Proceedings of 10th Global Business and Social Science Research Conference
23 -24 June 2014, Radisson Blu Hotel, Beijing, China, ISBN: 978-1-922069-55-9
Strategic Planning Process Dimensions and Smes
Performance
Hossein Hakimpoor*
This paper aims to investigate the impact of strategic planning (SP) process
dimensions on the SMEs performance. Regarding the critics about the bivariate methodology on previous research that have been conducted on SPperformance relationship the present study attempts to examine this
relationship taking account the role of contextual variables. A total of 126
SMEs responded to the survey. Data were analyzed by PLS technique. The
findings revealed that SP process dimensions have positive effect on the
performance. Result of analyses showed that there is a positive relationship
between the level of formality and comprehensiveness of SP and
performance and to less extent there is positive relationship between
participation of SP and performance. The current research reflects the value
of strategic planning to the SMEs and the role that strategic planning plays in
improving their performance.
JEL Codes: Management
1. Introduction
Strategic scholars are interested in understanding why firms make the strategic choices
they do, and how these choices and other factors affect firm performance. Understanding
these may lead to suggest ways firms can improve performance (2005). Indeed, the
relationship and effects of strategic planning on organizational performance has been a
central field of studies for researchers over the past three decades. There are numerous
research findings on the relationship between strategic planning and organizational
performance, but many of these findings have proved uncertain and ambiguous (Glaister
et al., 2008, Rudd et al., 2008, O‘Regan and Ghobadian, 2002a). These findings include
the range from positive relationships between strategic planning and performance to no
relationships; to negative relationships (Efendioglu and Karabulut, 2010). For example
there are empirical supports for a positive relationship between strategic planning (SP) and
performance (Glaister et al., 2008, Al-Shammari and Hussein, 2007, Phillips et al., 2001,
Baker and Leidecker, 2001), On the other hand, there are also evidences signifying that no
such relationship exist (French et al., 2004, Falshaw et al., 2006), and some researchers
have countered that explicit strategic planning is dysfunctional, or at best irrelevant (Miller
and Cardinal, 1994). This inconsistency raised the critics suggest that other factors will
affect on this relationship (Meilich and Marcus, 2006, Rudd et al., 2008, Hoffman, 2007). In
addition these studies have been criticized for little consideration on examining
organizational or contextual influences (Glaister et al., 2008). Thus, the study attempts to
examine the relationship between process dimensions of SP and performance of
Malaysian SMEs considering the role of contextual variables like the size of company, type
of industry, position of respondents in company, years of establishment of company and
demographic features of SMEs owners/managers. As a result of the above discussion, the
study aimed to achieve the following specific research objectives:
*Dr. Hossein Hakimpoor, Faculty of Management, Birjand branch, Islamic Azad University, Birjand, Iran,
Email: hhakimpur@gmail.com , corresponding author.
Proceedings of 10th Global Business and Social Science Research Conference
23 -24 June 2014, Radisson Blu Hotel, Beijing, China, ISBN: 978-1-922069-55-9





To investigate the relationship between the process of strategic planning and SMEs‘
performance.
To determine the relationship between the level of formality of strategic planning and
SMEs‘ performance.
To determine the relationship between the level of comprehensiveness of strategic
planning and SMEs‘ performance.
To determine the relationship between the level of participation in strategic planning
and SMEs‘ performance.
To identify the differences that exist in the relationship between SP and performance in
terms of different (a) firm sizes, (b) industry types, (c) position in company, (d) years of
establishment and (e) demographic features of SMEs owners/managers (i.e. race, age,
gender and education background).
The rest of the article is structured as follows: First, the extent literature relevant to
strategic planning and its dimensions and their relationship with performance are
reviewed. Then the conceptual framework and hypotheses are described. Then research
methodology is presented. Next the finding are discussed and summarised. The paper
concludes with a discussion of theoretical and managerial implications.
2. Literature review and hypotheses development
The majority of researches and studies that have conducted in strategic planning have
focused on two areas: the impact of strategic planning on firm performance and the role of
strategic planning in strategic decision making (Grant, 2003). Bromiley (2004) suggests
that strategic management research has three primary objectives: Explaining firm
behaviour at the strategic level; explaining performance differences among firms and
providing suggestions to improve firm performance. Table 1 shows some of the selected
empirical studies that have been conducted on SP-performance relationship. As can be
seen in Table 1 there are numerous research findings on the relationship between
strategic planning and organizational performance, but many of these findings have
proved uncertain and ambiguous (Glaister et al., 2008, Rudd et al., 2008, O‘Regan and
Ghobadian, 2002a). These findings include the range from positive relationships between
strategic planning and performance to no relationships; to negative relationships
(Efendioglu and Karabulut, 2010). Reviewing the literature, in spite of growing importance
of small businesses in the global economy and research efforts that have conducted in this
field, there is surprisingly little empirical work that has examined the relationship between
strategic planning process and organizational performance in SMEs. Accordingly, the
related hypothesis is as follow:
H1a, b: there is a positive relationship between SP and performance (a: financial, b: nonfinancial).
