Research Note
Strategic agility, dynamic relational capability and trust among SMEs in transitional economies

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Abstract

Rapid growth and urbanizing populations are transforming Africa, despite environmental turbulence, uncertainty and relational complexity. Research highlights how small firms rely upon trust-based buyer-supplier relationships in such contexts. Our study adopts a micro-foundational perspective and builds on dynamic capabilities literature and psychological trust theory. Our conceptual model shows how relational dimensions (i.e. communication, social bonds, and knowledge), influenced by meta-capabilities (strategic sensitivity, resource fluidity and leadership unity) embedded in micro-foundational activities build trust in small business cross-border buyer-seller relationships to support dynamic relational capability and enhance strategic agility in transitional economies.

Introduction

Transitional economies typically experience constantly shifting hypercompetitive environments (Chakravarty, Grewal, & Sambamurthy, 2013; Schaeffner, 2018), with turbulence, rapid changes and disruptions. African transitional economies are driven by globalization, political reforms, rapid technological changes and e-commerce (Cuervo-Cazurra, Ciravegna, Melgarejo, & Lopez, 2018; Fourné, Jansen, & Mom, 2014; Liang, Wang, Xue, & Ge, 2017; Maksimov, Wang, & Luo, 2017), human resource mobility, accelerated knowledge transfer, innovation, changing consumer preferences (Chit, 2017; Fainshmidt, Judge, Aguilera, & Smith, 2018), and product and business model obsolescence (Clauss, Abebe, Tangpong, & Hock, 2019; Weber & Tarba, 2014). Firms operating in this context will inevitably confront contradictory challenges, one being the challenge of remaining strategically consistent versus the value of rapid change in response to unexpected problems, opportunities, global imbalances (Cumming, Filatotchev, Reinecke, & Wood, 2020) and escalating trends. Emphasis on previously planned strategy might reduce temporal responsiveness, exacerbating the immediate problems or opportunities. This might have devastating effects. Strategic agility provides a potential path to address this paradox (e Cunha, Gomes, Mellahi, Miner, & Rego, 2020).

The reality of tensions and paradoxes is especially difficult for small firms (Arasti, Zandi, & Bahmani, 2014; Shin, Lee, Kim, & Rhim, 2015; Xing, Liu, Boojihawon, & Tarba, 2020). Despite efforts to improve the speed of their strategic adaptations and operational performance, African SMEs struggle to respond to constant unpredictable rapid changes in the business environment. SMEs must aim not only to be faster than larger MNEs and those from established economies but must also focus on building their agility and adaptability (Shin et al., 2015). Business failure is especially likely for SMEs (Arasti et al., 2014; Xing et al., 2020) as they balance tensions across formal processes in strategic planning and opportunistic strategic agility (e Cunha et al., 2020; Weber & Tarba, 2014). However, SMEs are very different from larger MNEs, where most of the strategic agility research has focused. SMEs differ in terms of their reach, scope and breadth of resources, operational functions and depth in senior management (Fourné et al., 2014). As they have far fewer senior managers, individuals exert greater influence over the strategic agility of their small firms. Managers’ capabilities and activities comprise the micro-foundations embedded in organizational activities (Bouguerra, Gölgeci, Gligor, & Tatoglu, 2019). Remarkably we know little about how SMEs develop strategic agility (Shin et al., 2015), address simultaneous tensions between organizing paradox (formalization and decentralization) and organizational levels of learning paradoxes (exploration and exploitation) (Al-Atwi, Amankwah-Amoah & Khan, in press), and the micro-level variables (Bouguerra et al., 2019) in transitional economies (Xing et al., 2020).

