busineSS

profileBatman007
Resource3.pdf

RESEARCH ARTICLE

Strat. Change 24: 553–567 (2015) Published online in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/jsc.2039

Copyright © 2015 John Wiley & Sons, Ltd. Strategic Change: Briefings in Entrepreneurial Finance

Strategic Change DOI: 10.1002/jsc.2039

A Comparative Study of Strategic Planning Practices of SMEs and Large‐Sized Business Organizations in Emerging Economies: The Case of UAE1

C. Muhammad Siddique College of Business Administration, American University in the Emirates, Dubai, UAE

While SMEs in the emerging economy of UAE have begun to use strategic planning tools such as financial analysis, PEST analysis, cost–benefit analysis, and core and distinctive competency analysis, they are still far behind large‐sized

business organizations.

Small and medium‐sized enterprises (SMEs) are widely regarded as key drivers of innovation, economic growth, and employment in the world economy. In emerg- ing markets, in particular, SMEs have played a crucial role in creating employment opportunities as well as making a substantial contribution to the GDP (Abdulla and Bin Bakar, 2000; Kutllovci and Shala, 2013; John, 2014). In the United Arab Emirates (UAE), SMEs have been a potent force in the growth and expansion of the country’s commercial industry. It is estimated that SMEs account for more than 90% of economic projects in the UAE, provide employment to over 60% of the workforce, and contribute more than 70% to the UAE’s GDP (Emine, 2012). Larger business organizations frequently regard SMEs as their primary, and perhaps most formidable, competitors. However, strategic planning in the SME sector is still rudimentary compared with large‐sized organizations (Kukalis, 1994; O’Regan and Ghobadian, 2002; Stonehouse and Pemberton, 2002; Kraus et al., 2006; Wang et al., 2007, Reboud and Mazzarol, 2008). This study was undertaken to look at the usage of strategic planning tools and techniques among SMEs and large‐sized business organizations in the emerging economy of the UAE to identify areas where SMEs must focus to develop and sustain their competitive advantage.

Although it is quite fashionable to talk about strategy in the business world, empirical research on strategic planning practices has been somewhat sparse, especially in the Arab Gulf region. Consequently, little is known about the nature of strategic planning and the type of planning instruments used by SMEs or their counterparts, the large‐sized business organizations. Dubai, with its good mix of multinationals and SMEs, provides a proper setting to explore and identify the

1 JEL classification code: M1.

SMEs based in UAE and other

emerging economies can benefit

from the strategic planning tools

and processes employed by their

counterparts in developed

economies.

With better training and

professional development

programs, companies can expose

employees to new developments

in strategic management theory

and practice.

Increasing competition in

emerging economies with an

influx of multinational companies

is likely to call for more

systematic strategic planning

models involving the use of

sophisticated planning tools and

techniques as sources of

competitive advantage.

554 C. Muhammad Siddique

Copyright © 2015 John Wiley & Sons, Ltd. Strategic Change DOI: 10.1002/jsc

type of strategic planning tools that SMEs and larger firms tend to use. A large number of local and regional business organizations – as well as branch offices or subsidiaries of multinational companies – are based in Dubai, which adds further to the uniqueness of Dubai as a site for the current study.

In recent years, the strategic planning theory and practice has shown a shift from the strategic planning process to instruments and techniques that form the content and substance of the strategy (Frost, 2003; Alde- hayyat et al., 2011). Strategic planning tools and tech- niques are considered important as they add to a manager’s diagnostic and analytical skills, which, in turn, shape the strategic planning process. The identification and applica- tion of appropriate strategic tools thus have a significant bearing on the performance outcomes of an organization and merit special attention.

