Proceedings of 3rd Asia-Pacific Business Research Conference 25 - 26 February 2013, Kuala Lumpur, Malaysia, ISBN: 978-1-922069


Strategic Planning and Business Performance: A Study of SMEs in Malaysia
Wong Kee-Luen, Kuek Thiam-Yong and Ong Seng-Fook
There are many small and medium-sized manufacturing enterprises operating in Malaysia. Some of these enterprises are successful and some face problems or failures within the first five years. Many strategists call for formal strategic planning in order to improve business performances of organizations. As strategic planning involves a process by which firms derive a strategy to enable them to anticipate and respond to the dynamic business environment, such efforts inevitably improve the competitiveness of business firms and eventually their performances. The purpose of this study is to examine whether by practicing strategic planning, the business performances of these SMEs can be resilient and sustainable over the long term. Data were collected via an e-mail questionnaire survey on 350 randomly selected small and medium manufacturers operating in the state of Perak. A total of 50 responses were received. Data analysis was conducted using a statistical analytical software (SPSS v. 17). The results confirmed that there is a positive relationship between strategic planning and their business performances (r=0.591, p=0.01). This indicates that manufacturing companies that have some form of strategic planning are more likely to perform better from the four perspectives of the balanced scorecard (BSC), namely, learning and innovation, financial, customer, and internal business processes perspectives. Multiple regression analysis results appear to indicate that the SMEs are particularly concerned over their financial performances and their customers’ satisfaction of their products.

Field: strategic management

1. Introduction
Many countries have accepted the notion that the small and medium enterprises (SMEs) are the building blocks of their respective economies. For Malaysia, the SMEs are a vital component and contribute significantly to the nation’s economy. Even though the sector is an important component, many these SMEs cannot sustain themselves over the long term and face problems and failures in their survivals within the first five years. Some authors have suggested that these failures arise because they do not practice any form of strategic planning (Chee, 1986). Strategic planning is a process which provides a direction for the improvement of business activities of organizations. It helps to formulate business strategy that when implemented tends to increase business performance in an organization. ____________________________________________________________________
Dr. Wong Kee-Luen, University Tunku Abdul Rahman, Malaysia. Email: Mr. Kuek Thiam-Yong, University Tunku Abdul Rahman, Malaysia. Email: Dr. Ong Seng-Fook, University Tunku Abdul Rahman, Malaysia. Email:

2006). Many studies have shown that business failure is largely due to an organization’s failure to plan. access to technology. strategic planning is important to the development of a resilient SME sector (Anderson & Sohal. he argues that there is a high risk that SMEs would be wiped out if they do not increase their competitiveness in the new. According to Nobel (1999). particularly among start-ups. 1999). etc. a business has no sustainable base for creating and maintaining a competitive edge in the marketplace. for SMEs to be competitive and successful. Pearce et al. 2004). Therefore.6 percent of fixed assets. According to SMIDEC (2002).9 percent of the country’s workforce. can be attributed to the lack of formal business planning (Castragiovanni. 2010). Studies have also shown that the high failure rate among small firms. for example. 2. Kuala Lumpur. there is a high risk that SMEs will be wiped out if they do not increase their competitiveness in the new. lack of potential managerial abilities. (Wang. rapidly changing business environment (Ting. 1986. human resource constraints. Strategic planning is extremely important for the success of an organization.8 percent of companies in the manufacturing sector. 2003). And. lack of financing. Keats & Pearson. The SMEs face many challenges in a globalized environment. 1996). lack of information on potential markets and customers. Malaysia. Norman and Thomas (2003) argue that by lacking a clearly defined strategy. In addition. Yet. heavy regulatory burdens. own 27.Proceedings of 3rd Asia-Pacific Business Research Conference 25 . In addition. It follows that the relationship between strategic planning and the business performance of the SMEs is examined. the unsuccessful consumption of strategic planning is the major barrier to achieve expected or estimated performance. the SMEs account for 93.. rapidly changing world of globalization. the SMEs play a vital role in the Malaysian economy and remain the backbone of industrial development in the country (Saleh. It has been documented that the barriers faced by SMEs in Malaysia tend to undermine their performance. Thus. 1987: . Literature Review The manufacturing industry is a significant contributor to Malaysia’s economy and the SMEs appear to be important to the manufacturing sector. 2008). the practice of strategic planning should be adopted to effectively to allocate time and resources to the activities appropriately.3 percent of total manufacturing output. Caputi & Harvie. Ting (2004) identified five key challenges: lack of access to finance.26 February 2013. the SMEs are providing the much needed inter-firm linkages required to support large enterprises and ensure that they remain competitive (Tambunan. and employ 38. contribute 27. and global competition. limited or inability to adopt technology. Some studies show that there is a positive relationship between strategic planning and business performance (Bracker. ISBN: 978-1-922069-19-1 Effective strategies are known to improve an organization’s performance ( Poister. Therefore this study attempts to explore the practice of strategic planning in SMEs and to investigate the impact of strategic planning on their business performances. low productivity.