Recent studies confirm strategic agility is idiosyncratic in nature (Fourné et al., 2014), relies heavily on the strategic cognition of individual senior managers (Schaeffner, 2018) and that human resource management (HRM) can enhance strategic agility by nourishing individual contributions and entrepreneurial behaviors. Micro-foundations research (Liu & Meyer, 2020) encourages examinations beyond single influences to how multiple, enmeshed lower level drivers, namely actors, processes and structures (Felin, Foss, Heimeriks, & Madsen, 2012) jointly impact actions of individuals inside and outside firms, which then aggregate to strategic agility as a higher-level phenomenon. Collective talents that are collaborative, improvised and creative are managed through HRM processes (e Cunha et al., 2020; Xing et al., 2020). Specifically, “the role that key individuals play in the strategic agility process is under-researched” (Morton, Stacey, & Mohn, 2018, p. 94).

The extant literature on the fundamentals to SME survival in substantially different contexts, such as transitional economies have received even less inquiry (Bidault, De La Torre, Zanakis, & Ring, 2018; Liu & Almor, 2016; Matanda & Freeman, 2009). This key gap in the strategic agility and micro-foundational literatures is holding back theoretical development. Identifying the more relevant mechanisms through which strategic agility is achieved in SMEs with more nuanced understanding of micro-foundational processes in transitional economies (Houjeir & Brennan, 2017), can open pathways through which businesses can drive productivity-based development mechanisms that support strategic agility. This is relevant “in times when the macro-environment is less munificent or faced with economic crisis” (Pereira et al., in press, p. 2). There is greater need for contextual understanding of diverse cultural effects that heighten uncertainty and thus the relevance of HRM and the micro-foundations in SME business relationships (Ashill & Jobber, 2010; Leonidou, Aykol, Hadjimarcou, & Palihawadana, 2018; Xing et al., 2020). This is manifested in transitional economies (Manolova, Manev, & Gyoshev, 2010) because of their heterogeneity, instability and hypercompetitive context.

The purpose of our study is to examine how culture as context plays a pivotal role in the way individual entrepreneurs perceive themselves and others (Kitayama & Uskul, 2011; Liu & Almor, 2016). The point of difference in this paper, is the emphasis on a human-based micro-foundational dynamic capability that may be non-substitutable across contextual domains (Fourné et al., 2014). Several objectives are offered to make conceptual, contextual and theoretical contributions. As a first objective, we argue that neither capability, leadership or organizational is enough on its own to ensure strategic agility. For an organization to achieve strategic agility, these two major capabilities must work together in complementarity. Our study shows that this requires development of a dynamic relational capability which can be achieved only with an underlying structure of highly effective micro-foundational processes. Further, entrepreneurs and managers from individualistic cultures face greater difficulty assessing the interests of their foreign business partners than those in collectivist cultures (Lee, Adair, & Seo, 2013), the latter typically found in transitional economies. Managers must manage the various tensions and paradoxes (Fourné et al., 2014; Liu & Almor, 2016; Robson, Katsikeas, Schlegelmilch, & Pramböck, 2019; Weber & Tarba, 2014). This study emphasizes the ‘leadership capability’ because individuals managers, not organizations make sense and decide on the direction and timing of changes and resource allocations, though improvisation (e Cunha et al., 2020) in exchanges with trading partners to work out how to execute their strategy. Related to this objective, the study emphasizes that the ‘organizational design capability’ depends on individuals who must decide how to creatively make structural adaptations to routines and orchestrate mechanisms to direct new courses of action. This is harder for SMEs with fewer resources (human and financial) operating in fast-moving transitional economies. We address this contextual gap to build theory.

