**STRATEGIC THINKING AND PERFORMANCE OF SMES
Mustafa Zakaria
Mohd Khairuddin Hashim
Romle Hassan
College of Business
Universiti Utara Malaysia
ABSTRACT
Although strategic thinking has attracted much attention in recent years, the review of
the literature reveals this specific area of strategic management has not received much
research emphasis. More specifically, the review of previous research in the area
suggests the relationship between strategic thinking and organizational performance,
particularly in the Malaysian small and medium-sized enterprises (SMEs) has not
been thoroughly explored. The study presented in this paper attempted to address this
research issue. The study collected data from 125 manufacturing SMEs located in
four states in northern Malaysia. Based on the analyses of the data collected, the
results show significant positive relationship between strategic thinking and the
performance of the SMEs in the study.
INTRODUCTION
The focus on strategic thinking as an important strategic management concept began
about three decades ago. Ever since being introduced in the 1970s, the review of the
strategic management literature indicates interest in the area of strategic thinking has
been growing steadily. More significantly, in recent years, strategic thinking has
gained acceptance not only as an integral part of the strategic management process,
but also as a good business practice among business organizations.
The emphasis on strategic thinking as an important priority for business organizations
is reflected in the increasing literature that indicates its adoption can assist firms in
formulating and implementing more effective business strategies. The views
presented in the literature suggest that by adopting strategic thinking practices, firms
operating and competing in dynamic and complex business environment would be
able to develop more focus, coherent, and innovative strategies as well as be able to
improve their business performance (Tregoe and Zimmerman, 1979; Ohmae, 1982;
Robert, 1988; Stumpf, 1989; Suutari, 1993; Bates and Dillard, 1993; Liedtka, 1997;
Barnett and Berland, 1999; Pellegrino and Carbo, 2001; and O’Shannassy, 2003).
Although strategic thinking is being considered as essential and beneficial to business
organizations, the review of previous studies on strategic management shows that as a
specific area of strategic management, strategic thinking has not being able to attract
much empirical research. Review of prior research on strategic thinking indicates that
past studies are not only limited in scope and focus, but they are also fragmented in
nature.
Furthermore, the literature shows that past empirical studies that examined strategic
thinking tend to mainly focused on large companies in the context of western business
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societies. Little research attention however, had been given to investigate strategic
thinking among the small and medium-sized enterprises (SMEs), particularly in the
local context.
Notwithstanding that in recent years there has been an increasing amount of literature
reporting research in strategic thinking, these investigations are exposed to several
limitations. For instance, majority of previous studies adopted the case study method.
Moreover, of the limited number of studies on strategic thinking, the emphasis has
been primarily on observing and reporting general research issues such as the
development of strategic thinking, strategic thinking competencies in organizations,
the strategic thinking process, development of strategic thinking instrument, and
implementation of strategic thinking, (Graetz, 2002; Linkow, 1999; Barnett and
Berland, 1999; Bates and Dillard, 1993; Thakur and Calingo, 1992; and Millet, 1988).
Given the importance of strategic thinking and the various shortcomings of past
studies, more focused research needs to be carried out in this area of strategic
management. One interesting and important area of research would be to investigate
the linkage between strategic thinking and performance of small and medium-sized
enterprises (SMEs). The purpose of this study is to investigate the relationship
between strategic thinking and performance of Malaysian small and medium-sized
enterprises.
LITERATURE REVIEW
Even though the term strategic thinking has been widely used, the literature indicates
there is still no one widely accepted definition of strategic thinking. The term strategic
thinking has been defined in different ways by different authors. However, a
comprehensive review of the definitions presented in the literature suggests that most
authors tend to agree and view strategic thinking as an integral part of the strategic
management process (Harrison, 2003; Wilson, 2003; Liedtka, 1997; Morrisey, 1996;
and Garrat, 1995).
