P3-15 million

 Medium enterprises: P15-100 million

 Large enterprises: P100 or more

Business Excellence - is about developing and strengthening the management systems and processes of an

organization to improve performance and create value for stakeholders BE is much more than having a quality system in place BE is about achieving excellence in everything that an organization does (including leadership, strategy, customer focus, information management, people and processes) and most importantly achieving superior business results (Mann et al., 2008)

2.3 The Research Questions

In this contemporary society characterized by rapid advancement in science and technology and dubbed

as the interconnected world, equally important with opportunities for growth and development are the threats

it may bring to any enterprises Thus, to ensure survival in the market, every enterprise must actively pursue sustainable growth and development

Acknowledging the vast contribution of MSMEs in every economy, several countries have taken steps to maintain national productivity through various business excellence initiatives Numerous studies over the years have been published claiming that business excellence models have helped MSMEs improve their processes and management systems, which yielded better to superior business results

Along this line, this chapter reveals the present state of MSMEs in the Philippines, and the different issues and concerns they face Likewise, this chapter will show how far the Philippine MSMEs have gone in the adoption of the business excellence model

3 Review of Related Literature

Philippine MSMEs

The role of the MSMEs in developing countries like the Philippines is so vast that it cannot be left unnoticed;

it ensures sustainable economic development (APBSD 2004,cited by Habaradas 2008) In 2012 MSMEs in the Philippines have dominated the market constituting 99.6% of registered enterprises, which created more than 60% of the total employment in the country (Tacneng (no date), Leano 2004, DTI 2012, Gumasing 2013, Juanzon and Muhi 2014) In addition, MSMEs contributes over 32% of the gross domestic product of the country (Leano 2004) From the foregoing statistics alone, MSMEs can be considered as the backbone of the Philippine economy Ironically, the support that these MSMEs receives from the government far outweighs their contributions to the economy of the country; thus, making these MSMEs susceptible and vulnerable to threats affecting their sustainability

Table 1 MSME Average Growth Rate Categorized per Sector

For the past decades, studies have shown that the growth of the MSMEs in the country has subdued (Aldaba, 2015; Aldaba and Aldaba, 2014; Berry and Rodriguez 2001) Though the average growth rate of MSMEs categorized per sector have shown an increase in the most recent years (See Table 1), they have not substantially increased value added, employment, and gross domestic product as to effect substantial growth

to the overall economy of the country

Figure 1 Contribution of SMEs to GDP

Compared with other neighboring countries, the Philippine SMEs contribution to the country’s GDP recorded the second lowest, next to Malaysia (World Bank 2013, cited by Mendoza 2013) This is a clear

manifestation that MSMEs in the country do receive substantially inadequate support from the government for their growth and sustainability

Table 2 MSME Contribution to Value-Added Categorized per Sector

Crystal-clear from the figures presented in Table 2, categorized by major economic sector, MSMEs contribution to value added have shown a consistent decrease since 1981 This however, is to the exclusion of the services sector which recorded a very modest increase since 1981

Table 3 MSME Contribution to Employment Categorized per Sector

Likewise, in terms of MSMEs contribution to employment, it is noteworthy that the sector of agriculture, fishery and forestry, which is the largest provider of employment from 1975-1999, recorded consistent and significant decrease from 52.83% for the period 1975-78 to 36.07% for the period 2000-2011, or a decrease of about 16% (See Table 3) The declining trend is also true to the sub-sectors of industry, except in the case of construction which increases to a very modest rate of 0.28% from the period 1990-99 to 2000-11 However, in general, industry sector recorded for the same periods a decline from 15.98% to 15.10% In the most recent period, services sector became the largest provider of employment

Figure 2 MSMEs Contribution to Export, Import and Trade

Finally, as to export, import and trade, MSMEs contribution shows an increasing trend from 1990 to 2000 and a decreasing trend from 2000 to 2011 (See Figure 2) Interestingly, the imports of goods and services have always been greater than the exports of goods and services The same may be attributed to the fact that industry sector constitutes the minority of the MSMEs

Philippine MSMEs Crisis

The slow acceleration of MSMEs in the country was caused by numerous barriers affecting their growth

A vast amount of literature is devoted in understanding these different barriers and the policies formulated in addressing the former In this contemporary society, the biggest challenges that MSMEs have to deal with still include insufficient access to financial resources, inadequate managerial expertise and competent personnel, and unfriendly environment in doing business

Access to Finance - To aid the MSMEs along their journey, the Department of Trade and Industries (DTI) is

mandated as the main government agency responsible for the development of MSMEs To address the need

of MSMEs to greater access to financing needs, there were several laws created for the purpose Republic Act

6977 of 1991 as amended by RA 9501 of 2008 otherwise known as the “Magna Carta for Micro,

Small and Medium Enterprises (MSMEs)” in summary, provides the following salient provisions of the law pertaining to extending financial assistance to MSMEs:

 creation of the Small and Medium Enterprise Development (SMED) Council to consolidate incentives available for SMEs;

 creation of the Small Business Guarantee and Finance Corporation (SBGFC) to address SME financing needs; and

 allocation of credit resources to SMEs by mandating all lending institutions to set aside 8% of their total loan portfolio to SMEs (6% for small and 2% for medium enterprises)