The second objective of our study is to examine the context underlying the existence of business relationships in transitional economies as fundamental to understanding the nuances of building relational capability. What is poorly understood, is that various specific relational competencies are likely to underpin successful leadership and organizational capabilities when operating in transitional economies. Prior research defines strategic agility as an externally focused capability (Shin et al., 2015) with three meta-capability vectors (i.e. paths, pillars) (Doz, 2020) that create flexibility in individuals as an internally focused competency (Shin et al., 2015). The paths comprise – ‘strategic sensitivity’ (i.e., heightened perception, awareness and attention to strategic situations as they occur), ‘resource fluidity’ (i.e., capability to free-up resources from one activity to be deployed quickly to new opportunities for growth), and finally, ‘leadership unity’ (ability of the senior management team to make and then implement innovative decisions quickly and the organizational leadership to avoid ‘win-lose’ politics) (Doz & Kosonen, 2007, 2008a). We draw on this literature to show effective development of micro-foundational processes, such as ‘strategic sensitivity’ in communication in cross-cultural settings (Narooz & Child, 2017) as this is likely to support strong trust-based relationships. This form of relationship will be essential for accurate information transfer and deep knowledge sharing (Fiedler, Fath, & Whittaker, 2017) that will be needed to support the willingness and speed of ‘resource fluidity’. Finally, leadership unity that operates with collective commitment is likely to build trust through strong social bonds needed for knowledge development (Berger, Herstein, Silbiger, & Barnes, 2017; Dikova, Jaklič, Burger, & Kunčič, 2016) and quick action between managers. The interplay of these relational competencies resides with individuals. Strategic agility is determined by the complementarity of managers’ appropriate leadership styles and presence of supportive relationships with others to create organizational adaptability. It is not firms that make sense and identify major opportunities or threats. Individual entrepreneurs/founders make the ultimate decision to respond or not - and - how and when - and - with whom they will engage in business. In transitional economies among African countries, firms rely on trust-based buyer-seller relationships with their business partners (Matanda & Freeman, 2009; Wilson, 1995) that underpin managerial opportunity recognition. This will involve a small number of senior managers in SMEs in their cross-border buyer-seller partnerships. Trust development is most important, especially in the early phase of business creation. Thus, greater clarity of micro-foundational influences on relational capability, trust and strategic agility is needed. Our study aims to explore how relational dimensions (i.e. communication, social bonds, and knowledge), influenced by meta-abilities (strategic sensitivity, resource fluidity and leadership unity) embedded in micro-foundational activities impact trust in small business buyer-seller relationships to support dynamic relational capability and influence strategic agility in transitional economies.

The final objective is to use a micro-foundational approach to establish the theoretical association between strategic agility and a new dynamic relational capability, the three meta-capability paths (strategic sensitivity, resource fluidity and leadership unity) and their influence on the three relational capability dimensions (communication, knowledge sharing and social bonds). The social network literature regards these three relational capability dimensions as fundamental to the development of trust, where trust is perceived as a social mechanism that grows through relationships among two or more exchange parties (Manolova et al., 2010). This study uses the lens of psychological trust theory (Deutsch, 1958) to explain these various micro-level influences among strategic behavior and trust building in early SME business relationship development, where trust formation is most vulnerable. Further, we situate our study in a transitional economy, where such relationship approaches are regarded as fundamental to business creation and growth (Dowell, Morrison, & Heffernan, 2015; Shin et al., 2015). To achieve the final objective, we respond to calls in the micro-foundations research to give more attention to clarity on matters “of aggregation and emergences and how the organizational context shapes behavior (Felin, Foss, & Ployhart, 2015, p. 609). We draw on analyses of 26 semi-structured in-depth interviews in the unique business culture of Tanzanian SME founders/owners and senior executives in East Africa engaging in cross-cultural buyer-seller relationships. We investigate linkages between dynamic (multi-faceted) and operational (single-generic) capabilities (Biesenthal, Gudergan, & Ambrosini, 2019; Clauss et al., 2019; Shin et al., 2015). The findings of the study demonstrate that, at the firm level, key relational dimensions influence trust in trading-partner relationships that develop dynamic relational capability to support strategic agility of SMEs in transitional economies. At the individual level, we identify three novel capability dimensions - ‘collaborative communication capability’, ‘social network learning’ and ‘internal knowledge alignment’ - of dynamic relational capability that directly influence trust in business relationships. This new theorized and identified dynamic capability is essential for complementarity in the major capabilities of ‘leadership’ and ‘organizational design’ that builds strategic agility of SMEs. SMEs able to develop dynamic relational capability have few stable rules and systems that outline standardized ways of modifying cultural clashes and disruption to knowledge and human-based resources in transitional economies. Adopting a micro-foundational perspective (Felin & Foss, 2005; Felin et al., 2015; Zimmerman, Barsky, & Brouthers, 2010) and building on contextual differences (Cumming et al., 2020), dynamic capabilities literature and psychological trust theory, we show that managers of SMEs in transitional economies rely on improvised and sophisticated cross-cultural communication styles and social bonds to balance simultaneous tensions for innovation and knowledge transfer in early buyer-seller relationship development to build strategic agility through strong, creative, trust-based partnerships.