Authors such as Thomson et al. (2004), O’ Shannassy, 2003, Harrison (2003), Viljoen
and Dann (2003), Graetz (2002), Pellegrino and Carbo (2001), Suutari (1993),
Bandrowski (1990), Ohmae (1982), South (1981), Morrison and Lee (1979) regarded
strategic thinking as a creative process of crafting innovative strategy that emphasizes
on identifying and managing competitive advantage. According to these authors,
strategic thinking involved sequential critical and creative thought processes that
underscored key issues and the creation of a more realistic and innovative framework
for developing competitive advantage, as well as effective strategy formulation and
implementation. These authors further highlighted that companies with strong
strategic thinking capabilities can enhance not only their present competitive
advantage, but also strengthen their future competitive position.
The literature however, seems to suggest that there is an agreement among the
strategic management scholars and consultants concerning the importance of strategic
thinking to organizations. From the scholars and consultants viewpoint, strategic
thinking is important because it helps organizations in terms of providing insights into
what they should be doing in the present as well as in assisting them to focus on the
future. By presenting the insights into the present and future, strategic thinking is able
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to offer organizations with a more realistic and effective framework for formulating
their strategic plans (Viljoen and Dann, 2003; Keelin and Arnold 2002; de Kluyer,
2000; Raimond, 1996; Morrisey, 1996; Garrat, 1995; Hanford, 1995; Wall and Wall,
1995; Tweed, 1992; Harper, 1991; Zabriskie and Huellmantel, 1991; Schmincke,
1990; and Robert, 1988).
Other scholars have indicated that strategic thinking helps business organizations
better understand phenomena and events in the real world by going beyond the
traditional linear thinking. By helping organizations better understand the real world
of business, strategic thinking can assist them to cope with the changes in the business
environment. Put it another way, strategic thinking allows an organization to clearly
understand the specific nature of the various elements in the business environment
(Weir, 2002; Wells, 1998; Markides, 1997; Mintzberg, 1995; Thierauf, 1993; and
Ohmae (1982).
Based on a study of 15 large companies representing 12 different industries in the
United States of America, Barnett and Berland (1999) found successful companies
were not only committed to a broad based strategic thinking, but also allowed
strategic thinking to pervade throughout their organizations. Furthermore, findings of
the study also suggested the linkage between strong strategic thinking capabilities and
the confident to forecast that helped to reduce uncertainty among the companies in the
study.
In another study that examined a small bank in the United States of America, Stumpf
(1989) discovered the bank experienced improved performance that resulted from
introducing an executive development program that emphasized on developing the
strategic thinking capabilities of its managers. According to the study, the
performance of the small bank improved in terms of its assets, sales turnover, profit,
and expansion programs. More specifically, the findings of the study indicated that
the assets of the bank had multiplied by six times, sales turnover and profit increased
by 10 times. The results of the study also showed that the bank was able to expand to
18 other states through its market expansion strategy.
Further studies conducted by Bates and Dillard (1993), Suutari (1993), and Stumpf
(1989) indicated that to practice strategic thinking effectively, organizations need to
develop the necessary skills and knowledge at different levels of management. For
instance, Bates and Dillard (1993) pointed out that strategic thinking can be practiced
successfully with certain measurable capabilities. Among these capabilities include;
intuitive ability, mental elasticity, abstract thinking, tolerance of risk, and tolerance
for ambiguity.
In the study by Suutari (1993), the author observed that the practice of strategic
thinking requires not only decision making skills to generate ideas, but also to make
decisions based on the understanding of strategy formulation and implementation that
emphasizes on achieving the objectives of the business. Suutari, however,
highlighted that most often organizations encountered the difficulty of identifying
people with strategic thinking ability and disposition to perform the strategic thinking
tasks in their organizations.