The present study examines the usage of strategic planning tools and techniques by SMEs and large‐sized business organizations in the UAE context. While a broad spectrum of planning tools is discussed in the strategy literature (Webster et al., 1989; Clark, 1997; Hussey, 1997; Lisinski and Saruckij, 2010), the following twenty tools were selected for empirical investigation in this study: SWOT, PEST, Porter’s five forces, core and distinc- tive competency analysis, financial analysis of competi- tors, financial analysis of own company, value chain analysis, organizational culture analysis, HRM analysis, portfolio analysis (BCG and GE models), mission analy- sis, cost–benefit analysis, key success factors, scenario construction, gap analysis, benchmarking, product life cycle, strategic group analysis, and stakeholder analysis. The choice of these instruments was based on input from subject matter experts (strategy consultants, planners with extensive industry experience), senior executives of com- panies that agreed to participate in the survey, and previ- ous research (Glaister and Falshaw, 1999; Elbanna, 2007; Aldehayyat et al., 2011).

This article is structured as follows. In the next section, a brief review of the literature on the use of strategic

planning tools and techniques in Western countries and in the Middle Eastern context is presented. Following this, data collection sources and procedures are discussed. The  next section presents data analysis and results. We  conclude with a discussion of the study findings, implications, and directions for future research.

Review of the literature

Strategic planning and use of planning tools and techniques The classical strategic management theory viewed strategy as a deliberate planning process, which is usually initiated by a company’s top management. The process involves a fairly elaborate industry analysis and assessment of orga- nizational resources to develop a formal, grand action strategy for the entire organization (Volberda, 2004; Wheelen and Hunger, 2012). This view placed special emphasis on the need for a systematic analysis of an orga- nization’s environment to equip decision makers with the relevant facts and figures. Over the years, this rational thinking led to the development of several important analytical tools and techniques such as SWOT analysis, PEST analysis, Porter’s five forces, portfolio models, strategic group analysis, and so on. Most SMEs and mul- tinationals based in the Western countries and their subsidiaries around the world continue to make extensive use of these planning tools and techniques in their strate- gic planning practices (Henry, 2011; Hill and Jones, 2012; Thompson et al., 2012).

The classical rational perspective fostered a prescrip- tive view of strategy, suggesting that the strategy develop- ment process must follow a sequential set of steps starting with a review of the mission statement, identification of performance objectives, environmental analysis, strategy formulation, implementation, and control (Johnson et al., 2008). Although the proponents of the ‘learning school’ (Mintzberg and Walters, 1985; Mintzberg, 1994), who argued that strategy is more likely to emerge than be

A Comparative Study of Strategic Planning Practices of SMEs 555

Copyright © 2015 John Wiley & Sons, Ltd. Strategic Change DOI: 10.1002/jsc

rationally planned, challenged this view, the rational approach continues to enjoy a large following. This may be partly attributed to the empirical evidence document- ing that planned strategies make a positive contribution to organizational performance (Greenley, 1994; Miller and Cardinal, 1994; Anderson, 2000; Snyman and Drew, 2003; Kee‐Luen et al., 2013). Despite the rise and fall in the popularity of formal strategic planning over the past half century according to Glaister and Falshaw (1999), strategic planning is widely considered as beneficial and it is ‘still going strong.’

Several empirical studies have appeared over the past two to three decades to assess the usage of strategic plan- ning tools and techniques. Glaister and Falshaw’s (1999) study of 113 UK service and manufacturing companies was perhaps one of the few early studies that offered a detailed examination of the nature and practice of strate- gic planning. The following five techniques ranked highest in terms of their usage in a list of 19 techniques they examined: spreadsheet what‐if analysis, analysis of key success factors, financial analysis of competitors, SWOT analysis, and core capabilities analysis. Overall, the respon- dents indicated a very positive attitude toward strategic planning.

In a later study, Dincer et al. (2006) extended the Glaister and Falshaw (1999) study to a sample of Turkish firms. The most common tools used in Turkey included economic forecasting models, SWOT analysis, scenario construction, financial analysis of competitors, and analysis of organizational culture. The foreign‐owned firms adopted a broader set of strategic planning tools and techniques than the local firms; the foreign firms also believed that strategy was more deliberate and planned than the local companies. In another study, Glaister et al. (2009) con- ducted a comparative analysis of strategic planning prac- tices of companies from the UK and Turkey. The findings revealed that UK firms employed a wider range of strategic planning tools and techniques than Turkish firms. However, both groups of firms believed that the strategic planning process is more deliberate than emergent in nature.