In the next section, we discuss the contribution to building strategic agility in the early phase of relationship development and its significance in transitional economies. We discuss the role of trust, improvisation and creativity in communication approaches, and social networks that build bonds and knowledge sharing as key dimensions of dynamic relational capability that drive strategic agility in SMEs. We then outline the qualitative research design and 15 case-studies we use to explore our research aims and objectives at different organizational levels. We present empirical findings through cross-case analysis and develop a new conceptual model. Finally, we offer theoretical contributions, address the study’s limitations, and provide future research directions and managerial implications.

Section snippets

Integrating a trust-based perspective and a micro-foundational approach

Our research will help managers understand how to develop relationships with companies in transitional economies. In this context, the objectives of the present research are twofold. The first objective is to identify multi-dimensional attributes that influence the development of cognitive and affective trust that support strategic agility in African SMEs. Cognitive trust based on contract, competence and goodwill influences business relationships, created through experience of working with

Psychological trust theory and a micro-foundational perspective

Psychological trust theory (Deutsch, 1958) focuses on the state of mind of an individual to explain the mechanism of trust building between parties. Deutsch (1958) defines trust as an individual’s confidence in another person’s expectations, intentions and motives. Psychological trust theory emphasizes cognition as the key dimension of trust. According to Rousseau, Sitkin, Burt, and Camerer (1998), trust may be influenced by cognitive cues including perceived individual ability or competence.

Contextual focus

Cumming et al. (2020) and Doz (2020) suggest that ‘context awareness’ can impact organizational agility in terms of the way plans and fast decisions are made by individual managers and executives. They regard it as essential to consider the context when exploring a specific business situation. As previously mentioned, attempts to understand the impact of cognitive and affective trust on strategic agility of SMEs, as distinct from larger MNEs, and with a strong contextual focus, such as

Strategic responsiveness in a business relationship

In developing dynamic capabilities and organizational agility in cross border activities, rapid responsiveness and adaptation from both parties to external changes is essential to ensure the survival of any business relationship in order to realign the strategic direction given knowledge and understanding of external information. However, the issue regarding the relative importance of cognitive trust versus affective trust in driving responsiveness has remained unclear. Against this background,

Strategic responsiveness in a business relationship

What is known from the international business literature is that SMEs are hesitant to initiate business relationships due to a lack of resources, capabilities and expertise in international business (Prange & Pinho, 2017). Drawing on and extending the strategic agility literature (Clauss et al., 2019; Cumming et al., 2020; Fourné et al., 2014) and integrating our findings, we demonstrate that business success in heterogenous, environmentally turbulent and volatile transitional economies, such

Implications for theoretical development

First, our research question explores the development of cognitive and affective trust during the initial phases of the business relationship in a transitional economy, further conceptualizing key factors such as social networks. Social networks facilitate business relationships by offering initial contacts (Costa et al., 2017). We confirm this by demonstrating how social networks that enable social bonds are vital in the initial development of business relationships but are not always readily

Conclusion

We draw from the micro-foundational approach and psychological trust theory to highlight the activities that are undertaken by individuals as three meta-capability paths (strategic sensitivity, resource fluidity and collective commitment). Our research shows that in contexts exposed to rapid changes, turbulence, disruptions and unpredictability such as those in transitional economies, individual managers will need highly developed abilities for improvisation and creativity to work with their

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