Strategic planning process contains several characteristics or dimensions. Phillips et al
(2001) stated four dimensions or characteristics for strategic planning process, including:
formality, participation, sophistication and thoroughness or comprehensiveness. Grover
and Segar (2005) have emphasized on the comprehensiveness, formalization,
participation and consistency and two other features that are related to information
systems. Although, small businesses follow a much less complex process (both in terms of
steps followed and methods used) in making their strategic decisions than that used by
larger organizations (Jocumsen, 2004). Accordingly, in this research three dimensions of
strategic planning process that are more common between academics were considered as
Proceedings of 10th Global Business and Social Science Research Conference
23 -24 June 2014, Radisson Blu Hotel, Beijing, China, ISBN: 978-1-922069-55-9
main dimensions of strategic planning process in SMEs, including:
comprehensiveness and participation (Hutzschenreuter and Kleindienst, 2006).
formality,
Proceedings of 10th Global Business and Social Science Research Conference
23 -24 June 2014, Radisson Blu Hotel, Beijing, China, ISBN: 978-1-922069-55-9
Table 1: Outline of Selected Empirical Studies on SP-Performance relationship
Authors
Variables studied
Research method
The relationship between the
use of strategic planning tools
and firm performance (ROA,
profitability, annual sales).
Questionnaire was mailed to
the CEOs of the 25 company
in the state of California
Correlation
analysis
(Phillips et al.,
2001)
The
interactive
between strategic
and performance
The
data
gathered
by
questionnaire from general
managers from 100 hotels
neural network
(French et al.,
2004)
Strategic planning factors and
performance relationship
(O'Regan
and
Ghobadian,
2004)
The
relationship
between
strategy, culture, leadership,
capability and performance
(Falshaw et al.,
2006)
The
relationship
between
strategic
planning
and
performance (with considering
the effect of a set of contextual
variables on this relationship.
(Kraus
2006)
The performance implications
of essential elements of
strategic planning in smaller
firms
(Baker
Leidecker,
2001)
et
and
al.,
effects
planning
Questionnaire was sent to 145
small regional professional
firms in New South Wales,
Australia.
A series of semi-focused
interviews and self-reporting
survey questionnaire were
used with the managers from
1000 SMEs
Data
gathered
via
a
questionnaire that was sent to
CEOs from 500 companies.
The study was based on a
representative sample of 290
small Austrian enterprises
Analytical Tools
Standard multiple
regression, Oneway ANOVA
Key Findings
There is a strong relationship between the use of
strategic planning tools and firms‘ ROA.
There is a strong positive correlation between
three specific strategic management tools and firm
profitability.
There is direct and positive effect of the constructs
of
planning
sophistication
and
planning
thoroughness on overall performance.
The degree of planning formality and rigidity can
hamper overall performance.
There is a link between planning and performance
but the link is not strong.
Correlation
analysis
The analysis shows that strong strategy
characteristics as well as strong leadership and
culture styles, irrespective of the style itself, are
associated
with
long-term
performance
improvement.
Regression
analysis
No relationship between formal planning
processes and subjective company performance.
Logistic
regression
analysis
The analysis shows planning formalization has a
positive significant impact on the probability of
belonging to the group of growth firms.
Other aspect of strategic planning (time horizon,
control and strategic instruments) did not impact
on performance.
Proceedings of 10th Global Business and Social Science Research Conference
23 -24 June 2014, Radisson Blu Hotel, Beijing, China, ISBN: 978-1-922069-55-9
Table 1: continued
Analytical
Tools
Authors
Variables studied
Research method
(Glaister et
al., 2008)
The relationship between Degree
of formality of strategic planning
and performance regarding the
moderating effect of organization
structure,
environmental
turbulence, firm size.
Data
collected
through
questionnaire that sent to CEOs
of 135 Turkish manufacturing
companies.
(AlShammari
and Hussein,
2007)
The
relationship
between
strategic planning and firm
performance, both financial(ROA
and growth in revenue) and
behavioral indicators in Jordan
Data was gathered via a selfadministrated questionnaire that
sent to the CEOs of the 37 firms
Based
on a sample
of
Jordanian
manufacturing
organizations
One-way
analysis
variance
(ANOVA)
(Hoffman,
2007)
Relationship between strategic
planning (process & content) and
performance
(subjective
&
objective)
regarding
the
moderating effect of culture.
