Firm's Diversification Strategy, Risk & Incentives (Viability Study on Indonesian SMEs)

Abstract

Small and medium enterprises, or referred to herein as “SME,” may face possible extinction when falling behind the fierce competition in the marketplaces. Undoubtedly, SMEs business viability is the big question mark. Given the limited current capabilities, SMEs may face substantial hurdles to constantly expand the business scope. Diversifying business activities may well be the option that those SMEs attempt to pursue as a way of breaking-off the limitation wall.

Firms may well use their intangible assets to build a solid ground to leap into the future. Intangible assets can be used to support the organizational diversifications strategy, perhaps. As the actual diversification can certainly take many forms, it is essential to note the common economic implications to any diversification strategies. For sure, uncertainties are always present in the course of actual implementation of diversification strategies. The level of managerial risk-aversion is noted as a reference point to analyze the likelihood of success and failure on any diversification deals, particularly for SMEs. On the other side of the coin, incentive structures are examined to provide necessary grounding on dealing with uncertainties and risk-aversion.

This paper attempts to evaluate the total impact of implementing diversification strategy for SMEs. The resource-based theory of the firm, and the knowledge-based theory of the firm are used as the starting point. The major concentration will be placed on the use of intangible assets, including potential risks and possible incentives on such diversification strategy, and strategic intent for SMEs. Market structure is also used as a reference point on building up arguments toward organization’s intent on diversification. This research was conducted in Indonesia (in the cities of Bandung and Jakarta), which focused on young organizations in retail and service industries.

Keywords: diversification, small/micro enterprises, strategy, risk management, incentive management, diversification strategy, SMEs

JEL Classification: M10, M20, M40, L13, L22, D43, G39, G30