Planning practices of SMEs in North-Western Region of Romania an empirical investigation
a,*, Cristina Ioana Balinta
a -Bolyai University, Horea Street, No.7, Cluj-Napoca, 400174, Romania
Abstract
In a developing economy such as Romanian economy, SMEs sector is considered to be a source of innovation, flexibility and economic development. Due to insufficient resources and strong competition that characterizes today's economic environment, SMEs are characterized by strong volatility. Strategic planning process is considered to be vital for the survival of any company as it helps them adapt to changing environment. It can be applied to all management levels and all types of organizations. The purpose of this paper is to identify the characteristics of planning activities of 200 SMEs in the North-Western Region of Romania within trade, services and manufacturing sectors. The main aspects considered refer to: formality of planning activities, planning horizons, frequency of plans revision, strategic planning tools used. The paper also examines the factors influencing strategic planning.
Keywords: strategic planning; small and medium sized enterprises;North-West Region;
1. Introduction
SMEs play an important role in economic and social development as they generate a significant share of GDP in any country approximately 70% in Romania, provide a very important number of jobs more than 60%
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in Romania, generate a large proportion of technical innovations, ensure the creation of the middle class, create prerequisites for professional, economic, social and cultural achievement of the population.
In a developing economy such as Romanian economy, this sector is considered to be a source of innovation, flexibility and economic development. Due to insufficient resources and strong competition that characterizes today's economic environment, SMEs are characterized by strong volatility. Strategic planning process which develops and implements decisions on the future direction of the organization is vital for the survival of any organization because it helps companies adapt to changing environment and is applicable to all management levels and all types of organizations Kerzner, 2001 , p. 15.
The use of strategic planning has favorable effects: improves performance, helps to improve management efficiency, which translates into a better ability to identify and capitalize on market opportunities and by encouraging employees to have a positive attitude vis-à-vis the change.
Skrt and Antocic 2004, p. 107 argue that the strategic planning thinking became mandatory for entrepreneurs in the context of global competition, technological change and market dynamics. Antocic and Hisrich 2004, p. 518 point out that strategic decisions are crucial to ensure heterogeneity of organizational behavior and the creation of value while being an important means to generate new value. Delmar and Shane 2003 argue, through an empirical study, that planning increases the chances of survival of a business, improving the product development process and also the organization of the newly created companies.
Strategic management, ie strategy content and process strategic planning is widely considered to be one of the factors that contribute to small firm growth Rue and Ibrahim, 1998; Kraus et al, 2008 in Kohtamäki et al, 2008. Given that the majority of research on strategic management so far focused on large companies many scholars have recently noticed that there is a need to adapt and apply these concepts in the context of small businesses as well Perry, 2001, Gibson and Cassar, 2005 in Kohtamäki et. al, 2008.
Previous research suggests that strategic planning in small businesses is often done in an informal way and rarely on a regular basis Kohtamäki et al, 2008, uncomprehensive occurring sequentially over time having a reactive rather than proactive orientation Robinson and Pearce, 1984. In small firms, strategy is typically a product of the single mind of the owner-manager, whose main focus is often on routinely operating his or her daily business, while strategic planning is perceived as less important or even not applicable Kraus, 2007.
For decades research in strategic management have focused on developed economies, particularly the U.S. and Europe Welsh, Dragusin, 2009 and less on developing economies. In addition, Romania, the studies or their results on the strategic activities of SMEs are either lacking, limited or not known. This study aims to contribute to the removal, at least to some extent of this shortcoming.
2. Methods and sample
The research method chosen was a questionnaire survey due to the fact that we intended to question as many small and medium enterprises as possible and to collect a relatively large amount of information and also that we needed structured and standardized data. Given that firms are generally reluctant to participate in such studies, in order to improve the response rate we chose "face to face" interviews which required the operators to travel to the firms and to assist the representatives of the companies they were mainly administrators or financial managers with the completion of the questionnaire.
In order to analyze the collected data we used a computer program for statistical processing of data SPSS version 16 that structured and systematized in an electronic database the information collected "on the field" with the questionnaire.
Our paper aims to outline a picture about strategic plannig of SMEs. We have transposed this purpose in the following research questions: do SMEs engage in planning activities?; is the planning formalized?;
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what is the time span of the plans developed?; how often are the plans reviewed?; do companies involve external consultanti in elaboration of plans?; what strategic management tools are being used?; and are all these aspects of strategic planning influenced by SMEs characteristics (i.e. company size, experience
and field of activity). Our sample includes 200 SMEs in the North-West region
- ud, 44.5 % of them have an experience of less than 5 years, 23 % have between 6 and 10 years of experience, 25 % have an between 11 and 15 years of experience and 7.5% have an experience of over 15 years. Of the companies surveyed, a total of 55 27.5% of SMEs are active in production, 75 37.5% are service firms, and 70 35% are trade firms. Regarding firm size, expressed as number of employees, 41% of companies fall into the category of micro up to 9 employees, 41.5% in the category of small 10-49 employees and 17.5% in the category of medium companies 50-249 employees.
3. Findings
Questioned on the conduct of planning activities, 178 SMEs 89% responded affirmatively, all medium-sized companies stating that they engage in planning activities. Similarly, all firms with over 15 years of experience declared they conduct planning activities. Only two production companies said they
We tried to identify the existence of a statistically significant link between planning activities undertaken by SMEs, on the one hand, and firm size, field of activity and firm experience expressed as number of years of activity, on the other hand, using chi-squared test. The results indicate a low intensity link only between the company experience and business planning, all companies with more than 15 years of experience stating that they conduct planning activities. Neither the main field of activity nor firm size influences the involvement in planning activities.