Data were collected via a mailed
questionnaire that sent to a
stratified random sample of
CEOs of 150 multinational
manufacturing firms
Correlation and
One-way
analysis
of
variance
(ANOVA)
The
relationship
between
strategic
planning
and
performance
(financial
and
nonfinancial) regarding four types
of flexibility as mediators between
strategic
planning
and
performance
Data were collected via 2300
questionnaires
that
were
administered to a database of
large to medium sized UK
manufacturing organizations.
structural
equation
modeling (SEM)
The impact of strategic planning
on financial performance
The data were gathered via a
questionnaire that was mailed to
the CEO of the top 500
manufacturing Turkish firms in
2006) .
correlation
(Rudd et al.,
2008)
(Efendioglu
and
Karabulut,
2010)
Key Findings
Correlation,
LISREL, causal
modeling
of
There is a strong and positive relationship
between formal strategic planning and firm
performance.
For firms in the high environmental turbulence
group and more organic structure the relationship
between FSP and firm performance is stronger .
This study shows firms that engaging in strategic
planning have better financial and behavioral
performance than firm that are not implementing
this practice.
The analysis shows culture has a moderating
effect on the relationship between strategic
planning and performance.
The flexibility mediates the relationship between
strategic planning and performance.
There is not a clear answer for the basic question
about the link/positive correlation between the use
of strategic tools and company performance.
Proceedings of 10th Global Business and Social Science Research Conference
23 -24 June 2014, Radisson Blu Hotel, Beijing, China, ISBN: 978-1-922069-55-9
2.1 SP formality
The field of strategic planning and the formality of planning have been associated
together from their earliest foundation (Falshaw et al., 2006). The reason of having a
written and detailed strategic planning is to ensure strategic planning process receives
commitment from those who are affected by it and to allow an explicit evaluation and
clearly specify objectives is part of the formal strategic planning. The meaning of the
term formal strategic planning is to express that a firm‘s strategic planning process
involves explicit systematic procedures of determining the mission, major objectives,
strategies, and policies that manage the gaining and distribution of resources to achieve
organizational goals. These systematic procedures used to gain the involvement and
commitment of those principal stakeholders affected by the plan (Mintzberg and
Lampel, 1999).
According to Papke-Shields et al. (2002), formality is ―the extent to which the planning
process structured through written procedures, schedules and other documents and the
extent of documentation resulting from the planning process‖. Grover and Segar (2005)
also have defined the formality of strategic planning as the existence of structures,
techniques, written procedures, and policies which guide the planning process.
A formal strategic plan implies a resolute means to contain factors and techniques in a
organized and methodical way to achieve specified tasks and an attempt to adjust a
company‘s strength relative to that of its competitors, in the most efficient and effective
way. Nevertheless, the empirical evidence about the impact of formal strategic planning
on the performance is largely questionable and uncertain. Doubtfully this is an outcome
of a lack of a generally accepted definition of formal and informal strategic planning.
O‘Regan and Ghobadian (2002a) revealed the accentuation and stress on the
characteristics of strategic planning by firms who utilize formal planning is higher in
every case compared with non-formal planning firms.
On one hand, formality in strategic planning proves to have positive result for small firm
performance. However, Lyles et al (1993) in their study on small firms found mixed
results that indicate formal strategic planning may have its greatest impact in large
firms. Moreover, Schwenk and Sharder‘s (1993) analysis found a positive association
between formal strategic planning and performance. Hassan and Minden (2010) argued
that the using formalized strategic planning depends on to the defender strategic
orientation. On the other hand, some authors have also stated that formalization of
planning does not affect performance (Ackelsberg and Arlow, 1985). French et al (2004)
also stated that there is no strong link between strategic planning and SMEs‘
performance. Moreover, they have brought into question the value of classical strategic
planning process for small firms. Falshaw et al (2006) claimed that there is no
relationship between formal strategic planning process and subjective performance of
companies. They have used three contingent variables: size, environmental turbulence
and industry. They stated organizational size (in terms of turnover), environmental
turbulence and organization‘s industry lead to more formalized planning systems. In
conclusion, regardless of the supposed positive association between strategic planning
and firm performance in the prescriptive literature, but after decades of research, there
is not yet an established theory/model on the actual differences regarding performance
between formalized and non-formalized plans (Glaister et al., 2008) and the effect of
Proceedings of 10th Global Business and Social Science Research Conference
23 -24 June 2014, Radisson Blu Hotel, Beijing, China, ISBN: 978-1-922069-55-9
formal strategic planning on a firm‘s performance is still ambiguous. Therefore, the
following hypothesis is presented:
H2 a, b: there is a positive relationship between the level of SP formality and
performance of SMEs (a: financial, b: non-financial).
2.2 SP comprehensiveness
The comprehensiveness has identified as ―the extent to which an organization attempts
to be exhaustive or inclusive in making and integrating strategic decisions‖ (Grover and
Segars, 2005). Academics believe that comprehensiveness is the extent to which an
organizations key decision makers have tendency to use an extensive process for
decision making that includes high level of investigation to developing alternatives
courses of action, evaluating alternatives and developing multiple criteria to screen
alternatives (Elbanna and Child, 2007a, Forbes, 2005, Miller, 2008, Papke-Shields et
al., 2002). Although, according to Jocumsen (2004), small businesses follow a much
less complex process (both in terms of steps followed and methods used) in making
their strategic decisions than that suggested by theoretical framework and used by
larger organizations. Even though, he added that before attempting to introduce
changes to methods and process of strategic decisions, the currently methods used in
strategic decision making process should be fully accepted. Comprehensiveness
process seems to have effect on firm performance. Three reasons support this idea.