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RESEARCH METHODOLOGY
Sampling and Procedure
The small and medium-sized enterprises (SMEs) in this study were defined as those
manufacturing firms which employed less than 300 employees. In the study, the
listing obtained from the Small and Medium Industries Development Corporation
(SMIDEC) branch office in northern Malaysia was used as the sampling frame. The
SMIDEC’s list consisted of 1464 SMEs located in the states of Perak, Penang, Kedah,
and Perlis. Based on the definition of SMEs adopted in the study, 700 firms were
identified and selected from the list.
The study used postal survey to gather the data from the 700 selected firms.
Structured questionnaires with self-addressed envelopes were mailed to the owners
and managers of the 700 firms. Of the 700 firms, 125 firms completed and returned
the questionnaires. The response rate of the study was 18 percent.
Questionnaire
The three sections in the structured questionnaire adopted in the study consisted of 34
items. In section one, 11 items were used to gather the general information on the
background of the respondents (4 items) and their firms (7 items). The 15 items in the
second section of the questionnaire were designed to capture the respondents’
emphasis on the six dimensions of strategic thinking. Among the six dimensions
included; obtaining foresight (3 items), acquiring insight (3 items), focusing on
creativity (3 items), being pragmatic (2 items), achieving relative advantage (2 items),
and maintaining focus (2 items). The respondents were requested to rate each item on
a five point scale ranging from (1) “Not Important” to (5) “Very Important.”
The third section consists of the items used to measure the performance of the firms.
Performance in the study is measured in terms of the firms’ average performance. Sales,
assets, gross profit, employment, equity, return on sales (ROS), return on equity (ROE),
return on asset (ROA) were used to assess the performance of the SMEs.
Profile of the Respondents
Out of the 125 respondents, 55 (44%) respondents had bachelor degrees, 30 (24%)
had school certificates, 24 (19.2 %) were diploma holders, 12 (9.6%) had masters’
degree, and four (3.2%) obtained PhD degrees. Eighty (64%) of the respondents were
Chinese, 35 (28%) were Malays, six (4.8%) were Indians, and the remaining four
(3.2%) respondents were from other races. Hundred and seven (85.6%) respondents
were male and 18 were female. Eighty respondents were between 40 to 60 years old.
The other 43 respondents were between the ages of 21 to 40 years. Only two
respondents were older than 60 years.
Characteristics of the Sample Firms
Table 2 presents the characteristics of the 125 firms that participated in the study. Of
the 125 firms, 53 firms (42.4%) were located in Penang, 38 firms (30.4%) in Perak,
27 firms (21.6%) in Kedah, and the remaining seven firms (5.6%) were operating in
4
Perlis. The 25 firms had been in operations between less than three years to more than
20 years. In terms of employment, 65 firms (52%) employed between one to 50
employees, 43 firms (34.4%) employed 51 to 100 employees, 11 firms (8.8%) had
between 101 to 150 employees, two firms (1.6%) had between 151 to 200 employees,
three firms (2.4%) had between 201 to 250 employees, and only one firm (0.8%) had
more than 250 employees.
As for the number of products produced, 57 firms (45.6%) indicated that they
produced more than five products, 11 firms (8.8%) produced four and five products,
26 firms (20.8%) produced three products, 12 firms (9.6%) manufactured two
products, and another eight firms (6.4 %) produced only one product.
Table 2: Characteristics of the Sample Firms
Characteristics:
Age of Firms:
Less than 3 years
3 to 5 years
6 to 10 years
11 to 15 years
16 to 20 years
More than 20 years
Frequency
Percentage (%)
2
3
31
34
30
25
1.6
2.4
24.8
27.2
24.0
20.0
65
43
11
2
3
1
52.0
34.4
8.8
1.6
2.4
.8
8
12
26
11
11
57
6.4
9.6
20.8
8.8
8.8
45.6
Sole proprietorship
Partnership
Private Limited Company
2
5
118
1.6
4.0
94.4
Paid-up capital:
Less than RM10 million
RM10 million-RM20 million
RM40 million-RM50 million
120
4
1
96.0
3.2
0.8
Number of Employees:
1-50 Employees
51-100 Employees
101-150 Employees
151-200 Employees
201-250 Employees
251-300 Employees
Number of Products Produced:
One product
Two products
Three products
Four products
Five products
More than five products
Legal Entity of Firm:
As shown in Table 3, 118 firms (94.4%) of the 125 firms were incorporated as private
limited companies, five firms (4%) were in the form of partnership, and two firms
(1.6 percent) were sole proprietorship. In terms of paid-up capital, 120 firms (96%)
had paid-up capital of less than RM10 million, four firms (3.2%) had paid-up capital
of between RM10 to RM20 million, and only one firm reported having paid-up capital
of between RM40 to RM50 million.