Several other researchers have investigated the use of strategic planning tools in the context of the UK. In a survey of 159 small and medium‐sized service and manu- facturing firms sampled from northeast England, Stone- house and Pemberton (2002) found internal financial analysis, followed by SWOT analysis, to be the most frequently used techniques. Only larger businesses, according to Stonehouse and Pemberton (2002), displayed genuine ‘strategic thinking’ in their planning practices. Gunn and Williams (2007), based on a postal survey of a cross‐section of organizations in the UK, identified the following three strategic tools with high usage: SWOT analysis, benchmarking, and critical success factors. The three least‐used techniques were resource capability analy- sis, industry structural analysis, and McKinsey’s 7 ‘S’ framework.

Perhaps Frost’s (2003) study was one of the most comprehensive on the use of strategic tools. Frost investi- gated the use of strategic planning tools by SMEs in Western Australia, Singapore, Hong Kong, and Malaysia. The results indicated that the strategic tools and tech- niques that management used for a given set of tasks were fairly similar. The four most frequently used tools were SWOT, PEST, financial ratio analysis, and budgeting. On the whole, SMEs used a somewhat limited range of strategic tools and techniques compared with larger busi- ness organizations.

Research in the context of the Middle East Over the past two decades, some valuable research efforts have been made in the Middle East to identify the most common strategic planning tools and techniques used by business organizations. In an earlier study, Khan and Al‐ Buarki (1992) examined the use of strategic planning tools in Bahrain. Some 22% of the companies made regular use of strategic management tools, and the most common tools used included financial analysis, SWOT analysis, gap analysis, and SPACE (strategic position and action evaluation) analysis. Strategic planning tools such as portfolio (BCG) analysis, perceptual mapping, and

556 C. Muhammad Siddique

Copyright © 2015 John Wiley & Sons, Ltd. Strategic Change DOI: 10.1002/jsc

directional policy matrices were the least common tools in Bahrain. Al Ghamdi (2005) conducted a similar study in Saudi Arabia and the findings suggested that only 10% of Saudi business organizations used strategic tools on a regular basis. The most common tools used were as follows: critical success factors, benchmarking, and what‐ if analysis. The next most popular set of strategic tools consisted of SWOT analysis, product life cycle, and stake- holder analysis. Strategic planning tools such as the expe- rience curve, portfolio analysis, value chain analysis, and PIMS (profit impact of market strategy) showed very limited use, while the Delphi technique, cognitive mapping, and Porter’s five forces were the least‐used plan- ning tools.

In a study of 120 Egyptian companies, Elbanna (2007) investigated the use of some 28 strategic tools and respondents’ attitudes toward strategic planning. The fol- lowing five tools received higher ranking in terms of their usage by Egyptian companies: pro forma financial state- ments, cost–benefit analysis, SWOT analysis, competitor analysis, and portfolio analysis. The least‐used tools included the experience curve, value chain analysis, Por- ter’s five forces, Boston Consulting Group (BCG) matrix, General Electric (GE) matrix, PIMS, and the Delphi tech- nique. A high proportion of respondents were not familiar with some of the traditional strategic management tools. Most respondents, however, showed a positive attitude toward strategic planning.

Aldehayyat and Anchor (2008) explored the aware- ness and use of strategic planning tools and techniques in Jordan in a sample of 203 public companies from the financial, service, and industrial sectors. The top five stra- tegic planning techniques used by Jordanian companies were financial analysis, PEST or STEP analysis, Porter’s five forces analysis, analysis of key success factors, and core capability analysis. A considerable number of respondents did not use several planning tools because of their lack of awareness. In a more recent study, Aldehayyat et al. (2011) investigated the use of strategic planning tools and tech- niques in a sample of 40 hotels in Jordan. Of the 16

techniques they examined, the top five with the highest mean scores were as follows: financial analysis of own business, SWOT analysis, PEST analysis, Porter’s five forces, and analysis of critical success factors. The rela- tively less‐used techniques consisted of analysis of organi- zational culture, strategic planning software, value chain analysis, stakeholder analysis, portfolio analysis, scenario construction, and core capability analysis.

