FACTORS AFFECTING ADOPTION OF STRATEGIC PLANNING BY SMES

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ABSTRACT

This study sought to investigate factors affecting adoption of strategic planning by SMEs in Enugu state. It was guided by three objectives namely to determine organizational factors affecting adoption of strategic planning; to determine resources which affect adoption of strategic planning and to investigate strategic leadership factors influencing adoption of strategic planning by SMEs in Enugu state. This study used a descriptive survey research design. The target for this study was all SMEs owners and employees in Enugu state. There are 63 licensed manufacturing firms in Enugu state according to CAC. Simple random sampling was used to select respondents from each of the manufacturing firms. This study sampled 20% of the manufacturing firms in Enugu state. The average number of permanent employees in the manufacturing firms is five (5) and 20% of the manufacturing firms are 13. Most of the manufacturing firms are owner managed hence one (1) owner per hardware shop participated in the study. The sample size for the study was therefore the average number of employees in the manufacturing firms multiplied by number of sampled manufacturing firms. The sample size of the study was 78 respondents. This study used both primary and secondary data. Primary data was collected using semi-structured questionnaires. Questionnaires were administered by the researcher on the spot. Data collected was coded and analyzed using both qualitative and quantitative methods. Qualitative data from open-ended questions was analyzed using content analysis. Descriptive statistics such as frequencies, percentages and mean scores were used to analyze quantitative data. Results were presented in tables and charts. The study established that resources allocation affects strategic planning to a great extent. The organizational factors influenced strategic planning to a moderate extent. The study revealed that to a little extent there is inability to manage change effectively and lack of alignment between culture and strategy of organization. The study established that strategic leadership embraced strategic planning to a moderate extent. In the comparison of resource allocation, organization culture and strategic leadership as drivers of strategic planning and implementation, the study revealed that strategic leadership of the organization to a great extent is a driver of strategic planning and implementation. Allocation of resources in the organization and culture of the organization to a moderate extent are drivers of strategic planning and implementation. This study concluded that resources form a critical part of strategic planning adoption and implementation. It is important for SMEs to allocate enough resources and develop their human resource to support strategic planning and adoption. The size and nature of organization’s workforce and the industry that SMEs operate in determines their strategic planning adoption and implementation. This shows the need to have enough employees with the necessary skills and competency. Strategic leadership have key responsibilities that coordinate all units and elements of an organization and determine its operation. In comparison with resources and organizational factors, strategic leadership factors to a great extent take the lead as drivers of strategic planning adoption and implementation. The strategic leadership factors can therefore be termed as the most important driver influencing strategic planning and adoption. This study recommends that SMEs should embrace strategic planning practices by allocating enough resources towards this course and developing capacity of their employees to support it. The SMEs should allocate resources not only to achieve short-term goals but also focus on long-term growth.

 

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Today’s business environment is characterized by an increasing intensity of competition, globalization of the world economy, rapid technological changes and the growing expectations of customers, suppliers and the workforce. Surviving and growing in this turbulent and dynamic business environment requires strategic thinking and decisionmaking (Stonehouse & Pemberton, 2002). Although, research findings on the association between business planning and organizational performance have remained controversial and inconclusive (Temtime, Chinyoka and Shunda, 2003) there is much consensus that strategic planning is a vital means of meeting these challenges.

Small and medium-sized enterprises (SMEs) play a key role in around the world. In Europe’s economies, for instance, SMEs employ as much as 66% of the total employed personnel in the private sector and account for 55% of total revenues in the EU (Bauer, 2002). The role played by SMEs in any society is undoubtedly important, for instance, in Portugal around 98% of the industrial fabric is composed by SMEs. Most of times, firms are seen as a black box on what concerns to development however the measures taken by them, entrepreneurial strategies, and entrepreneurship actions, have influence in the development theatre (Stonehouse & Pemberton, 2002).

