EFFECT OF STRATEGIC PLANNING ON THE FINANCIAL PERFORMANCE OF SMALL AND MEDIUM SIZE ENTERPRISES IN NIGERIA
The main objective of the study was to investigate the strategic planning process on the financial performance of professional service SME’s in Nigeria. Five specific objectives of the study are: to determine the effect of strategy formulation on the performance of professional service SME’s in Nigeria; to investigate how strategy formulation affect financial performance of professional service SME’s in Nigeria; to investigate how strategy implementation affect the financial performance of professional service SME’s in Nigeria; to evaluate the effect of strategy evaluation on financial performance of professional service SME’s in Nigeria and to identify the moderating effect of innovation on the relationship between strategic planning process and financial performance of SMEs. This study unit of measurement was senior, middle level managers and owners of professional service SME’s in Nairobi. The study used cross-sectional descriptive study design. From a target population of 51287 registered professional service SMEs in Nairobi, 381 respondents were chosen using proportionate and purposive sampling, with one respondent selected from each SME. Questionnaire was used as the data collection instrument, with both descriptive and inferential statistics performed. From the findings it was revealed that environmental scanning, strategy formulation, strategy implementation and strategy evaluation all had positive significant effects. The findings of factor analysis also indicated that only 8 dimension of strategic planning process are considered important to SMEs. Further, the findings showed that innovation have moderating effect on the relationship between strategic planning process and the financial performance of professional service SMEs. Thus it can be concluded that strategic planning process affects the performance of SMEs to a small extent. The study also concludes that innovation practices hold potential in affecting the relationship between strategic planning process and financial performance among professional service SMEs. The study recommends that professional service SMEs adopt strategic planning process as a way of improving their performance. It is also important for SMEs that have adopted strategic planning process to embrace innovative practices as a way of further enhancing professional service SMEs financial performance.
1.1 Background of the Study
The background of this study outlines the strategic planning process from global perspectives, African and Nigerian contexts respectively. This is explained in the section below.
1.1.1 Strategic Planning process from Global Perspectives
SMEs (Small-and-Medium-Enterprises) are one of the major pillars in the economic development of both the developed countries and emerging economies. Based on recent research, besides creating most employment opportunities in comparison to major corporations, most business activities of countries are linked to SMEs. However, SMEs are highly vulnerable and are characterized by high failure rates.
Chen and Bowen (2012) in one of the first study carried out in UK points out that strategic planning process is central to the financial performance of SMEs. The study suggest that although strategic planning process is important to the financial performance of SMEs, the formality of the strategic planning process has no bearing on the performance of SME, with both formal and informal strategic planning process holding great sway in the financial performance of SMEs in UK.
Since the 1970s Ibrahim, Sulaiman, Kahtani and Abu-Jarad (2012) posits that most new jobs at the macro level of OECD (Organization-of-Economic-and-CulturalDevelopment) are generated by SMEs. In New Zealand and Australia, for example, SMEs contribute approximately 30% of the country’s GDP (Gross-Domestic-Product).In the UK and the US, SMEs contribute 51% of the country’s GDP. SMEs also play a major role in terms of facilitating innovation, enhancing entrepreneurial skills and creating employment opportunities (Ahearne, Lam, & Kraus, 2014).
Review of studies in Europe reveals that SMEs have strategic planning process in a similar manner like the large enterprises. For instance, in a study by Mamula and PantićPopović, (2015), show that approximately 80% of SMEs managers claim to have formal strategic plans. In another study conducted in Germany, more than 70% of SMEs pointed out that strategic planning process play an important process in improving the performance of SMEs. Although reviews studies in Europe suggest the importance of strategic planning process, planning in SMEs is majorly based on informal process with less regard to planning instruments as in bigger corporation (Stonehouse & Pemberton, 2012).
SMEs are the leading enterprises in the OECD region accounting for around 99% of all firms. Resultantly, SMEs contribute around 70% of jobs in the region and contribute around 60% of value addition in the area. In developing countries, 45% of job opportunities are attributed to SMEs while approximately 33% of GDP is associated with the businesses (IFC, 2010).
Hartman, Lundberg and White (2015) point that strategic planning are important tools used by SMEs in USA in performance improvement. However, they suggest that the application of strategic planning process in USA SMEs cannot be viewed as simplified version of strategic planning process in large corporations. They propose that for strategic planning process to have impact on performance, SMEs need to adopt techniques that suit them (Mazzarol, Reboud & Souter, 2009).