1974. Fairhurst & Rogers. Malaysia. the entrepreneurial mode. 1994). the planning mode. the BSC captures both leading and lagging performance measures. and a system for monitoring the results of the plan implemented. Thus. ISBN: 978-1-922069-19-1 Hopkins & Hopkins. With the use of four perspectives. the identification and evaluation of alternative strategies are closely related to existing strategies. Andersen. For the entrepreneurial mode. The main reason why the relationship between strategic planning and business performance is still inconsistent is due to the use of different measures of business performance. Lindsay and Rue (1980) point out that organizations have always attempt to counter uncertainty with greater planning efforts. and limited. external instability leads to greater informality (Wilson.Proceedings of 3rd Asia-Pacific Business Research Conference 25 . Courtright. However. 1994). there should be less bureaucratization and more flexible decision making (Burns & Stalker. and the adaptive mode. In other words.26 February 2013. 1961. 1987. such statements require the support of empirical research. and the learning and growth perspective. Still some authors show the relationship is negative (Fulmer & Rue. and they are smaller companies and produce a limited number of products or services. Organizational theories predict that in uncertain external environment. the internal business process perspective. According to Pearce and Robinson (2010). Gable & Topol. In such firms. strategic planning can lead to increase in performance whereas performance can lead to business success. . strategic evaluation is informal. Robinson and Pearce (1983) argue that formal strategic planning is a conceptual activity suited solely for larger firms and therefore has no effect on the financial performance of small firms. intuitive. there are generally three modes of formal strategic planning. the customer perspective. BSC measures business performance across four different perspectives: the financial perspective. However. Larger firms that make strategic evaluation part of a comprehensive. For firms that follow the adaptive mode. procedures for generating and evaluating alternative strategies. the companies are basically under the control of single owners. McKiernan & Morris. Kallman & Shapiro. formal planning system are in the planning mode. He continues to mention that a systematic procedure is necessary to gain commitment of those affected by the strategies implemented. 1997. 1978. Kuala Lumpur. Norman and Thomas (2003) argue that businesses tend to have more chance to succeed when there is strategic planning in the organization. 2000). Mintzberg (1993) identified the adaptive mode which is associated with medium sized firms. Kukalis (1991) observes that increased rates of external change tend to increase the flexibility of planning practices. 1989). Armstrong (1982) advises that formal strategic planning is an explicit process for identifying the firm’s long term objectives. a business has no sustainable basis for creating and maintaining a competitive edge in the market place. Kaplan and Norton (1992) suggest the use of the balanced scorecard (BSC) to comprehensively determine the business performance of firms. They continue to reason that without a clearly defined strategy. thereby providing a more balanced view of business performance.