Due to an extensive application of strategic management instruments in big companies and a widely accepted notion that rational economic decision making should prevail in enterprises regardless of size, practitioners and academics alike have recently called for a more substantial use of strategic planning in SMEs. Most concepts and instruments of strategic management are considered to be irrespective of company size. However, SMEs in particular often cannot acquire all required resources which prevent successful implementation of actions. In contrast to bigger companies, SMEs normally dispose of a lower level of resources, lower access to human and financial capital as well as to the selling markets, and possess an insufficiently developed administration. Thus, the application of formal planning mechanisms is often missing, especially up to a certain „critical size‟ (Kraus, Reiche and Reschke, 2008).

SME‟s are considered to be the principal driving force of economic development in almost all economies. In Kenya, SMEs are vital. According to Gakure and Amurle (2013), the SMEs sector employs 74% of the labour force and contributes over 18% of the country‟s Gross Domestic Product (GDP). Despite its great contribution to Kenyan society, and the numerous policy prescriptions, SMEs sector encounter series of challenges and constraints that inhibit its growth. The effect is less growth, low competitiveness, high failure rate, and an average lifespan of five years. On the other hand, for a long time strategic planning is known to be an essential activity that generates positive outcomes for firms of all sizes. However, little is known of the strategic planning practices among SMEs in Africa and in particular Kenya (Gakure and Amurle, 2013).

In Kenya, there are different definitions of small and medium enterprises which are yet to be consolidated. A national baseline survey of small and medium firms carried out in 1999, for instance, defines a small firm as one which employs 6-10 people while a medium one is expected to have 11-100 employees (CBS et al, 1999). However, an MSE bill has been in process for 10 years but has not yet been enacted into law. This bill takes a different approach by combining employment with other measures of size. It defines a micro enterprise as a business activity whose annual turnover does not exceed Ksh. 500,000 and/or employs less than 10 people with total assets and financial investment subject to determination by the Minister from time to time. For the purpose of this study, Small and Medium Enterprises was determined by number of employees. An SME was considered to have 11-100 employees.

Strategic planning, among other things, deals with assessing the internal and external business environment for the purpose of identifying organizational strengths, weaknesses, opportunities and threats. It is based on this assessment that firms establish organizational goals and determine the strategies to achieve them. Strategic planning is the attempt to prepare for future contingencies and thus to account for environmental dynamics and complexity. This entails the need to build alternative future scenarios and configurations.

Although the future cannot be predicted, it is possible to prepare for the future and/or alternative „futures‟ and align the enterprise accordingly. Unlike strategic management, planning is not concerned with the development of strategic goals and visions but rather deals with extrapolating present tendencies into the future.

Hence, strategic planning provides guidelines and programs for the achievement of specific goals and visions. It specifies the basic conditions as well as the scope for future business activities and is thus a key instrument for the overall strategic management. Five types of planning of varying depth can be conceptualized: (1) simple financial plans, (2) planning based on forecasts, (3) externally oriented planning (the entrepreneur begins to think strategically), (4) pro-active planning of the corporate future (instead of reacting to market-based changes), and (5) strategic planning as a systematic instrument of strategic management. Many decision-makers in SMEs are convinced that real entrepreneurs do not plan. Instead, it is assumed that they use their limited time resources more effectively for operational or sales activities.

Additionally, formal planning is often regarded as limited to large enterprises and thus not transferable to the requirements of the fast-moving and flexibly-structured SMEs. From an entrepreneur‟s perspective, three major objections are expressed against the use of strategic processes in SMEs (Fuglistaller, Frey and Halter, 2003): first, that strategic instruments limit the flexibility and the ability for improvisation; second, it is preferable to use the limited time resources for operational, sales or research and development activities rather than for strategy development processes; and third, that strategic management is too bureaucratic.

Small and Medium Enterprises are often the main drivers of economic growth and their survival and success is crucial to economic stability (Lange, Ottens, and Taylor, 2000).

However, as the number of SMEs increases so does competition, which might then result in a decrease in prices, low customer base, or both. This might in turn erode existing profits and create less incentive for people to start SMEs. Adoption of strategic planning plays an important role in the survival of SMEs because it helps to create business opportunities and combat pressure from competition.