Firstly, it helps to decision makers dealing effectively with inherent complexity of
strategic decisions. Secondly, it helps to decision makers in reducing the effect of
cognitive biases, and finally, it enhances implementation motivation among decision
makers (Miller, 2008). Although, the relationship between strategic planning
comprehensiveness and performance is not clear and the empirical studies in this field
seem to produce contradictory results (Elbanna, 2011). Figure 1: conceptual framework
of the study
As a result, there is not a clear understanding of the effects of comprehensiveness on
firm performance, even though this is a dominant paradigm in the teaching and practice
of strategic management (George, 2007); furthermore, there are not empirical
evidences who clarify this relationship in SMEs context. Accordingly, in this research the
relationship between SP comprehensiveness and performance was tested. Therefore,
the following hypothesis is presented:
H3a, b: there is a positive between the level of SP comprehensiveness and
performance of SMEs (a: financial, b: non-financial).
2.3 SP participation
Participation is the other important component of strategic planning process. Although,
the major responsibility of an organization‘s owner or chief executive officer is making
good strategic decision, both managers and employees must also be involved in all
activities of strategic management process. Actually, participation is a key to gain
commitment for needed changes (David, 2001).
To initiate planning process and systems in a meaningful way, the organization needs
participation and commitment of all organizational levels (McDonald, 1992). Indeed, the
only way to gain ownership and commitment to strategic plan is participation in planning
(Phillips, 1996). According to Grover and Segar (2005) participation contains the extent
Proceedings of 10th Global Business and Social Science Research Conference
23 -24 June 2014, Radisson Blu Hotel, Beijing, China, ISBN: 978-1-922069-55-9
of involvement in SP, or variety of individuals involved in SP (Papke-Shield et al, 2002).
In line with Ketokivi and Castaner (2004) participation in the strategic planning process
can generate informational, affective and emotional effects. Indeed, in a participative
strategic planning process, top management usually forms a number of teams of
employees from different units and hierarchical levels in order to analyze the
implementation of past strategies and the organizational environment and to propose
goals, as well as strategies, and budgets for achieving those goals. Participation in
decisions as the extent to which lower level managers participate in the organization‘s
strategic decision making processes and thereby influence the organization‘s strategic
outcomes (Andersen, 2000).
The role of participation in the process of strategic planning has highlighted with authors
(e.g. (Elbanna, 2008, Fiegener, 2005). Most of researchers have emphasized on the
management participation in strategy development as an important factor for
organizational performance (Elbanna, 2008). According to Andersen, (2004)
participation in decisions, and strategic planning processes were all positively correlated
with economic performance. Although, most of these studies have been conducted on
large firms‘ context, the basic elements of strategic planning are same in large and
small companies (Tapinos et al., 2005). Yet, empirical evidences that concentrate on
the relationship between the levels of staff participation in strategic planning process in
SMEs context are scarce (Phillips et al., 200; Papke-Shield et al., 2002).Therefore, the
related hypothesis is as follow:
H4a, b: there is a positive Relationship between the level of SP participation and
performance of SMEs (a: financial, b: non-financial).
2.4 Control variables
Researchers argue that every investigation on relationship between strategic planning
and performance should be considered in relation with organizational or contextual
variables (Glaister et al., 2008). In this study some contextual and organizational
variables that have been examined in previous researches are controlled. Although,
there may be several determinants of SP-Performance relationship this study posits that
firm size, type of industry, position in company, years of company establishment and
demographic characteristics of SMEs owner-managers (i.e. age, race, gender and
education level) are major variables that are controlled in this research.
3. Theoretical Framework of Research
Figure 1, summaries the theoretical framework of this study. As shown, this research
focuses on the relationship between the strategic planning process dimensions (i.e.
formality, comprehensiveness and participation) and performance.
Proceedings of 10th Global Business and Social Science Research Conference
23 -24 June 2014, Radisson Blu Hotel, Beijing, China, ISBN: 978-1-922069-55-9
Figure 1: conceptual framework of the study
3. Research methodology
This study begins by sending an email to 2000 owners/managers in three states with
the highest number of SMEs, Selangor, WP KL and Johor listed in 2011 th Malaysian
SMEs Directory. The owners/managers are surveyed as respondents, because, they
have a significant impact on every aspect of the strategic and activities of SMEs.
Considering the control variables, the stratified random sampling method was used for
gathering quantitative data, because the stratifying criterion help researcher to be
ensure that the resulting sample is distributed in the same way as the population
(Bryman, 2008).