operating income by division. implementation and execution are affecting the bottom line enhancement. Measurement of survival is measured in terms of cash flow. and return on equity (Kaplan & Norton. As for the customer perspective. create more value for customers. information systems availability. Financial goals for big companies would be profitability. Core competencies should be identified and measured in order to ensure continued market leadership (Kaplan & Norton. Kaplan and Norton (1992) advise that the customers’ concern tend to fall into four categories: time.Proceedings of 3rd Asia-Pacific Business Research Conference 25 . success by quarterly sales growth. But these are different from the financial goals of SMEs who do not have large volume of resources. 3. Time refers to measuring time leaking when companies receive orders from customers to deliver the products and services to the customers. The research models are presented below: . 1992). and improve operating efficiencies continually to increase revenue (Kaplan & Norton. growth and shareholders’ value. 1992). Research Models The primary objective of this study is to identify the relationship between the degree strategic planning is practiced in SMEs and their business performances. and empowerment. Malaysia. the financial goals are simply to continue to exist. Quality refers to product defect level as perceived by the customers. and costs. 1992). For the SMEs. prosperity by increased market share by segment. to be successful and to prosper. A company’s ability to innovate. In terms of the internal business process perspective. Performance and services look at how the company’s products create values for the customers. This is followed by determining which perspectives are particularly important to their business performances. and learn is directly related to the company’s value to launch new products. motivation. These critical internal operations need to be focused by the managers in order to satisfy customers’ needs. metrics on this perspective allow management evaluate and judge how well business is operating and how well their products and services meet customer expectations. Although customer-based measures are important. performance and service. improve. Intense competition requires the company to make continued development to their existing products and processes and have the capacity to initiate new products. quality. The learning and growth perspective examines how an organization learns and grows. they must translate these overall measures internally into the company in order to fulfill customer’s expectation. Costs refer to the extent the customers perceived the selling prices of the products and services as value for money invested. Kuala Lumpur. Measures on this perspective include management emphasis on employee capabilities. the financial perspective is a financial performance measurement indicator as to whether the company’s strategy. ISBN: 978-1-922069-19-1 According to Kaplan and Norton (1992).26 February 2013.

Section A collects demographical information of the manufacturing companies. Section B collects data on strategic planning based on 5-point Likert scale. the research approach has to be quantitative in nature.26 February 2013.Proceedings of 3rd Asia-Pacific Business Research Conference 25 . also based on 5-point Likert scale. Thus. The SMEs are defined as: . Thus. Kuala Lumpur. quantitative data were to be collected from targeted respondents. the customer perspective. the internal process perspective. The questionnaire had three sections. Research Methodology As the research objectives require the measurements of the degree or extent strategic planning is practiced in organizations and also that of business performance. Malaysia. a list of manufacturing companies was obtained from the Federation of Malaysian Manufacturers (FMM). The study concerned the SMEs from the manufacturing sector. ISBN: 978-1-922069-19-1 Model 1 Strategic Planning Business Performance Figure 1: Strategic Planning and Business Performance Model 2 Financial Perspective Customer Perspective Business Performance Internal Business Process Perspective Learning & Growth Perspective Figure 2: The Four Perspectives of Business Performance 4. A purposive questionnaire was designed to collect data on strategic planning and the four perspectives of business performance: the financial perspective. It followed that the data collection method was the structured survey method using a self-administered questionnaire. and the learning and growth perspective. Section C collects data on the four perspectives of business performance.