Table 1. The link between characteristics of SMEs and development of planning activities
Number of employees Main field of activity
Company conducts planning activities
2 5.459 8.972 4.235
df 2 3 2
Sig. 0.065 0.03 0.12
c 0.163 0.207 0.144
Researchers opinion that small businesses which adopt a more formal planning process will place greater emphasis on improving the quality of the strategic decision making process and as a result of the formal planning process, small firms consider and adopt more strategies Lyles et al.,1995. A percentage of 55.5% of the 200 surveyed SMEs, said they did not develop strategic plans in writing. Most companies that elaborate written strategic plans are medium sized, having 10 to 49 employees, active for no more than five years see Table 2.
We were also interested in finding out if SMEs characteristics namely, size, field of activity and years of experience, influence the elaboration of plans in writing. Chi-squared test values show that company size
2=22.727, df= 2, N=200, sig.=0.000 <0.05, c= 0.319 and main field of activity 2=7.484,
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df= 2, N=200, sig =0.024 <0.05, c= 0.190 influence the elaboration of strategic plans in writing, while
No Yes Total
Number of employees
0-9 49.5% 30.3% 41.0%
10-49 44.1% 38.2% 41.5%
50-249 6.3% 31.5% 17.5%
experience
less than 5 years 48.6% 39.3% 44.5%
6-10 years 20.7% 25.8% 23.0%
11-15 years 22.5% 28.1% 25.0%
over 15 years 8.1% 6.7% 7.5%
Main field of activity
Production 19.8% 37.1% 27.5%
Services 42.3% 31.5% 37.5%
Commerce 37.8% 31.5% 35.0%
Total Number of firms 111 89 200
Regarding the influence of the latter factor on formalization of strategic planning process, we identified only a partial link of moderate intensity 0.445 for medium sized firms 50 - 249 employees, all medium-sized companies with experience from 6 to 10 years developing written strategic plans.
There are significant differences between firms that develop written strategic plans and those who do not write their business plans in terms of goals achievement in the last two years as the 2 test results suggest 65.5% of firms that have only partially fulfilled the objectives are firms that do not prepare written plans, and 59% of the firms that have fully achieved their objectives and 60% of companies that have exceeded their targets are companies that have developed written plans.
term of 1.88 years, over 57% of SME s declaring that the timeframe for developing written plans is 1 year median = 1. Over 76% of the companies draw up plans for a period of less than three years. This lead us to conclude that companies are more concerned with operational rather than strategic issues, only six companies stated that the timeframe of the plan is five years and one that aimed to draw up plans for more than five years.
We applied 2 test to identify factors influencing the time horizon of plans. The results df = 15, N = 200, sig .= 0.002 <0.05, c = 0531 show a strong link between time horizon and company experience. In terms of firm size and main field of activity the test revealed no influence of them on the time horizon of the plans.
Questioned about the review frequency of plans, most companies surveyed said they are reviewing their plans quarterly 31% and monthly 27%. Applied tests show that, in general, strategic plans review frequency does not depend on firm size or field of activity or business experience.
Only a percentage of 16.5% of SMEs said they turn to outside consultants to develop strategic plans. This is due, on the one hand, to poor financial resources and on the other hand, to the reluctance of entrepreneurs to share their business information with people outside the company. 2 test results, indicate that in general,
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experience and field of activity do not influence firm decision to turn to outside consultants to develop strategic plans. We identified a poor link between firm size and use of external consultants. In the case of micro and small enterprises the share of those that use consultants for planning activity does not exceed 15% while in the case of medium sized enterprises the share doubles 31.4%.
Another characteristic of strategic planning is the use of planning tools. Our study shows that the most commonly used tools are SWOT analysis 49.5% and pessimistic and optimistic scenarios 43.5%. Conversely, the least used are General Electric and Boston Consulting Group matrix 2%. A percentage of 15.5% 31 firms of surveyed SMEs stated they did not use any of the following strategic tools: SWOT analysis, BCG matrix, GE matrix, PEST analysis, pessimistic and optimistic scenarios, the Balanced Scorecard.
Fig.1 Use of strategic tools
In general there could not be identified any statistically significant link between the field of activity and firm experience, on the one hand, and tools used on the other. 2 test results = 0.041 <0.05, c = 0.176 show that it was identified a statistically significant link only between the use of BSC and firm size, the percentage of firms that use this tool increasing with firm size.
4. Conclusions
Because of the importance of SMEs, and of the benefits of strategic planning for their survival and performance, this paper aims to promote strategic planning as best practice for SMEs to improve chances of survival and to obtain and enhance performance. According to Rue and Ibrahim (1998) strategic planning is characterized by long term orientation, written strategies and evaluation and control. Kraus et al. (2006) add to these the use of strategic planning instruments. Thus, we have some practmanagers.
The SMEs participating in our study declared they engage in planning activities but less than 50% of them elaborate written strategic plans. Although there are researchers that, based on their studies, argue that SMEs do not necessary need to formalize their strategic planning as this may affect their flexibility which is crucial for their success Le Roux, 1998, the results of our study support us in recommending a formalized planning process as this will increase the chances of achieving the goals established.
n anticipating them. We argue for a more pro-
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dynamic and global environment as anticipating opportunities, but more important threats, will increase the chances of survival and success.
To fulplanning tools. The companies that participated in our study declared they use mostly SWOT analysis and scenarios which demonstrate a strategic thinking effort on their behalf but the number of tools they use is one
managers to improve their knowledge of strategic management tools as they will guide thinking and will constitute a starting point of structuring activity Knott, 2006.
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