Two stratifying criterion were used in this study, namely size and type of industry. Size
has two levels, small and medium. Type of industry includes 6 groups of SMEs that
have the majority of them (75.8%) including, Textiles and Clothing; Metal and Non
Metallic Mineral Products; Food Products and Beverages; Paper and Recorded Media;
Furniture and Wood Products; and Rubber and Plastic Products. The questionnaires
were distributed between January to July 2012.
The email describes the purpose of the survey and provides a link to the online
questionnaire. The email was sent in three rounds. The first round generates 86
responses, followed by a reminder and 26 responses in the second round and finally 14
responses in the third round giving a response rate of 6% or 126 respondents. It is not
easy to get a high respond rate from the respondent in SMEs context. Considering
some of the previous researches that have been conducted in Malaysian SMEs context
Proceedings of 10th Global Business and Social Science Research Conference
23 -24 June 2014, Radisson Blu Hotel, Beijing, China, ISBN: 978-1-922069-55-9
(e.g. Hashim (1999) with 100 respondents, Hshim et al.,(2003) with 100 respondents
and Sa‘ari (2005) with 150 respondents) the respondent number of this study was
acceptable.
3.1 SP measures
In assessing the level of formality of strategic planning process two measures were
employed by researchers. The first measure that has been used with a number of prior
studies is the presence or absence of a written strategic plan (Ghobadian et al., 2008).
This measure dichotomizes firms into planner and non-planners. But the formality of
strategic planning process is a multi-dimensional phenomenon. Therefore, using a unidimensional variable to conceptualize a multi-dimensional phenomenon is inefficient. To
overcome this problem researcher has to use of multiple indicators to assess how
closely the element of written documentations is look like to the normative strategic
planning process. Some researchers stated dimensions that define the main
characteristics of the formal strategic planning process (Ghobadian et al., 2008, Phillips
et al., 2001).
Phillips (1996) measured the formality of planning based on some elements included:
existence of explicit goal setting; long-range and written planning; specifying the
responsibilities and assigning implementation responsibilities to specified individuals;
level of commitment to long-range plan; budgeting based on market segments;
reviewing the performance against the budget. Similarly, Ghobadian et al. (2008) have
used seven dimensions that define the main characteristics of the formal strategic
planning process. They argued these dimensions have identified by several authors to
describe the features of formal strategic planning. It seems that there is convergence
and overlapping between these dimensions and which stated by other researchers.
After a synthesis of above literature, in this study, a mixed instrument has been decided
and used to determine the level of formality of strategic planning process. Beside, to
compare strategic planning of SMEs, in this study two other dimensions that have been
identified as main dimensions of strategic planning process were used. These
dimensions are planning comprehensiveness and planning participation.
According to Phillips (1996), the comprehensiveness of planning is a suitable measure
to compare strategic planning practice of companies, especially when we do not have
access to detailed market share and profitability data. Reviewing the literature, there are
some measures that have been used by researchers for measuring the
comprehensiveness (e.g.(Atuahene-Gima and Haiyang, 2004, Forbes, 2005, Goll and
Rasheed, 2005, Papadakis and Barwise, 2002). Considering the common measures in
literature the level of planning comprehensiveness was determined in terms of the
following criteria:




Using experiences from a number of management levels.
Using divers set of ideas that include a number of internal and external sources of
ideas, rather than limited internal sources.
Evaluating thoroughly each possible action before planning.
Attempting to determine optimal courses of action from identified alternatives in
planning
Proceedings of 10th Global Business and Social Science Research Conference
23 -24 June 2014, Radisson Blu Hotel, Beijing, China, ISBN: 978-1-922069-55-9
The participation level for this study was assessed based on the level of influence from
two dimensions that had been validated in earlier research by Phillips (1996) and
Phillips et al (2001) and Papke-Shield et al (2002). First dimension is the level of
influence that differing staff levels exert on the strategic planning process. Second
dimension is the level of influence that differing functional areas exert on the strategic
planning process.
3.2 Performance measures
Previous studies have used either a subjective or an objective approach to measuring
performance (Greenley and Foxall, 1997). It seems that the simplest way to measure
performance is using the objective financial measures (Haber and Reichel, 2005, Sousa
et al., 2006). The principal performance measures are financial returns and firm growth (
i.e. short and long term) (Daily et al., 2002). Some researchers (Sa'ari, 2005, Hashim
and Zakaria, 2007) have measured the performance of exporting SMEs by using the
return on assets (ROA), return on sales (ROS), return on investment (ROI), and also
growth. Growth is based on the composite of the average performance of the ROA,
ROS and ROI of the SMEs (BPCI= (ROA+ ROI+ROS)/3) (Lee, 1988). Nevertheless, it
seems that selection of each of these indicators depends on data availability and data
accuracy. Although, obtaining objective financial data is difficult in SMEs, because the
most of small firms are privately held, it is unlikely that CEOs will be willing to provide
detailed accounting data on the firm‘s performance (Garg et al., 2003). Hence, these
data are sometimes confidential. Furthermore, checking the accuracy of objective
financial data on SMEs is impossible, because these data are not openly available
(Haber and Reichel, 2005). The point of this discussion is to highlight the fact that data
availability and accuracy associated with financial measures in SMEs are two main
problems that lead to using subjective measures for evaluating SMEs‘ performance. In
addition, industry-specific factors affect on absolute scores on objective financial
performance measures. Consequently, making any comparison between objective
financial data obtained for SMEs in different industries could be misleading and
inappropriate. In contrast, subjective measures are more flexible and useful for SMEs,
particularly for multi-industry comparison (Covin and Slevin, 1989).