1.2 Statement of the Problem

In times of increasing environmental dynamics and uncertainty it is vital to keep informed about corporate goals and their attainment on a regular basis and therefore view strategy development as a future investment. In this respect, the main use of strategic planning lies in the predictability of possible future scenarios and variations.

Although, the majority of well-known strategy concepts have been developed for large companies that generally display a higher level of awareness for existing problems and hence allocate more resources to this topic, some of these concepts and instruments also seem to be suitable for implementation in SMEs. A specific strategy concept for SMEs, however, needs to account for their unique conditions and problems. Small and medium enterprises (SMEs) are faced with many challenges, and the development of a sound strategy for the SME could define how these challenges are met which, in turn, could mean the difference between success or failure of the enterprise. If a sound strategy is major contributing factor to the success of a small business, but the evidence of sound strategic management is not present in successful SME‟s, one could question the way strategic management is conceptualized (Wang, Walker & Redmond, 2007).

Although small and medium-sized enterprises (SMEs) typically employ a major share of an economy‟s total employees, SME management suffers from an insufficient businessrelated knowledge base that top managers in SMEs possess. Indeed, formal plans or cost controls are often only provided on an irregular basis and planning instruments are usually only used by a small number of individuals and developed rather intuitively (Brinkmann, 2002). There is no research that has been conducted to assess the factors which affect adoption of strategic planning by SMEs operating in Enugu state. These shortcomings point towards the importance of examining the value of strategic planning for SMEs in more detail. This study sought to investigate factors affecting adoption of strategic planning by SMEs in Enugu state.

1.3 Research Objectives

This study was guided by the following general and specific objectives:

1.3.1 General Objectives

To investigate factors that affects adoption of strategic planning by SMEs in Enugu state

1.3.2 Specific Objectives

  1. To determine organizational factors that affects adoption of strategic planning by SMEs in Enugu state
  2. To establish resources which affect adoption of strategic planning by SMEs in

Enugu state

  1. To investigate strategic leadership factors that influence adoption of strategic planning by SMEs in Enugu state

1.4 Research Questions

  1. What are the organizational factors that affect adoption of strategic planning by SMEs in Enugu state?
  2. Which are the resource factors that affect adoption of strategic planning by SMEs in Enugu state?
  3. What are the strategic leadership factors that influence adoption of strategic planning by SMEs in Enugu state?

1.5 Justification of the Study

Strategic planning is extremely important for the success of an organization. Studies have also shown that the high failure rate among small firms, particularly among start-ups, can be attributed to the lack of formal business planning. Unsuccessful consumption of strategic planning is a major barrier to achieve expected or estimated performance. Therefore this study attempts to investigate the factors affecting practice of strategic planning in SMEs.

1.6 Significance of the Study

This study will be of value to a number of beneficiaries. To the SMEs, an understanding of factors affecting adoption of strategic planning will inform means to address the problem. This will result into enhanced use of strategic planning practices that will see more SMEs reap benefits. To the government, the findings of this study will provide an opportunity to understand factors affecting SMEs in their efforts to embrace strategic planning. They government through its policy making organs will benefit from these findings by recognizing where its efforts could be directed to help SMEs adopt strategic planning. Given that SMEs control a significant part of Nigeria economy, by unraveling factors affecting their adoption of strategic planning and accelerating their growth would result to improved economy in the country. To the customers, the findings of this study will ensure practices that yield better service delivery.

1.7 Scope of the Study

There are many factors that affect operations of SMEs. This study focused on the organizational, resource and strategic leadership factors affecting SMEs in Enugu state.

1.8 Limitations of the Study

There are a number of challenges that were anticipated in the course of this study. Data collection posed a challenge because not all hardware owners could understand contents of data collection instrument that was used. This challenge was addressed through administration of questionnaires on the spot where the researcher was available to offer any clarification that was required. Another limitation was the vast area that is covered by Enugu state. This study used descriptive survey method through questionnaires which was an economical method to address this challenge.

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