The findings of these studies offer valuable insights into the use of strategic planning tools and the views held by companies with regard to the importance of such tools and techniques in the Middle East. The present study was designed to extend the findings of these studies to the UAE, where usage of strategic planning tools has not been systematically investigated. Likewise, there is little data on the nature of strategic planning or the way SMEs or larger firms perceive the importance of strategic planning in the UAE. An earlier study concluded that strategic planning with long‐term orientation was not a common practice in the UAE (Al‐Shaikh, 2001). However, over the past decade, the UAE has witnessed a remarkable growth in both the SME and multinational business sectors, leading to an intensely competitive business environment. It is thus important to take a fresh look at the nature of stra- tegic planning and the type of planning tools and tech- niques that business organizations pursue in the current highly competitive environment of the UAE. The rapidly growing SME sector in the UAE further makes it worth- while to compare SMEs with larger business organizations to identify differences and similarities between them in terms of the usage of strategic planning tools and the general attitude toward the importance of strategic planning.

Methodology

Study sample and data Data for this study was collected from the Emirate of Dubai, the second largest emirate after Abu Dhabi.

A Comparative Study of Strategic Planning Practices of SMEs 557

Copyright © 2015 John Wiley & Sons, Ltd. Strategic Change DOI: 10.1002/jsc

According to a recent survey, SMEs accounted for 95% of the establishments in Dubai and contributed about 40% to Dubai’s economic growth (Dubai SME, 2014; John, 2014). In addition to a vast SME sector, Dubai also has a number of large‐sized private and public business organizations. As with other emirates, most SMEs and large businesses in Dubai are in the service industry.

Since the present study was undertaken to compare the use of strategic planning tools and techniques by SMEs and larger firms, the sample included an approxi- mately equal number of SMEs and larger firms. Consis- tent with the definition set forth by the Government of Dubai (Dubai SME, 2014), business firms with 250 or fewer employees were considered to be SMEs and firms with more than 250 employees were defined as large‐sized firms. A sampling framework of 800 companies was devel- oped from the commercial directory maintained by Dubai Chamber of Commerce and Industry (DCCI, 2013). The size of the business enterprise was the primary criterion used in defining the sampling framework. Using a simple random sampling technique, 400 companies (50% of the sampling frame) were selected for the present study. Of these 400 companies, 185 provided the requested data. Four surveys with incomplete data were excluded from the analysis, resulting in an effective response rate of 45%. The usable data on 181 companies included 91 SMEs and 90 large‐sized enterprises.

Given the nature of the study, the questionnaire was administered to senior managers who were considered to be knowledgeable about their organization’s strategic planning practices and the tools and techniques they use. Over half of the 181 respondents who provided the requested data completed the questionnaires on the first visit, while in the remaining cases the questionnaires were left with target respondents and collected at a later date.

A comparison of the responses received on the first visit and those received over a period of two to three weeks did not show significant differences in the mean values of key study variables. This indicates that the available data did not have any non‐response bias (Armstrong and

Overton, 1977). A test for common method bias was also conducted. The results of the factor analysis did not reveal a single factor in any of the measures used in the study (Podsakoff et al., 2003). Most variables produced two or three factors, where the first factor did not account for more than 38% of the common variance, suggesting that common method bias was not a problem (Lindell and Whitney, 2001).

In terms of the organizational position of survey par- ticipants, a little over half (53%) included senior managers working as general managers, administrators, directors, chief financial officers (CFOs), and chief operating officers (COOs). 48% of the respondents had Bachelor‐level edu- cation, while 15% held Master’s degrees or professional designations. The average length of service in the current organization was 7 years, while 36% of respondents had worked for more than 10 years with their organizations.

In terms of size, 50% of the business organizations had fewer than 251 employees, defined as SMEs in the present study. The size of the remaining companies ranged from 260 to 570 employees. 71% of business organiza- tions were in the service industry, and over half of them have been in operation for over 18 years. 66% of compa- nies were in the private sector.