It is well documented that subjective performance measures are valid and reliable for
founder reported performance measures (Chandler and Hanks, 1994, Brush and
Vanderwerf, 1992, Simpson et al., 2004). On the other hand, there is a strong
relationship between owner/managers mentality and subjective financial performance of
their enterprises (Wijewardena et al., 2008). Moreover, the subjective approach has
been used widely in empirical studies. Using subjective measures based on executives‘
perceptions of performance, have been justified by several authors (McDougall et al.,
1994, Golden, 1992, Hart and Banbury, 1994, Powell, 1992). All of them have found
consistency between executives‘ perceptions of performance and objective measures
(Falshaw et al., 2006).
The SME owners-managers are the best sources for obtaining direct measures of firm
performance. Nonetheless, the researchers have often restricted their request for data
to firm growth in sales/or in number of employees) because of the sensitivity
surrounding financial measures and concerned about response rate (Watson, 2007).
Proceedings of 10th Global Business and Social Science Research Conference
23 -24 June 2014, Radisson Blu Hotel, Beijing, China, ISBN: 978-1-922069-55-9
Furthermore, growth is very important for business survival and also for policy makers.
Consequently, firm growth (in sales/or number of employees) has selected as a good
indicator for performance of unlisted firms (Delmar and Shane, 2003). Conversely, it is
argued by some researchers that performance measures should include both financial
and non-financial meters (Laitinen, 2002). Because the financial measures alone are
not sufficient for making decisions in modern firms. According to Reijonen and Raija
Komppula (2007) these non-financial meters usually contain the time, flexibility, quality
of manufacturing and entrepreneurial satisfaction. These measures can be turned into
numbers and evaluated numerically.
Having synthesized above literature, and given the difficulty in collecting valid data in
one hand and the need for valid performance measures on the other hand, in this study
both subjective financial and non-financial performance measures were used
simultaneously. The term ‗‗subjective measures‘‘ refers to self-reported measures
(Haber and Reichel, 2005). These measures include: growth in market share; growth in
revenues (sales); growth in profitability; growth in number of employees, growth in
quality of products and growth in customer satisfaction, in last three years of SMEs
activities that are used as subjective (financial and non-financial) performance
measures.
4. Data Processing and Analysis
Based on the collected data the majority of respondents have Malay and Chinese race
(more than 90%) and the majority of the respondents are Male (66%). The sample was
slightly dominated by respondents with 20-30 years old (38%) and 31- 40 years old
(24%). Approximately 70% of respondents are managers in their company. More than
62% of respondents had at least undergraduate degree.
Regarding the population of this research was the SMEs; small-to-medium size
companies were selected as sample of this study. Firms that participated in the survey
were divided into two categories: small (56.2) and medium (43.8%). Type of industry
was including 6 groups of SMEs that had the majority of Malaysian SMEs (75.8%). The
study‘s analysis was based on 121 usable responses from different industry types.
About 13.22% of respondents were from textiles and clothing industries, metal and non
metallic mineral products (25.62%), food products and beverages (9.91%), paper and
recorded media (16.52%), furniture and wood products (14.04%), rubber and plastic
products (13.22%) and other firms (7.43%). Table 4.3 shows the information about the
status of participating firms.
In this study, exploratory factor analysis (EFA) was used to test factorial validity. The
results of EFA analysis revealed 13 factors with an Eigenvalue greater than one and no
single factor explained a great amount of variance (i.e. variances ranged from 2.28% to
11.71%). This test confirmed the lack of significant systematic common method bias or
variance in the data. Principal Components Analysis (PCA) has been used as the most
common EFA procedure. Thus, a PCA/EFA analysis was conducted in SPSS 19.0
using collected data. Initially, KMO index (i.e. Kaiser-Meyer-Olkin measure of sampling
adequacy) was 0.798 indicating adequacy of sample size for EFA test. The PCA
analysis of main variables confirmed all items did align properly with their related
Proceedings of 10th Global Business and Social Science Research Conference
23 -24 June 2014, Radisson Blu Hotel, Beijing, China, ISBN: 978-1-922069-55-9
theoretical constructs and thus satisfy three objectives of EFA as discussed previously.
