THE IMPACT OF STRATEGIC PLANNING ON THE PROFITABILITY OF SMALL AND MEDIUM-SIZED BUSINESSES IN NIGERIA
CHAPTER ONE/INTRODUCTION
Despite the plethora of literature in the field of strategic planning no single definition of strategic planning is universally agreed upon. Terms such as superior performance, competitive advantage over rivals (Grant, 2001), growth ( Larsen, Tonge, & Ito, 2000) and formality (O‟Regan & Ghobadian, 2007) are often discussed within existing definitions, all of which are valid but none of which are applicable to every business all the time. Growth often does not form part of the strategic plan of a company in a mature industry, similarly the process and outcomes are not necessarily formalised. Armstrong (2006) contends that strategic planning calls for an explicit process for determining the firm’s long range objectives, procedures for generating and evaluating alternative strategies, and a system for monitoring the results of the plan when implemented.
According to Poister (2010), strategic planning takes a “big picture” approach that blends futuristic thinking, objective analysis, and subjective evaluation of values, goals, and priorities to chart a future direction and courses of action to ensure an organization’s vitality, effectiveness, and ability to add public value. As indicated by Foundation for Community Association Research (FCAR) (2001), strategic planning is not only about ensuring that an organization remains financially sound and be able to maintain its reserves, but it also projects where the organization expects to be in five, ten or fifteen years and how it will get there. It is a systematic planning process involving a number of steps that identify the current status of the organization, including its mission, vision for the future, operating values, needs (strengths, weaknesses, opportunities, and threats), goals, prioritized actions and strategies, action plans, and monitoring plans (Armstrong, 2006). Strategic planning can be referred to as a process to establish priorities on what will be accomplished in the future and allows all components of the organization to pull together around a single plan for execution for the attainment of a common objective. Yepwi (2007) concludes that strategic planning is a comprehensive statement of an organization’s mission, objectives and strategies, adding that it is a detailed roadmap that an organization intends to follow in conducting its activities.
Hunt (1998) elucidates that strategic planning provides a mechanism for enhancing communication between various units of an organization on its strengths and weaknesses in the pursuit of a common set of objectives. This would enhance the organization’s ability to prevent problems. In fact, Fehnel (2000) aptly notes that strategic planning is a systematic process in which an organization assesses its basic reason for being (that is, its purpose or mission), what its strengths and weaknesses are, and what opportunities and threats it might face in the immediate and foreseeable future. The organization then uses this assessment to decide whether or not to make changes in what it does, how it does it, and with whom it interacts in order to fulfill its purpose.
The definition of SMEs differs from one country to another but is often based on employment, assets or a combination of both. According to the World Bank (2010), small and medium enterprises are conceived as enterprises which have at most 300 employees and an annual turnover not exceeding 15 million US dollars. Further to the above, there is the distinction of small enterprises having fewer than 50 staff members and up to 3 million US dollars turnover while micro-enterprises have up to 10 persons and $100,000 turnover. The Small Business Administration (SBA) in the U.S.A defines Small scale enterprises by its loan purpose and nature of services. In the UK, sections 382 and 465 of the Companies Act 2006 define an SME for the purpose of accounting requirements. According to this, a small company is one that has a turnover of not more than £5.6 million, a balance sheet total of not more than £2.8 million and not more than 50 employees. A medium-sized company has a turnover of not more than £22.8 million, a balance sheet total of not more than £11.4 million and not more than 250 employees.
According to the Central Bank Nigeria’s (CBN) Credit Guidelines, a small Scale Industry is any manufacturing or service enterprise whose annual business turnover does not exceed N500,000 ceiling which was imposed on the Agricultural Credit Guarantee Scheme (ACGS) and not more than N1 million (one million Naira). According to SMEDAN (2009), a business is defined as small in the manufacturing sector if it employs fewer than 100 employees. National Council of Industries refers to SMEs as business enterprises whose total costs, excluding land, are not more than two hundred million naira (₦200, 000,000.00). Small and Medium Enterprises Equity Investment Scheme (SMEEIS) defines SMEs as any enterprise with a maximum asset base of N200, 000,000 (200 million Naira) excluding land and working capital with the number of staff employed by the enterprise expected to be not less than 10 and not more than 300.