Siu, Fang and Lin (2004) proposes that successful SMEs in Taiwan and China tend to adopt an overall business approach that entails the use of strategic planning process and techniques, carry out regular situational strategies and develop emergent strategies to meet the dynamic situation. Furthermore, SMEs that embrace strategic planning are often characterized by high innovation, presence of newly patented products, using new management technologies and process and expanding their ventures overseas. Nonetheless, as Wang et al. (2007) point out, most SMEs which fail in China have poor strategic planning process.
Around 81% of firms across the globe practice strategic planning, with 89% of firms in the US embracing the practice (O’Regan & Ghobadian, 2007). Based on an analysis of SMEs in the US, Baker, Adams and Davis (1993) points out that the performance of SMEs is positively influenced by strategic planning. Consequently, strategic planning is characterized by setting objectives and goals for at least the next three years and its relationship with the environment including formulating a formal plan which consists of written plans; alternative strategies; probable future resource requirements; continuous monitoring and modification strategies and includes environmental scanning (Mekic & Mekic, 2014).
Aldehayyat and Twaissi (2011) highlight that strategic planning process among countries in the Middle East is still at nascent stage with small companies not engaging in strategic planning process. They further show that SMEs in the Middle East still give less importance to formal strategic planning process, with the SMEs that engage in strategic planning mostly using informal planning methods. Strategic planning was introduced in china in the past decade; hence, only a few SMEs in the country have embraced the practice. In fact, most managers and owners of SMEs in China are not aware of the concept and mostly associate the practice with large companies; hence, they show little interest in strategic planning. However, Chinese SMEs focusing on internationalization have adopted the practice (Cunningham & Rowley, 2008).
Hill (2001) observes that SMEs in Ireland and the United Kingdom do have fairly strong strategic planning process unlike other countries in European Union. They state that most of SMEs in UK do engage in some form of strategic planning process, formal or informal process. The nature of strategic planning process of SMEs in UK contradicts the nature of strategic planning in most countries as it is relatively developed.
1.1.2 Strategic Planning Process in Africa
In South Africa, it does not seem to be the case; van Scheers (2010) established that a lack of strategic planning process is a common experience among SMEs, with most managers/owners lacking strategic planning skills. This shows that strategic planning process in South Africa is still low and at early stages across most sectors. In SubSaharan Africa, minimal research has been conducted on strategic management in SMEs. For instance, Abesiga, Netswera, and ziwa (2015) point out that strategic planning process is still very low among SMEs in Uganda. In addition, the study revealed that the small strategic planning process that is carried out among SMEs is still informal, with most SMEs still guided by the traditional way of operating business.
Mori, (2013) shows in his study that majority of SMEs in Tanzania have yet to adopt strategic planning in their practices. Further, the study revealed that strategic planning is more dominant among SMEs in urban places than SMEs in rural places. Majama and Tebogo Magang (2016) also indicate in their study that was carried out in Botswana that adoption of strategic planning is still low in Botswana, with some of the SME owners/managers not knowledgeable on strategic planning.
In Ghana, Appiah Fening et al. (2008), argues that most of the SMEs in Ghana have yet to adopt strategic planning process. A situation that he states has led to poor performance of most SMEs in Ghana.Donkor, Donkor and Kwarteng (2018) in a study conducted in Ghana, points out that SMEs that adopt strategic planning process exhibit long term sustainability as opposed to SMEs without strategic plans. Makinde and Olalekan (2017) established that SMEs in urban areas in Nigeria have adopted strategic planning process more than SMEs in rural areas. As a result he emphasizes that SMEs in urban areas in Nigeria are likely to succeed in the long run than SMEs in the rural areas of Nigeria.
1.1.3 Strategic Planning Process in Nigeria
Njoroge (2015) points out in his study that strategic planning process among SMEs in Nigeria does not always take place in a formal and structured way. Strategic planning process in Nigeria he asserts are characterized by unstructured and informal process, with strategic planning process being sporadic as opposed to planned.
In a similar manner, Kihia (2017) indicated that SMEs implementing strategic management concepts tended to be more profitable and successful than those that did not. Awino (2013) further stated that SMEs in the ICT sector needed to think strategically in order to survive. The author stated that a significant number of SMEs in the ICT sector employ strategic planning practices and have written strategic plans. In this regard, he see strategic planning process as offering competitive advantages to SMEs.
In Nigeria, studies by Kefa (2014) and Amurle (2014) have been conducted on strategic planning process in SMEs. From these studies it has been revealed that most SMEs are yet to adopt strategic planning process. For the SMEs that have adopted strategic planning process are in urban centers, the study showed that majority of the SMEs are medium SMEs. In lights of the low strategic planning adoption process among SMEs in Nigeria, this study aimed at analyzing the effect of strategic planning process dimensions on the financial performance of professional SMEs.
