SME Diversification Strategy in Post-War Iraq: A Case Study

Introduction and Industrial Cluster Context

This chapter explores how National United Group's (NUG) location decisions and its position within an industrial cluster are critical to understanding its strategic orientation, as well as the design, implementation, and outcomes of its diversification strategies in the post-Iraq War period. The results of the study are discussed in relation to the theoretical models and frameworks examined in the literature review. This section addresses findings related to the fundamental questions asked of study participants — NUG managers and employees — and the findings derived from an examination of archival information.

The chapter discussion is organized according to the frameworks and theoretical models introduced in the literature review, and explicitly refers to the questions asked of NUG managers and employees.

The term industrial cluster refers to a concept in economic geography that encompasses all the features of the Iraqi environment in which SMEs operate, for the purposes of this study. Together with political and social contexts, these economic scenarios are believed to substantively influence the diversification strategies and strategic performance of SMEs in the post-2003 Iraqi war period.

Renewal and Adjustment in Industrial Clusters

The industrial cluster framework applies to SMEs in the post-war period that forms the time basis of this study. The framework aptly fits the situation of National United Group (NUG) as a member of a "concentration of interconnected companies, specialized suppliers, service providers, firms in related industries, and associated institutions" (Porter, 5). As an amalgamation of two formerly independent enterprises — here referred to as KAPICO and the Jaffar Group — NUG operates as a hub for various marketing and distributorship arrangements associated with the auto parts industry in Iraq. NUG distributes a minimum of 13 separate auto parts brands and has simultaneously operated four distinct lines of business: spare parts, tires and batteries, lubricants, and a service station.

This section examines the impact of strategic orientation and diversification strategies on the firm — as part of an industrial cluster — in relation to its economic and socio-political context.

Multidimensional environments contribute a range of pressures and — as in situations during and after periods of war — economic shocks, sociopolitical forces, and any number of factors that contribute to a climate of "ambiguity and uncertainty" (Carter, 2). Firms can be thought of as responding to these dynamic multidimensional environments in one of two ways: adjustment or renewal. As it applies to SMEs in this study, adjustment refers to the "extension of established trends which lead to stagnation and gradual decline in the medium to long-term" (Chapman et al., 3). The research findings from the archival data indicate that, in terms of costs and profits, the strategic orientation and diversification strategies adopted by NUG were highly successful. Thus NUG did not enter a phase that was wholly one of adjustment.

However, adjustment can be attributed to certain managers and employees of NUG whose responses to surveys, questionnaires, and interviews indicated a desire to maintain the status quo, even in the face of a drastically changed business environment. That some components of NUG's operations were functioning in an adjustment mode is illustrated by the disconnect between local sales forecasts, orders placed with international suppliers, and actual sales. A desire to maintain relationships with the network of international distributors meant that a great many resources were committed to inventory and to building NUG's extensive distribution network. Not only was NUG's business stagnating, but the firm was tipping the balance with regard to prospects for a profitable and sustainable enterprise.

Diversification and Renewal Strategies

Renewal occurs when there is "a significant or radical change of an existing development path through diversification, enabling a cluster to sustain its prosperity" (Chapman et al., 3). NUG clearly engaged in the process of renewal through its diversification into several lines of business and through expansion into new free markets in parts of Iraq outside its operating base in Baghdad.

One apparent strategic response that NUG implemented was diversification. The range of support for diversification as a strategic response was largely upheld by managers and employees of NUG. In response to survey questions asking whether diversification is an important firm-level strategy for supporting renewal in the post-2003 period, and whether it is important for the firm to respond to changes in environmental factors by changing its strategic orientation, a majority of managers agreed that both were important for a firm to succeed.

When the company was first established, NUG's core business was spare auto parts distribution. Before long, however, NUG agreed to establish distributorship arrangements for a number of other product lines in various segments of the auto care market, thereby employing sectoral diversification. In response to an increasingly difficult business climate in the wake of the war, NUG also moved forward through geographic diversification. According to a review of NUG's financial statements, this renewal strategy proved to be financially beneficial, and in 2009 net profits company-wide increased to nearly double what they had been in 2005. The renewal strategy of moving into healthier markets paid off enormously.

Conclusion

It is evident that for NUG, as an SME in post-war Iraq, its strategic orientation was fundamentally very influential on the design, implementation, and outcomes associated with its diversification strategies. This research found that strategic orientation and diversification strategies had a substantial impact on NUG's outcomes over the post-2003 war period. The impact extended to the perceptions of employees and managers who were asked to attribute a rationale to the firm's actions. It also extended the analysis to NUG's fiscal situation in the post-war years, finding that strategic orientation led to substantive financial growth and an increasingly stable future. At the time of the research study, the actual experiences of the firm and its employees verify that the diversification strategies were working well for National United Group.