RA 9178 otherwise known as Barangay Micro Business Enterprises (BMBE) Act was enacted in 2002 The law provides support to microenterprises and the informal sector through “incentives to local government registered barangay micro enterprises, exemption from income tax, reduction in local taxes, exemption from payment of minimum wages, financial support from government financial institutions and technological assistance from government agencies” (Aldaba, 2015)

Under the foregoing laws, programs implemented include the lending programs, known as SME Unified Lending Opportunities for National Growth (SULONG) and the One Town, One Product (OTOP) (Leano, 2004) Both programs provide comprehensive financial assistance package as a start-up working capital at a low interest rate per annum

Ease of Doing Business - Gumasing 2013 refer to ease of doing business as "such procedure, regulations and

policies that bear direct influence to ensure business build up and promote business development constitutes what most businesses" Relating to the foregoing, the Philippines has been recording a dismal performance in the competitiveness arena According to World Economic Forum (WEF), out of the 133 world economies included in the study, the Philippines ranked 75th in 2006 and 71st for 2007 to 2008 This may be attributed to the country's failure to provide a conducive environment for planting and doing business

In a study conducted by World Bank in 2013 entitled "Doing Business", it revealed that starting a business

in the Philippines requires 16 procedures, takes 36 days, and cost 18.1% GNI per capita, making it land at Rank

161 (Refer to Figure 3)

Figure 3 Doing Business in the Philippines

The same study showed that starting a business in the Philippines necessitates the compliance to several requirements Figure 4 reveals the number of procedures in starting a business in various cities in the Philippines The too many requirements as Gumasing (2013) articulated, was attributed to excessive bureaucracy and red tape in getting a business permit

Figure 4 Doing Business in Various Cities in the Philippines

These studies conducted by the World Bank are clear indications of the need to simplify, streamline and improve the requirements and processes in doing business in the country This would produce enabling government that may facilitate an increase in the number of registered MSMEs

In addition, the 2004-2009 ASEAN Policy Blueprint for SME Development includes the fine-tune policy & regulatory framework for SME development, and promotion of public-private synergies & partnerships for SME development & integration, as activities under the program area creating conducive environment

To further improve processes, adherence to a certain quality management system (QMS) or international standards, such as ISO 9001:2015 may also contribute to efficiency in delivery of goods and services QMS is the interaction of people, process, and documentation to meet the customer’s stated and implied needs The result would be a reduction in inefficiencies and waste, improved work practices, increased morale of the management team, and the opportunity for a greater market share (Mohammed & Abdullah 2012, cited by Juanzon and Muhi 2014)

Technical Know-How - These challenges confronting the MSMEs are even aggravated by the paradigm shift

to globalization and regional integration This call for liberalization from global market players also exposes the MSMEs to the high risk of competition This is even more alarming among MSMEs from developing countries as they have to be at par with MSMEs from developed countries

MSMEs from the Philippines still experience the same old problem of difficulty in penetrating the international market despite substantial trade and investment liberalization (Aldaba and Aldaba 2012) With the continuous call from international economic players for globalization and regional integration, there would be an overflowing production of goods and services, which however, is tantamount to fiercer competition It is thus, a great challenge on the part of the government to prepare its MSMEs to be globally competitive

In line with the production of goods and services, the MSMEs have to consider two parameters to meet consumer preferences and market demands: the price and non-price parameters such as product quality,

health and safety in consumption, social equity in employment and production, and ecological implications

of products and processes These processes require the "adoption of new and innovative business and industrial organization models, and the upgrading of production and marketing processes by most SMEs" (Wattanaprutipaisan 2002b, pp 63-64; Momaya 2000, pp 160-161; and Altenburg 1999, pp 32-34, cited by Wattanaprutipaisan 2003, p 4)

Meeting consumer preferences and market demands based on the aforementioned parameters will be a good start to penetrate the international market Otherwise, MSMEs will be threatened by the free flowing of goods and services In fact, even prior to the conception of globalization and integration, the country's local market is already flooded with imported products, particularly from China These imported products which are sold at a significantly lower price have been a great threat to locally produced goods

To be at par with international market players, several mechanisms were considered to enhance the competitive advantage of local MSMEs A dynamic and efficient MSMEs contribute “in creating international competitive advantage” (Hall 2003, cited by Habaradas 2008) As part of the activities under the 2010-2015 ASEAN Strategic Action Plan for SME Development, the DTI designed and implemented "training and entrepreneurship development programs to provide existing and potential entrepreneurs with the necessary skill and knowledge to become competitive players in both the domestic and international markets The DTI-Philippine Trade Training Center (PTTC) designs and develops training curricula and instructional materials and conducts training programs for MSMEs Its programs and services include entrepreneurship development, business management, export management, IT and webpage development, quality and productivity, and international standard seminars like ISO 9000 quality management system" (Aldaba, 2015)