Besides facilitating economic diversification and resilience, development of SMEs makes massive contributions towards the progress and growth of host nations. For example, SMEs which account for over 80 % of businesses in Nigeria and contribute
18% of the country’s GDP and employ 74% of its labour force is employed in the sector. Auka and Langat (2016) in this regards argues that the potential of SMEs to contribute to the GDP growth of the country can only increase to the extent that they adopt best practices. They acknowledge that strategic planning process offers SMEs in Nigeria great potential of succeeding and not failing as many SMEs have done locally.
1.1.4 Strategic Management Planning
Strategic management planning refers to a philosophical approach to business that involves more than a set rules stipulated for an organization. To successfully implement the strategic planning process, it is important for executive to think strategically before applying that thought to a process. Equally, to successfully implement the process, it is important to ensure that every person in an organization including subordinate staff understand the strategy. The stage of strategic management planning include goalsetting, analysis, strategy formation, strategy implementation and strategy monitoring (Nyamwanza, 2014).
SMEs are characterized by few formal strategy processes; however, the business depicts the existence of emergent and intended strategies. For example, entrepreneurial strategy which is common among some SMEs is defined as the presence of intentions at the individual level, tacit vision of a single leader, and adaptability to new opportunities; hence, the firm is under the control of the leader and located in protected niche in its environment; these strategies are relatively deliberate but can also be emergent.
Pournasir (2013) suggests that strategy process involves various stages and activities including strategic thinking; strategy formation; option selection; option generation; performance control; action taking; and Strategic change. Despite the various strategic process architectures being provided by different authors, the processes can be looked into three major categories: strategy formulation; strategy implementation; and strategy review and control. Regardless of the various stages and activities, the strategy processes is a set of concurrent, iterative and cyclical activities rather than a set of sequential and static set of activities. This conceptual classification is valid, however it is important to mention that these stages are not distinctive and boundaries between phases are not clear in practice (Arasa & K’Obonyo, 2012).
Some authors Ackermann, Eden, and Brown (2005) interpret some phases within the process differently. For instance, ‘Evaluation’ can be looked at from two different lenses First interpretation is related to working out how the strategies work before events happen and looking at the effects of possible actions towards achieving goals. This type of evaluation is considered as part of formulation phase. On the other hand, the second type of evaluation seems to be part of review and control as in the work of Pushpakumari and Watanabe (2009). This type of evaluation looks at how well strategy is working in practice once strategy is put into action. It focuses on three elements within review process which are (1) an evaluation of the extent to which the strategy has been implemented and is embedded in the organization, (2) an evaluation of the assumptions underpinning the strategy, and (3) an evaluation of the influence the strategy has on those in an organization who act on the strategy (Chen & Bowen, 2012).
SMEs in Nigeria have adopted strategic planning process with an aim to enhance their competitiveness. In addition to enhancing their competitiveness, external factors have contributed to the adoption of strategic planning process. These external factors include economic factors, social factors, technology information systems and competition. Besides, the external factors, political factors have contributed to the adoption of strategic planning process among SMEs in Nigeria. However, the adoption of strategic planning process among SMEs has been both formally and informally, with formal strategic planning process dominant among medium SMEs while informal strategic planning process is dominant among micro and small enterprises (Wafula, 2015).
To anticipate, and simultaneously deal with environmental turbulence successfully SMEs in Nigeria embrace strategic planning. Such plans must be designed to realize organizations’ competitive goals of the organization, and thus ensure the organizational mission is executed. Strategic planning as Muturi (2016) points out is more than capital or financial in SMEs. Instead, strategic planning in SMEs involves properly organized process that encompasses all future activities of an organization (Wafula 2015).
1.1.5 Small and Medium Enterprises
SMEs often refer to businesses that have less than 250 workers. In general, microbusinesses have between 1 and 9 workers while employees in small businesses range between 10 and 49. Medium-sized businesses on the other hand have between 50 and 249 workers while business that have over 250 workers are considered as large enterprises. On the contrary, Alibhai, Bell and Conner (2017) consider SMEs as independent firms that have less than 250 workers and have an annual turnover below EUR 50 million. In comparison to large organizations, SMEs have increased relatively fast since the 1980s in most developed economies. The UK for example, had approximately 4.3 million business; with 90% being SMEs in the first quarter of 2005.
The SMEs in the country provided 47% of employment in the country’s private sector and a turnover of 36%. The economies of other developed countries such as Russia, the US and China are also have a high proportion of SMEs (Skokan, Pawliczek & Piszczur, 2013).