This means that there were 64% small enterprises. Number of full time employees Up to 64% (32) of the SMEs surveyed employed 5 to 50 full time employees while 36% (18) employed 51 to 150 full time employees. a sample of 50 target respondents was selected from the sampling frame using the simple random sampling method. 20% (10) in apparel manufacturing. Data Analysis and Findings The questionnaires received were checked and edited for errors and omissions before being entered into a statistical analytical software. 24% (12) within 7 to 9 years. Medium enterprises - The list of SMEs was extracted from FMM list of manufacturing companies according to their definition.000 or employs between 5 to 50 full-time employees. E-mails with the attached questionnaire were sent to the target respondents on 22 February 2012. Malaysia. Location 70% (35) were located industrial estates. 12% (6) in the electrical industry. By the end of the two week deadline. Kuala Lumpur. SPSS version 17 accordingly. The data analysis and findings were tabulated and presented in the following sections. and 2% (1) located in other areas. 16% (8) in the steel industry. 22% (11) were situated in shop lots. Characteristics of the respondents Age of the firms Up to 32% (16) of the SMEs surveyed were established within 4 to 6 years. 6% (3) in construction materials manufacturing.000.000. Type of industries Up to 32% (16) were in food beverage manufacturing. and 14% (7) in other industries. The responses from the remaining 16 respondents were collected by face-to-face structured interviewing. Only 14% (8) were established for less than 3 years. Sales turnover between RM1. and 30% (15) were established 10 years and above. ISBN: 978-1-922069-19-1 Small enterprises – Sales turnover between RM250.26 February 2013.000 to RM1.000 to RM5.000. 5.000 or employs between 50 to 150 full-time employees. and 36% medium enterprises.Proceedings of 3rd Asia-Pacific Business Research Conference 25 . 6% (3) in housing areas. . 34 responses were received. A total of 350 SMEs was found to be in the state of Perak and this list became the sampling frame. Subsequently.

SD=1. the SMEs perform averagely as seen from the four perspectives of business performance (mean=3.75).77).08.75 0. 3 being Neutral.12.55 0. This indicates that the SMEs are trying to improve themselves by practicing some form of strategic planning.30.71). . 5 being Very Frequently. 2 being Disagree.Proceedings of 3rd Asia-Pacific Business Research Conference 25 .08 3.07 0. Table 2 Means and SDs of the 4 Perspectives of Business Performance Perspectives of Business Performance Financial Customers Internal Business Process Learning & Growth Business Performance Mean 3. the SMEs do practice some form of strategic planning (mean=3.48). problems.28.98 1. SD=0. 4 being Agree. They tend to conduct external and internal analysis before they make decisions only on certain occasions (mean=3. SD=0. they perform quite modestly from the financial perspective (mean=3.71 The results are interpreted based on measurement scales: 1 being Never.88 0. Generally. SD=0.30. Based on Table 1.12 3. However.80 0.80). Kuala Lumpur. 3 being Occasionally.99). SD=0. However.98).28 3. Occasionally.15 SD 0.48 The results are interpreted based on the measurement scales: 1 being Strongly Disagree. The means and SDs of business performance are tabulated and presented in Table 2. 4 being Frequently.30 3. They perform quite well from the customer satisfaction perspective (mean=3. 5 being Strongly Agree.34. SD=0. they practice them only occasionally. or opportunities (mean=3. SD=0. However.28.88) or confronted with certain issues. Table 1 Means and SDs of strategic planning practices Strategic Planning Practices Articulate vision External and internal analysis Use strategy to address issues Commitment to implement strategy Evaluate performance of strategy Summated average of strategic planning Mean 2.28 3.08.08 3.97 0.07). SD=0.99 0.15. ISBN: 978-1-922069-19-1 Descriptive Statistics The means and standard deviations (SDs) for strategic planning practices are shown in Table 1.26 February 2013.55) as well as from the internal business process perspective (mean=3.22.96 3. They are also some efforts to instill learning and growth among the SMEs (mean=3.22 SD 0.30 3. SD=0. SD=0. Malaysia. the employees are committed to implement the strategy (mean=3. they do evaluate the performance and effectiveness of the strategy implemented (mean=3.77 0. 2 being Rarely.34 3. when directed by the management.