Measurement of variables The survey instrument was designed to generate data on the following aspects of strategic planning practices:

• frequency of use of a set of 20 strategic planning tools and techniques;

• time horizon of strategy; • responsibility for strategic planning; • attitude toward strategic planning; • demographic data on the organization – size, owner-

ship, type of business (manufacturing, service, or both).

Strategic planning tools and techniques Twenty strategic planning tools were selected for the present study, following discussions with five subject

558 C. Muhammad Siddique

Copyright © 2015 John Wiley & Sons, Ltd. Strategic Change DOI: 10.1002/jsc

matter experts who had extensive industry experience as consultants and planners, and ten senior managers of companies included in the study. The list of 20 tools was presented to respondents for rating on a 7‐point Likert‐ type scale assessing the frequency of use of each strategic tool. Although a pilot survey conducted before launching the study indicated sufficient knowledge and understand- ing of strategic planning tools and techniques among the target respondents, a glossary of the 20 tools and techniques with definitions and brief descriptions was appended to the survey questionnaire. This greatly improved the accuracy of respondents’ answers to the survey questions.

Nature of strategic planning The respondents were asked to rate on a 7‐point scale the extent to which their organizations pursued planned and emergent strategies, or no formal strategic planning.

Planning horizon The following three planning horizons were considered in this study: less than five years, five years, and more than five years.

Involvement in strategic planning Questions were asked to assess the extent of involvement of different individuals and committees in the strategic planning process. The respondents were given a list of the following individuals and committees and asked to rate the involvement of each on a 7‐point scale: the owner/ manager or CEO, planning committees, senior managers, middle managers, external consultants, and board of directors.

Views about strategic planning Survey participants’ attitudes toward strategic planning were assessed with a set of 10 statements, which asked if the strategic planning helped the company align its resources with business opportunities or produced rigidity and bureaucracy.

Nearly all items measuring a given strategic planning practice as described above were selected from previous studies, and thus have well‐established psychometric properties in the literature. However, the present study assessed the reliability of all measures with Chronbach’s alpha coefficient and the validity by means of inter‐ item and item‐to‐total correlations. All measures pro- duced alpha reliability coefficients higher than 0.70 – the threshold value required for a measure to be considered reliable. The average size of inter‐item and item‐to‐total correlations was 0.46, documenting the validity of the variables under investigation.

Data analysis and results Since the main focus of the current study was to compare SMEs and large‐sized business organizations on variables of interest, a two‐sample means test was deemed appropri- ate to assess the degree to which differences between SMEs and larger firms were statistically significant. Several previous studies in this area also employed mean values to rank the usage of strategic planning tools and techniques, as well as to compare subgroups such as service versus manufacturing or local versus foreign companies (Glaister and Falshaw, 1999; Dincer et al., 2006; Glaister et al., 2009). The present study reports results based on the two‐sample means test (i.e., t‐test).

Use of strategic planning tools and techniques Table 1 summarizes the results relating to the use of strategic planning tools and techniques. As can be seen, SWOT analysis occurred as the most common technique among both SMEs and large‐sized business enterprises. Other frequently used strategic planning techniques included financial analysis of own company, HRM analy- sis, cost–benefit analysis, and PEST analysis. In terms of rank, the next five tools with mean scores closest to the median score of 4 are as follows: mission statement review, organizational culture analysis, core and distinc- tive competencies, scenario construction, and portfolio

A Comparative Study of Strategic Planning Practices of SMEs 559

Copyright © 2015 John Wiley & Sons, Ltd. Strategic Change DOI: 10.1002/jsc

analysis. Several other techniques which have gained extensive use in Western countries, such as Porter’s five forces, value chain analysis, gap analysis, and strategic group analysis, were infrequently used in the current study sample.