Unlike the OECD region, most Sub-Saharan countries have witnessed a high growth of SMEs in the last ten years. The SMEs are the backbone of most African countries and represent around 90% of business, and simultaneously account for 60% of employment opportunities (Wambui & Wario, 2015). In Ghana, for example, SMEs provide 85% of employment in the manufacturing sector. Moreover, besides accounting for around 92% of business Ghana, the sector contributes 70% of Ghana’s GDP
In Nigeria, SMEs are increasing rapidly and have spread across all industries including the manufacturing, finance, textile, transport and hospitality sector, among others. Nigeria has a volatile and unpredictable business environment where activities of enterprises are influenced by internal and external factors. Unlike large businesses, SMEs are less agile, and therefore are more vulnerable to a VUCA environment. The contribution of SMEs in Nigeria’s economic development is well-documented. The sector, for example accounts for 74.2% of the total persons in employment (KNBS, 2016). Equally, SMEs contribute around18.4% of Nigeria’s GDP. Besides providing goods and services sector, SMEs in Nigeria promote innovation and competition and improve entrepreneurship which plays a key role in industrialization and development in the private sector (Gituma, 2016). Nigeria expects to become an NIN (Newly-Industrialized-Nation) by 2030. As such, SMEs must play a critical role enabling the country to become an NIN; hence, the high proportion of early failure in the sector must either be eliminated or reduced significantly. However, besides the high mortality rate of businesses in the sector, most small business are stagnant and maintain at most five employees and rarely graduate into medium organizations. In fact, Muhando (2015) posits that most small businesses in the country rarely celebrate their third birthday. The purposes of this research is to enhance an understanding of strategic planning as the best practice that can be used facilitate better performance of SMEs in the country and reduce the high mortality rate in the sector.
1.2 Statement of the Problem
SMEs play a key role in economic development in Nigeria including contributing around 70% of the country’s GDP, employing almost 63.6% of the workforce and generating technical innovations, among others. Therefore, the sector is a source of economic development, innovation and flexibility. The importance of SMEs to a country’s GDP has attracted interest on the performance of SMEs. A World Bank report by Alibhai, Bell & Conner (2017) revealed that majority of SMEs in Nairobi county have poor financial performance. Although the report acknowledged that professional service SME (PSEs) perform better than SMEs in other sectors the performance of PSEs was still deemed as poor. Similarly, Nakhaima (2016) in her study established that SMEs in Nairobi have poor financial performance and as a consequent suggested the need for strategic planning to improve the performance of SMEs.
Strategic planning process continues to gain traction in SMEs, albeit not through the formal strategic planning process but the informal process. Sandanda (2014) asserts that strategic planning process is increasing in terms of adoption among SMEs. He further argues that strategic planning process is used by SMEs differently in various sectors; questions still abounds with regard to its effect on performance on SMEs in various sectors. Although a number of studies have been carried out on relationship between strategic planning process and performance of SMEs in different sectors, mixed and inconclusive finding still exists.
Regionally, studies by Makinde and Olalekan (2017); Donkor and Kwarteng (2018); Dubihlela and Sandada (2014) have all supported the importance of strategic planning process on SME performance. Locally, studies by Njoroge (2015), Najib and Baroto (2013), Maroa and Muturi (2015), Wambui and Wario (2015) and Kihia (2017) have recognized the role of strategic planning process on the performance of SMEs. The aforementioned studies have examined the strategic planning-financial performance relationship in agriculture, manufacturing, ICT and retail sector. However, professional service firms that is a key component of SMEs is still yet to be examined. This raises the question, how does strategic planning process affect financial performance of professional service SMEs. This study is an attempt to fill the gap by analyzing the effect of strategic planning process on financial performance of SMEs in professional service sector.
1.3 Objectives of the Study
1.3.1 General objective
The general objective of this study was to investigate the effect of the strategic planning process on the financial performance of SMEs in professional service sector in Nigeria.
1.3.2 Specific objectives
- To establish the influence of environmental scanning on the financial performance of professional service SMEs in Nigeria
- To determine the influence of strategy Formulation on the financial performance of professional service SME’s in Nigeria
- To establish the influence of Strategy Implementation on the financial performance of professional SMEs in Nigeria.
- To identify the influence Strategy Evaluationon the financial performance of professional service SMEs in Nigeria.
- To analyze the moderating influence of innovation on the relationship between strategic planning process and financial performance of professional service SMEs in Nigeria.
