ABSTRACT
The business environment is increasingly becoming uncertain and unpredictable because of globalization, technological changes and trade liberalization. As a result, like large enterprises, SMEs are facing many new and unexpected challenges that threaten their performance and competitiveness. Strategic planning is a management tool that helps organizations focus their energy and resources to ensure that goals and objectives are achieved. The SME sector plays an important role in economic development in terms of poverty reduction and employment creation in Kenya. Previous studies in this area, focused on Strategic planning in large firms and very few studies have been done on the impact of strategic planning on small and medium sized firms. This study determined the relationship between strategic planning and performance of medium sized enterprises in Kenya. The objectives of the study were to determine the relationship between strategic environmental analysis, organizational direction and strategy formulation on firm performance. The study used structured questionnaires to gather primary data from Medium sized enterprises. The structured questionnaire was used on 47 medium sized enterprises. Multiple regression and Pearson’s correlation were used to test the study hypotheses. The results show that environmental analysis, organizational direction and strategy formulation had a positive influence on performance of medium sized enterprises. R2 was 0.424 indicating that strategic planning explains 42.4% variation of organizational performance of medium sized enterprises. The study indicates that strategic planning significantly influences organizational performance, therefore, organizations need embrace strategic planning to enhance performance in their organizations. However, there are other factors besides strategic planning which also influence organizational performance. Therefore, the study recommends further research to identify the other factors which influence organizational performance.
CHAPTER ONE
INTRODUCTION
Background of the study
Globalization has resulted in fierce competition internally and externally to many organizations. However, coping with the ambiguities brought about by such development and how to achieve competitive performance is a real challenge for every organization, small and medium sized enterprises included. Companies have to take appropriate actions to deal with these challenges.
According to Raduan et al (2009), a business that does something that is distinctive and difficult to replicate has competitive advantage and is likely to be more profitable than its rivals. Pearce and Robinson (2011), assert that from a resource based view strategic planning can result in strategic change which may increase strategy-environment fit, hence can become a source of sustained competitive advantage especially when strategic planning system improves flow of products and services between manufacturers and users.
Small and Medium Enterprises (SMEs) play a very important role in a nation’s economy. This is true for both developed and developing countries. SMEs constitute a high proportion of a nation’s business activities and generate more employment opportunities than large corporations in recent years.
Although small and medium size enterprises typically employ a major share of an economy’s total employees, formal plans and cost controls are often only provided on a regular basis and planning instruments are usually only used by a small number of individuals and developed rather intuitively (Brinkmann, 2002). These shortcomings point towards the importance of examining the value of strategic planning for SME’s in detail.
Medium Enterprise Sector in Kenya
Medium sized Enterprises play a very important role in a nation’s economy. This is true for both developed and developing countries. They constitute a high proportion of a nation’s business activities and generate more employment opportunities than large corporations in recent years.
The small and medium enterprises play an important role in the Kenyan economy. According to the Economic survey 2011, of the 503,000 jobs created in 2010, 80.6 percent or 440,400 were in the Small and medium Enterprise sector. Despite their significance, past statistics indicate that three out of five businesses fail within the first few months of operation (Kenya National Bureau of statistics, 2007).
There is no universal definition for Small and Medium Enterprise (SME). There are different standards about the definition of SMEs in Kenya. A national baseline survey of SMEs carried out in 1999, defines a small enterprise as one which employs 6-10 people, while a medium one is expected to have 11-100 employees (CBS et al, 1999). However there is an SME bill that has been in process in Kenya for more than 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 Kshs.500, 000 and or employs less than 10.
In spite of their many contributions, Small and Medium Enterprises are ‘plagued’ by high failure rates and poor performance levels (Jocumsen, 2004). To ensure sustained development of the sector, it is vital to understand why some enterprises are more successful than others. Comprehensive of extant studies in SMEs (Shwenk & Shrader 1993) suggest that ceteris paribus, a key determinant of business success lies in the presence or absence of strategic planning and management.
Strategic planning
Strategic planning is concerned with the setting of long term organizational goals, the development and implementation of strategy to achieve these goals and the allocation or diversion of resources necessary for realizing these goals (Stonehouse & Pemberton 2002). In practical sense, strategic planning is about competitive advantage. The purpose of strategic planning is to enable a business to gain as efficiently as possible, a sustainable edge over its competitors.
Research has consistently shown that most small and medium sized enterprises do not engage in strategic planning (Berman et al, 1997; Orser et al, 2000; Sandberg et al, 2003). This is at odds with much of the strategy literature that dictates that enterprises must actively plan for the future to compete effectively and survive (Ennis 1998). Accordingly, SME owner-managers have been accused of being strategically myopic and lacking the long term vision as to where their company is headed (Mazzarol, 2004). The concern is that by neglecting strategic management and planning, SMEs may not achieve their full performance and growth potentials, and their survival could be placed at risk (Berry 1998).
Strategic planning is more likely in to be, in those enterprises that are innovative, that have more newly patented products and that employ new processes and management technologies and that achieve international growth (Upton et al, 2001).
With respect to performance, strategic planning and management are more common in better performing SMEs. SMEs that engage in strategic planning, compared to those that don’t, are more likely to be those that achieve higher sales growth, higher returns on assets, higher margins on profit and higher employee growth (Bracker et al, 1988).
While it is certainly true that SME performance success is driven by more than strategic planning alone, previous findings generally support the contention that there are, on balance, greater advantages to it. However, given the evidence, it is well recognized that strategic planning is rare or nonexistent in the majority of SMEs. In practice, SMEs tend to orientate towards short term operational rather than long term strategic issues and decision making tends to be reactive rather than proactive (Gaskill et al, 1993). In SMEs that claim to plan, plans are frequently ad hoc and intuitive rather than formally written and provide little basis upon which business performance can be measured or analyzed (Kelmar & Noy 1990).
If the high rate of insolvencies and failure amongst SMEs, relative to larger businesses in the economy are to be taken as a guideline, it is clear that the financial risks involved in managing, owning and investing in small to medium sized businesses are relatively high.
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Item Type: Kenyan Topic | Size: 76 pages | Chapters: 1-5
Format: MS Word | Delivery: Within 30Mins.
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