Except for the following strategic planning tools, large‐sized organizations reported significantly more use of planning tools and techniques as summarized in Table 1: SWOT analysis, HRM analysis, cost–benefit analysis, organizational culture, scenario construction, and strategic group analysis. As stated previously, part of the reason for larger firms’ extensive use of strategic plan- ning tools may be attributed to their resource strength. Most large organizations had in‐house professional staff to pursue the application of diverse strategic planning tools and techniques. In addition, larger organizations were more likely to seek the help of outside consultants

to design and implement a broader set of strategic man- agement tools.

Involvement in strategic planning Table 2 presents comparative data on the extent of involve- ment of different personnel in the strategic planning process in SMEs and larger organizations. As can be seen, larger organizations made more extensive use of planning committees than SMEs in developing strategic plans. Larger organizations also more frequently sought the services of outside consultants than the SMEs did. Fur- thermore, the board of directors had significantly more involvement in the strategic planning of larger firms. The data did not reveal any significant difference between SMEs and larger organizations in terms of the involvement of top and middle management in strategic planning activities.

Table 1. Use of strategic planning tools and techniques: a comparison of SMEs and large‐sized business organizations

Strategic planning tools and techniques

All firms (N = 181)

SMEs (N = 91)

Large firms (N = 90)

t‐Value Sig. of t

Mean Rank Mean Rank Mean Rank

SWOT analysis 5.38 1 5.37 1 5.40 1 0.12 0.901 Financial analysis of your company 5.09 2 4.84 2 5.35 2 2.21 0.028 HRM analysis 4.55 3 4.48 3 4.63 5 0.57 0.565 Cost–benefit analysis 4.53 4 4.38 4 4.67 4 1.12 0.264 PEST analysis 4.16 5 3.81 5 4.52 6 2.63 0.009 Mission statement review 3.92 6 3.14 10 4.72 3 9.68 0.001 Organizational culture analysis 3.90 7 3.73 6 4.06 7 1.37 0.173 Core/distinctive competency analysis 3.63 8 3.40 8 3.86 8 1.87 0.060 Scenario analysis 3.61 9 3.50 7 3.70 10 0.71 0.475 Portfolio analysis (BCG, GE) 3.40 10 3.21 9 3.59 11 1.83 0.053 Value chain analysis 3.13 11 2.91 11 3.35 12 2.18 0.030 Gap analysis 2.93 12 2.12 12 3.75 9 7.04 0.001 Porter’s five forces analysis 2.71 13 2.11 13 3.32 13 5.17 0.001 Benchmarking 2.68 14 2.08 16 3.29 16 6.18 0.001 Product life cycle analysis 2.65 15 2.06 17 3.23 17 6.23 0.001 Key success factors 2.57 16 2.11 13 3.03 18 4.85 0.001 Stakeholder analysis 2.55 17 1.80 18 3.31 14 6.59 0.001 Financial analysis of competitors 2.54 18 2.09 15 3.30 15 4.78 0.001 Experience curve analysis 2.53 19 2.10 14 2.95 19 4.37 0.001 SWOT analysis 5.38 1 5.37 1 5.40 1 0.12 0.901 Note: The mean is an average of a 7‐point scale with ‘Not at all’ (1) and ‘To a great extent’ (7) end‐points.

560 C. Muhammad Siddique

Copyright © 2015 John Wiley & Sons, Ltd. Strategic Change DOI: 10.1002/jsc

Nature of strategic planning: planned versus emergent strategies As indicated by the results in Table 3, both SMEs and larger organizations pursued planned strategies which tend to involve a formalized process covering nearly all essential stages of the planning process, such as situation analysis, identification of goals and objectives, formulation and implementation of strategies, and monitoring of results. Emergent strategies were relatively more common among SMEs. Only a small proportion of companies investigated in this study did not pursue formal strategic planning.

Time horizon of strategic planning Results relating to the time horizon of strategic planning of SMEs and larger organizations are summarized in Table 4. The SMEs mostly pursued strategies with time horizon less than five years. The larger companies, by

contrast, mostly employed long‐term strategies covering a five‐year time span or more than five years.

The differential time horizons of SMEs and larger firms may be attributed to the nature of their target market focus. SMEs largely pursue niche marketing (Kotler et al., 2011), and a short time horizon is one option to keep …