1.4 Hypotheses of the Study
In order to empirically meet the study objectives, this study tested five set of hypotheses as outlined below:
H01: Environmental scanning has no significant influence on the financial performance of professional service SMEs in Nigeria
H02: Strategy Formulation has no significant influence on the financial performance of professional service SME’s in Nigeria.
H03: Strategy Implementation has no significant influence and the financial performance of professional service SME’s in Nigeria.
H04: Strategy evaluation has no significant influence onfinancial performance of SME’s professional service SMEs in Nigeria.
H05: Innovation does not influence the relationship between strategic planning process and financial performance of professional service SMEs in Nigeria.
1.5 Significance of Study
This section highlights the importance and contribution of the study to various stakeholders. The stakeholder can be broadly classified as:
1.5.1 Managers of SMEs and Management Consultants
The finding of the study isof interest to the Managers or owners of the SMEs. Through the study findings and recommendation SMEs owners are in a good position to adopt strategic planning process in their business. The SMEs managers are in a position to adopt strategic planning process as evidence based as opposed to theoretical basis. Further, the study findings offer consultants the opportunity to develop programs that suits the needs of SMEs in Nigeria. This will results in development of niche training programs in line with business needs of SMEs.
1.5.2 Internal Employees
This study results offers the employees within the SMEs the drive to acquire strategic planning process. Based on the study recommendation, SMEs employees can be in a position to enhance the adoption of specific planning process. Employees can also act as source of motivation to managers and owners to adopt strategic planning process by coming into contact with the findings of the study.
1.5.3 Government Policy Makers
The finding of the study is of great significant to the SMEs in Nigeria. Findings of this study are also expected to be of great importance to policy makers. The documented report of this study can easily be acquired from the library and provide more understanding on public policy analysis on SMEs in Nigeria. From the study policy briefs can be made and share with policy makers both from the government and private sector. Through presentation made based on the study findings in seminars and conferences the findings will contribute to improving the discourse on strategic management planning process in SMEs. Therefore, this study is important to policy makers in government who have earmarked the informal sectors as one of the key growth pillars in vision 2030. Through the findings the government can develop policies that will encourage the adoption and use of strategic planning process thereby improving growth SMEs, and by extension the development of the country.
1.5.4 Academicians and Research institutions
The study further made a myriad of contributions to the literature on the strategic management which was part of articles useful to researchers who want to further this study and to other wider stakeholders in academic circles. Specifically, through the findings of this study more knowledge will be broadened on the strategic planning process of SMEs in developing countries. Through the findings of this study, the theoretical application of different theories in management has been tested in developing countries context. This will enhance the applicability of different management theories in varying context.
1.6 Scope of the Study
The study was about the strategic planning process in small and medium sized enterprises in Nigeria. Specifically, the study focused on the role of environmental scanning, strategy implementation, strategy formulation and strategy evaluation. The study used the four states of planning process to allow the researcher gain full knowledge on strategic planning process in SMEs. This is because the emergent form of strategic planning process views the four states as interrelated. This study was be limited to professional SMEs that have been in operation for at least one year. Professional service SMEs was the focus of the study for the reason that Alibhai, Bell and Conner (2017) states that professional service SMEs occupies approximately 30% of SMEs in urban areas.
1.7 Limitations of the Study
This study had its limitations; however it did not have significant interference with the outcome of the study as discussed under the following sections: The study did not have the most up to date sampling frame for professional service SMEs. The study used sampling frame by national chamber of commerce (2012) and to correct for under sampling the researcher used a sampling correction factor.
The study collected secondary data through financial statements. However during the data collection process this was a challenge as some of the respondents were not free to give out financial statement of the firms. To overcome this challenge, the researcher and only collected data on sales or profit of SMEs. Besides, the research assistants assured the respondents of privacy and confidentiality of any documents provided.
The other challenge experienced in the study was delayed response from some of the respondents during data collection. To overcome this, the researcher requested for contact information of the respondents where necessary. Through these contact information the researcher reminded the respondents on their commitment to participate in the study by filling questionnaire.
Another challenge that was experienced during data collection had to do with difficulty in reaching some of the participating SMEs during data collection. This was overcome by the researcher making contact with prospective organizations in advance through emails. Most of the organization email was source from their website or business directory. This allowed the researcher to get permission before visiting the organization.
The study also faced difficulties with regard to getting appointment from some of the managers and owners who had indicated their willingness to participate. To overcome this the researcher used referral mechanism from known contacts and participating firms to convince other unwillingness managers.
EFFECT OF STRATEGIC PLANNING ON THE FINANCIAL PERFORMANCE OF SMALL AND MEDIUM SIZE ENTERPRISES IN NIGERIA