Partial Abandonment by Smes Investing in Advanced Manufacturing Technology: Some Qualitative Evidence

Introduction Today's global marketplace is characterized by increasing product diversity, shortening product life cycles and changing cost patterns. In this environment, advanced manufacturing technology (AMT) is a particularly important strategic investment for small firms (Mechling, Pierce and Busbin 1995). While large firms invest in AMT to gain efficiency, economies of scope and flexibility, similar investments are increasingly necessary for the smaller businesses with which they compete (Ariss, Raghunathan and Kunnathar 2000). For these small companies, AMT helps recoup the competitive advantage they once had over their big-business counterparts: flexibility and responsiveness to the market (Meredith 1987). Moreover, they can "up the ante" with their own innovative use of AMT (Meredith 1987; Schroeder, Gopinath and Congden 1989) and establish new competitive advantages. Although many small- and medium-size enterprise (SME) owners and managers intuitively recognize the strategic benefits (1) of AMT, they are reluctant to make the necessary capital investment. Ariss, Raghunathan and Kunnathar (2000) investigated the incentives and disincentives to invest in AMT in small firms. While small firms adopted AMT to increase productivity and improve their competitive position, many were deterred by their own lack of technical knowledge, unfavourable labour relations and inadequate technical skills at the plant level. Garsombke and Garsombke (1989), in a survey of small business, found additional inhibitors, namely the lack of financial resources, knowledgeable staff and time to investigate new technologies, as well as the incompatibility of the new technology with the existing facility. They found firms investing in automated production systems did not experience improved return on investment ratios or profit margins, despite the potential for positive returns inherent in these technologies (42). Similarly, Rishel and Burns (1997) found "no evidence of immediate financial returns" (9) from investment in AMT by small businesses, as measured by change in sales and return on investment. Garsombke and Garsombke (1989) postulate the time lag and costs of implementation explain this incongruity: "perhaps automation has longer term positive impacts on performance that did not show up or perhaps there are extensive up-front costs and other negative consequences which inhibit successful implementation and performance of new automated systems" (43). These factors and the high capital cost can render small business owners and managers hesitant to invest in AMT. This is exacerbated by its relatively high capital cost, which can typically take over five years to recover (Bessant and Haywood 1986). "Managers who are risk averse are less likely to adopt AMT and expose themselves to such high levels of uncertainty" (Ariss, Raghunathan and Kunnathar 2000: 18). For a SME with restricted financial resources, a delayed or non-existent return can be a considerable hardship. Yet, by not making the needed strategic investments in technology, companies can suffer competitively. It is thus important to understand why this "no immediate return" condition occurs so we are able to recognize the threats to the return on AMT investment and reduce their impact. We contend that SMEs, while in the throws of complex implementation, abandon the valuable but hard-to-quantify strategic benefits of the AMT technology, though they are integral to its return on investment. We further propose this partial abandonment is partly attributable to inadequate evaluation of the benefits and costs when setbacks occur and adaptations are necessary. We thus set out to explore the implementation stage of SME investment in AMT and how the companies adapt to setbacks. Theoretical Foundations Although the capital budgeting process and associated evaluation techniques are well established (Pike 1996), AMT investments are prone to inadequate evaluation. …