Assessing Government Interventions

There is no question that the government on its part was able to design and implement programs and projects that will foster the growth and development of MSMEs considering its huge contribution to the national economy However, in a recent study evaluating the implementation of the 2010-2015 ASEAN Strategic Action Plan for SME Development and 2004-2009 ASEAN Policy Blueprint for SME Development, results show that efforts of the government were futile The study reveals that the programs and projects of the government in response to the 2010-2015 ASEAN Strategic Action Plan for SME Development and 2004-

2009 ASEAN Policy Blueprint for SME Development yielded low average effectiveness scores, which scores ranged from without- to no- or little concrete impacts on the implementation (Aldaba 2015)

While there are initiatives from various government agencies for MSME development, it can be gleaned that there is no single agency or department that monitors and coordinates all these programs and policies of the government In the case of Cambodia for example, up until 2014 there was no single department which oversee all programs and policies for SME development In fact, “as many as 25 different ministries and organizations have developed their own SME promotion strategies, regulations and policies focusing on achieving varying outcomes” (Bailey, 2008) None of these ministries coordinate their respective programs and policies which have considerably resulted to duplication of efforts and redundant programs and policies Consequently, in the yearly journal published by World Bank entitled, “Doing Business”, Cambodia ranks below the median

In relation to the foregoing, it is thus imperative to ensure coherence and joined-up government efforts in order to effectively manage the different programs and policies created for MSME development Once coherence and joined-up government are achieved in as far as the various initiatives of the government for MSME development are concerned, the same has to be aligned with the program and policy measures at the ASEAN level Aldaba (2015) pointed out that in working out for the complementation in the implementation

of the program and policy measures at the ASEAN and domestic level requires “an integrated approach and coherent set of domestic and regional policies and programs designed with the direct involvement of SMEs”

Moreover, most of the assessed program and policy measures are still in place despite the significant findings of Aldaba (2015) on the implementation of the 2010-2015 ASEAN Strategic Action Plan for SME Development and 2004-2009 ASEAN Policy Blueprint for SME Development This perhaps is one of the impediments on the various programs and policy of the government of MSME development - the absence of

a monitoring and evaluation mechanism integrated in the design of a program or policy In a study conducted

by Asian Development Bank (2009) entitled, Enterprises in Asia: Fostering Dynamism in SMEs, it revealed that

“while individual assistance programs and country experiences vary considerably in their scope and design, many of the programs to support SMEs have common weakness”, which include its observation pertaining to SME programs not being subjected to rigorous evaluation

Accordingly, based from the foregoing, the amelioration on the program and policy measures for MSME development focused on the integration of the various existing government initiatives, which have been rigorously evaluated and are proven to be effective and with significant impact to its intended beneficiaries

Business Excellence

Total Quality Management (TQM) as it was first known, but which is now commonly referred to as the Business Excellence model (Mann et al., 2008) is about adopting a holistic approach to strengthen the management systems and processes of an organization for growth and productivity improvements (SPRING Singapore, 2010) The business excellence model helps organizations improve their performance through the conduct of an organizational assessment using an internationally benchmarked business excellence framework

To date, the business excellence model has been adopted in several countries across the globe, including at least seventeen (17) countries in Asia The Philippines on its part has adopted the Malcolm Baldrige Criteria for Performance Excellence in setting up its National Quality Award in 1998, which is the Philippine Quality Award (PQA) The award application to PQA is open to both public and private sector organizations, regardless of industry, size, structure or stage of development Noteworthy, that since the PQA was established, none from the MSME has ever been a recipient of PQA at any level There are several reasons this, which may have to do with awareness of and capability to adopt business excellence model, needless to state other factors herein stated in earlier section

Interestingly, Soliman (2012) has observed that in spite of the inarguably huge promising benefits of business excellence models, “the practice is still considered to be very costly for the global small to medium size (SMEs) organizations to adapt.” He anchored his claim on the fact that “in order to achieve business excellence in the organization, the quality level of multiple dimensions of the organization must be measured and then improved, such dimensions are leadership, customer’s satisfaction and teamwork” (Kanji, 1998, cited

by Soliman, 2012) Boys et al (2004) has suggested instead alternatives paths for small to medium sized organization in their journey towards achieving business excellence for their globalized businesses “These alternative paths are firstly work on acquiring ISO9001 then move towards acquiring ISO9004, which an industry specific standards These two certifications according to the authors are much cheaper than going straight on persuading business excellence; also they will definitely guide the globalized small to medium sized firms (SMEs) toward achieving business excellence for their organizations in the future” (Boys et al.,

2004, cited by Soliman 2012).This is the case in the Philippines, where MSMEs are more inclined to acquiring ISP 9001 certification Note however, that such certification is likewise costly in the Philippines hence, only few MSMEs are certified to such standards Moreover, Terziovski (2003) as cited by Soliman (2012) had suggested that step for SMEs in their journey towards achieving business excellence, which is “to strengthen their networking practices in order to be able to compare themselves informally with the best in class on regular basis”