Convergent validity is the agreement among measures that are related theoretically.
Item loadings, and average variance extracted values (AVE) are two methods to
examine this validity. The AVE values of the variables, indicated in Table 2, are
between 0.55 and 0.80, providing more proof for convergent validity. As suggested by
Hair et al., (1998), all AVEs were above 0.5 indicating those constructs can explain high
percentage of variance of the latent variable.
Table 2: AVE, CR, and Cronbach Alpha of the constructs
Construct
AVE
Formality
Comprehensiveness
Participation
Financial performance
Non-Financial
Performance
0.699
0.704
0.801
0.616
0.605
Composite
Reliability
0.920
0.904
0.923
0.905
0.932
Cronbach
Alpha
0.892
0.859
0.877
0.873
0.917
As is presented in Table 2, all variables have the CR greater than 0.70. Therefore, both
Cronbach alpha and composite reliability suggest satisfactory level of construct
reliability.Partial least Square analysis (PLS) using Smart PLS was utilized as the
second main statistical technique in this study for testing the main relationship between
variables. The Smart PLS is one of the PLS software applications that is flexible and
useful tool for building statistical models provide results for all types of variables,
regardless of whether they have metric, quasi-metric, ordinal, or categorical scales
(e.g., binary coded) (Ringle et al., 2005). However, recent review of PLS-SEM use in
the strategic management field, the method‘s dissemination is not as widespread as in
other (Hair et al., 2012b). According to Hair et al. (2013) hierarchical component models
are relatively easy to conduct in PLS-SEM; thereby Smart PLS is a recommended
analysis tool for models involving hierarchical constructs that are those constructs with
more than one dimension. Another advantage of using Smart PLS in this study was that
it has the ability to handle smaller sample sizes and nonlinear effects can be easily
included in a PLS path model (Hair et al., 2013).
Using SPLS analysis, it is necessary to generate the significance of estimates using
resampling methods because data normality is not an assumption in SPLS. The most
common resampling methods in SPLS are Bootstrapping, jackknifing, blindfolding.
However, among those methods, to generate t-values and valid standard errors,
bootstrapping considered superior to the jackknifing and blindfolding. In bootstrapping
approach, PLS creates N sample by replacement from the data set of the study, then,
re-estimates confidence interval, standard error, and related t-test (Chin et al., 2003). In
this study, the distribution of all path estimates was approximated using bootstrapping
method.
As can be seen in Table 2, based on the results of bootstrapping for main relationships,
t-statistics were significant for most of the main relationships (p<0.05, or p<0. 01), thus,
establishing the accuracy and significance of path estimates. A summary of hypotheses
and results of related analyses are shown in Table 3.
Proceedings of 10th Global Business and Social Science Research Conference
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Table 3: Supported hypothesis, Path coefficients and T-statistics
Hypotheses
Original
Sample
Sample
Mean
Standard
Error
T Statistics
Result
H1:SP=> TPERF
H1a:SP => FPERF
H1b:SP => NFPERF
H2a: form => Fperf
H2b: form => NFperf
H3a: comp => Fperf
H3b: comp =>
NFperf
H4a: part => Fperf
H4b: part => NFperf
0.4214
0.3410
0.4534
0.3174
0.2585
0.2826
0.3093
0.4221
0.3566
0.4695
0.2654
0.2328
0.2346
0.2381
0.0623
0.0698
0.0611
0.1367
0.1140
0.1297
0.1073
6.7589
4.8829
7.4162
2.3218
2.2664
2.1788
2.8813
Supported
Supported
Supported
Supported
Supported
Supported
Supported
0.2096
0.0852
0.1994
0.0889
0.0876
0.0828
2.3915
1.0285
Supported
Not
Supported
In this study, race, gender, age, education background, position in company, firm size,
industry type, and years of company establishment, were assumed as control variables.
These variables were chosen for this study in order to characterize the relationship
between SP and performance based on its different organizational and managerial
aspects. By doing so, the researcher analyzed the different categories formed by those
factors. Hence, any influence of each of eight control variables in the relationship
between SP dimensions and performance was elaborated in next sections using
analysis of variance (ANOVA). The result did not show any significant difference for the
relationship between SP and performance in terms of different groups of age, education
background, years of company establishment, type of industry, and position in
company. Based on the result of ANOVA analysis the relationship between SP formality
and performance is different according to the size of companies. Furthermore, the
relationship between SP comprehensiveness and performance is different according to
race and gender of participants.
6. Conclusion and managerial implications
To enlighten the ambiguous and inconsistent relationship between strategic planning
aspects and SMEs‘ performance, in this study, SP dimensions have been proposed to
be related to performance Result of analyses showed that there is a positive
relationship between SP and performance and was consistent with studies in SP and
performance relationship (Mazzarol et al., 2009, Siu et al., 2004, Ogunmokun and Hsin
Tang, 2012).