591.000 Internal Process 0. the SMEs are expected to be more professional in their management. 1997.49. ISBN: 978-1-922069-19-1 The relationship between strategic planning and business performance Table 3 shows the Pearson’s correlation results for strategic planning and business performance. the customer perspective will improve the most with more strategic planning (r=0. and ever changing.479** 0.00). Pearce et al. 2000). and competition turning global. The results indicate that the more strategic planning is being practiced.336** 0. Hopkins & Hopkins. the more the four perspectives of business performance will improve. p=0. The relationship is positive indicating that the more strategic planning is being practiced. Anderson. Of the four perspectives. Kuala Lumpur.000 Customer 0.05 level.01 level. All the four perspectives of business performance are significantly related to strategic planning. The relationships between strategic planning and the 4 perspectives Table 4 shows the Pearson’s correlation results between strategic planning and the four perspectives of business performance. This finding found supports from many studies (Bracker & Pearson.040 * Correlation is significant at the 0.26 February 2013. Table 4 shows the Pearson’s correlation coefficients between strategic planning and the four perspectives and business performance.01 level.291* 0. (2-tiled) ** Correlation is significant at the 0. the better would be the business performance of the SMEs.591** 0. dynamic.000 Learning & Growth 0. The financial performance will also . Table 4 Correlations: Strategic planning and 4 Perspectives of Performance Financial Strategic Planning Pearson Correlation Sig. Malaysia. 1986.Proceedings of 3rd Asia-Pacific Business Research Conference 25 .490** 0. Table 3 Pearson’s Correlation: Strategic planning and Business performance Business Performance 0. p=0. With the business environments becoming uncertain.01). 1987. They are advised to adopt strategic planning to prepare themselves properly for the new challenges ahead and sustain their competitiveness to achieve better business performance.. (2-tailed) 0. ** Correlation is significant at the 0.00 Strategic Planning Pearson Correlation Sig. The results confirm the significant relationship between strategic planning and business performance (r=0.

393 0. Kaplan and Norton (1992) state that the financial and customer perspectives are lagging measures because they are evaluated using past historical information such as sales growth.479. there is a slight positive correlation with strategic planning (r=0. costs of quality. the SMEs rated the internal business process perspective as the most important variable to business performance (beta=0. Therefore.01). The two main concerns for SMEs are customer satisfaction and financial sustainability.Proceedings of 3rd Asia-Pacific Business Research Conference 25 . Table 5 shows the beta results.421). 2000). profitability.01).287 Rank 1 2 3 4 Based on the regression results. Business Performance. etc. This is a significant finding for the SMEs. Multiple Regression Analysis (MRA) A MRA was conducted by regressing the four perspectives on the dependent variable. Kuala Lumpur. p=0. The objective is to identify the relative importance of the perspectives to business performance. level of defects.393).26 February 2013. they have all the more reasons to adopt formal strategic planning in their organizations as the process gives strategic direction to accomplish the strategic goals and provide feedback to the managers for deviations from the goals established (Simmons. the SMEs perceive the learning and growth perspective will improve the least with strategic planning (r=0.336. It is surprising that the financial perspective is of the least importance to business performance. Malaysia.421 0. ISBN: 978-1-922069-19-1 improve moderately with more resources committed to strategic planning by the top management (r=0. Kaplan and Norton (1982) also advised that the SMEs are more interested in business survival rather than profitability. Table 5 Standardized Coefficients of the Independent Variables Independent Variable Internal Business Process Customer Learning and Growth Financial Beta 0. it is heartening to note that the SMEs place so much importance to the performance of the . They are in the know that customer satisfaction leads to sustainable sales turnover and profitability. p=0.291.04). growth and shareholders’ value. This finding found support in Robinson and Pearce’s (1984) assertion that “formal strategic planning is a conceptual activity suited solely for larger firms and therefore has no effect on the financial performance of small firms”. Lastly. and learning and growth perspectives). etc. Nevertheless.404 0. This is followed by the customer perspective (beta=0. As far as the internal business process is concerned. And the internal business process and learning and growth perspectives are leading measures because they are measured using estimated future information such as core competencies and new innovations.404) and the learning and growth perspective (beta=0. The correlation results appear to indicate that emphasis on strategic planning by the management will bring better improvements to lagging measures (the financial and customer perspectives) than leading measures (the internal business process. p=0.

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