Previous studies on the relationship between strategic planning and SMEs performance are mixed. Some find positive relationship, some find no relationship while some find negative relationship. For instance, Okwachi, Gakure and Ragui (2013) investigate how managerial practices affect the implementation of strategic plans by SMEs in Nairobi County in Kenya. A survey of 96 SMEs was conducted from a population frame of 810 SMEs registered by the Nairobi City Council. Both quantitative and qualitative data were collected. A questionnaire containing both open-ended and closed questions was used for data collection. The response rate of 91.67% was achieved. Data collected was analyzed using the Statistical Package for Social Sciences (SPSS) software. The study results indicate that managerial practices affect implementation of strategic plans in Kenyan SMEs.
Akande, Adewoye, Oladejo and Ademola (2011) examine strategic importance of age and size of enterprise as well as the sources of funds available to them to their performances. Data were analysed using simple descriptive statistics that include pie and bar charts and multiple regression analysis. The equation specified performance as dependent variables and age, size and sources of funds as independent variables. The result revealed that the size and age of microenterprises have effect on their performance as the relationship were both positive and significant at (P<0.05).
Fiberesima and Abdul Rani (2013) also examine the impact of strategic management on business success in Nigeria. The study concluded that strategic management was found to be positively related to corporate success, and strategic management practices improve business success. Muogbo (2013) explores the impact of strategic management on organizational growth and development of selected manufacturing firms in Anambra State in Nigerian. Results from the analysis indicated that the adoption of strategic management has significant effect on competitiveness and significant effect on employee’s performance and has significantly increased organizational productivity.
Amurle, Gakure, and Waititu (2013) study objective was to establish the effect of strategic planning on the performance of Information and Communication Technology (ICT) SMEs in Kenya. The study results revealed that strategic planning has significant and positive influences on performance of ICT SME’s in Kenya.
Glaister, Dincer, Tatoglu and Demirbag (2008) found strong positive relationship between formal planning process and performance in manufacturing Turkish companies. In the same vein, Elbanna (2008) emerged that strategic planning practice positively related to strategic planning effectiveness in privately owned Egyptian companies.
Aldehayyat and Twaissi (2011) identify strategic planning system characteristics in Jordanian small industrial firms and to examine its relationship with corporate performance. The results of the research strongly indicated that there was a positive relationship between strategic planning and financial performance. Arasa and K’Obonyo (2012) also examine the relationship between strategic planning and firm performance. Correlation analysis results indicated the existence of a strong relationship between strategic planning and firm performance.
Kraus, Harms and Schwarz (2006) find that planning formalisation have positively effect on performance in small Austrian enterprise. Dauda, Akingbade and Akinlabi (2010) also examine the influence of strategic management on corporate performance in selected small scale enterprises in Lagos Metropolis, Nigeria. Findings reveal that strategic management practices enhance both organizational profitability and company market share.
Luen, Yong and Fook (2013) investigate whether strategic planning affects business performances of these SMEs over the long term in Malaysia. The results confirm that there was a positive relationship between strategic planning and their business performances.
However, the studies of Shrader, Mulford and Blackburn (1989) find no apparent systemic relationship between strategic planning and performance. Falshaw, Glaister and Tatoglue (2006) also find no relationship between formal planning process and company performance in UK companies. Al-Qatamin and Al-Qatamin (2012) also conduct an assessment of corporate strategic performance in a sample of Jordanian banks. Results indicated that profitability has a weak positive discriminatory effect, while productivity has no statistically significant contribution to strategic performance.
Download Full Material-N5000