Based on the result of this study there is a significant relationship between SP and total
performance. The relationship between SP and non-financial performance is stronger
than the relationship between SP and financial performance. It means that the SMEs
that used higher level of SP, had higher level of non-financial performance (rather than
financial performance) in terms of customer satisfaction, quality of products and
increase in market share during the last three years of their activities. These findings to
great extent are consistent with Ogunmokun and Tang (2012) stated that the extent to
which the strategic planning activities performed by SMEs is related to the level of
Proceedings of 10th Global Business and Social Science Research Conference
23 -24 June 2014, Radisson Blu Hotel, Beijing, China, ISBN: 978-1-922069-55-9
performance. Indeed the extent to which firms carried out the various strategic planning
process activities is related to the performance of the SMEs (Ogunmokun and Hsin
Tang, 2012).
Result of analyses showed that there is a positive relationship between formality of SP
and performance. This finding supports the hypotheses H2a, b and shows the
importance of formality in strategic planning for SMEs and was consistent with previous
studies (Philips et al., 2001; French et al., 2004; Kraus et al., 2006; Mazzarol et al.,
2009; Siu et al., 2004, Claycomb et al., 2000; Ogunmokun and Tang, 2012). Formality
in strategic planning proved to have positive result for small firm performance.
Regardless of barriers to strategic planning in SMEs the results of this study showed
that the SMEs‘ owners/managers who have formal strategic planning (e.g. adapting
specified objectives and having long-range and written plans to guide the operating
activities) have higher level of performance (financial and non-financial).
The results of analyses supported the relationship between SP comprehensiveness and
performance. Indeed, the analysis implied that the SMEs who had higher level of
comprehensiveness had also higher level of performance (financial and non-financial).
The level of comprehensiveness was determined in terms of using various internal and
external sources in planning, attempting to determine optimal courses of action from
identified alternatives and evaluating thoroughly each possible action before making
strategic decisions. Although, small businesses follow a much less complex process
(both in terms of steps followed and methods used) in making their strategic decisions
than that suggested by theoretical framework and used by larger organizations
(Jocumsen; 2004).
Based on the result of analyses there is a positive relationship between SP participation
and financial performance and was consistent with limited previous research in this area
(Elbana, 2008; Andersen, 2004). Indeed, the analysis showed that the SMEs who had
higher level of participation in SP had also higher level of financial performance. A likely
explanation of this finding is that the participation in strategic planning is likely to have
strong effect on employees‘ awareness and understanding of organizational goals that
is necessary for employees to orient themselves toward the achievement of the
organization's goals, not only the goals associated with their position (Ketokivi and
Castaner, 2004). Practically, the significant relationship between participation in SP and
financial performance implies that if SMEs‘ owners/managers communicate the
priorities resulting from the planning process to the different managerial levels and
functions after having engaged in a participatory process, participants' expectations will
be fulfilled, even if they do not fully agree with the announced goals and it would cause
improving the planning effectiveness and performance (Elbanna, 2008).
The study failed to support the hypothesized relationship between SP participation and
non-financial performance. Surprisingly, the result of analyses showed that there is not
any significant relationship between SP participation and non-financial performance.
Possible explanation for this finding is that although the majority of existing research
assumes positive associations between participation of lower level manager strategic
activity and organizational performance, there is a strong likelihood that their behaviour
influences outcomes in both positive and negative ways. It means that the pursuit of
self- (and subunit) interests may not always be matched with support for organizational
Proceedings of 10th Global Business and Social Science Research Conference
23 -24 June 2014, Radisson Blu Hotel, Beijing, China, ISBN: 978-1-922069-55-9
goals and strategies (Wooldridge et al., 2008). Building on the results of analysis the
relationship between SP formality and performance is different according to the size of
companies. In other word, the larger firms have higher potential for strategic marketing
planning formally and it is reasonable because of lack of experts of strategic planning in
small companies. Although, the ANOVA analysis did not show any significant difference
between small and medium size companies in terms of comprehensiveness and
participation in SMP (p>0.05). Indeed small and medium size companies showed the
same level of comprehensiveness and participation in SP. One possible explanation for
this finding is that the participating firms were homogenous since all of them were
among Malaysia SMEs and thus, firm size (in terms of number of employees) might not
be suitable to distinct different level of SMP comprehensiveness and participation in
these firms.
The relationship between SP comprehensiveness and performance is different
according to race and gender of participants. It means that female owners/managers
had higher level of comprehensiveness in their SP than the male owners-managers.
One possible explanation for this finding is that the female owners/managers have
tendency to use an extensive process for decision making that includes high level of
investigation to developing alternatives courses of action, evaluating alternatives and
developing multiple criteria to screen alternatives because they perceive more fear of
failure than men (Shinar et al., 2012). Nevertheless, it is recommended that next
researchers consider this variable in their examinations.
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