5
THE RESULTS
Strategic Thinking Emphasis
The mean and standard deviation (SD) scores of strategic thinking are presented in
Table 3. As shown in Table 3, the mean scores of strategic thinking ranged from
3.3600 to 4.1520. At the general level, these results suggest that the firms in the study
emphasized on the six dimensions of strategic thinking.
Table 3: Mean and Standard Deviation (SD) Scores of Strategic Thinking
Strategic Thinking Emphasis:
Mean
SD
3.9760
3.6080
3.7600
.8563
1.0309
9951
4.0320
4.1520
3.9120
.7924
.8524
.8891
Flexibility to adapt to unanticipated changes.
Use different approach to market product.
Ability to anticipate surprises, threat and crises.
3.6400
3.6480
3.4400
.8557
.9180
.9193
Being Pragmatic:
Implement project when the expected return is sure.
Move into a different business if the return is better than existing one.
3.6240
3.3600
1.1458
1.0133
3.5760
3.6800
9776
1.0441
3.8560
3.8800
.8953
.9034
Obtaining Foresight:
Analyze trends to identify potential opportunities
Keep track of trends that affect firm's competitiveness.
Analyze issues that affect firm's competitiveness
Acquiring Insight:
Keep track of demand trends in the industry.
Monitor changes in customers' needs.
Monitor competitors’ actions and strategies
Focusing on Creativity:
Achieving Relative Advantage:
Periodic internal meeting to discuss market strengths
Anticipate competitors’ responses to firm's actions in the market.
Maintaining Focus:
Share firm’s future direction and mission with employees.
Adapt strategic direction based on changes in customers' needs.
Relationship between Strategic Thinking and Performance
Table 4 indicates the results of the correlations between strategic thinking (obtaining
foresight, acquiring insight, focusing on creativity, being pragmatic, achieving
relative advantage, and maintaining focus) and the average performance (as measured
in terms of ROE, ROA, ROS, equity, assets, sales, gross profit, and number of
employees).
As shown in Table 4, the results show significant relationships between strategic
thinking (obtaining foresight, acquiring insight, focusing on creativity, being
pragmatic, achieving relative advantage, and maintaining focus) and the eight
measures of performance as adopted in the study (ROE, ROA, ROS, equity, assets,
sales, gross profit, and number of employees).
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Table 4: Correlations between Strategic Thinking and Average Performance
Strategic Thinking
Emphasis:
ROE
ROA
ROS
Equity
Assets
Sales
Gross
Profit
No.
Employees
.042
.026
.016
.120
.223*
.148
.074
.076
.097
.034
.043
.285**
.313**
.300**
.255**
.152
.070
.062
.012
.145
.133
.063
.033
.206*
.014
.007
.000
.181*
.124
.111
.133
.146
.070
.086
.142
.091
.066
.127
.092
.183*
.141
.160
.143
.121
.139
.182*
.179*
.167
.036
.040
.060
.186*
.183*
.129
.128
.151
.121
.036
.022
.214*
.194*
.183*
.151
.182*
.111
.016
.051
.156
.203*
.076
.016
.047
.107
.211*
.026
.078
.095
.087
.069
.189*
.085
.037
.018
.006
.032
.126
.179*
.059
.157
.185*
.088
.231**
.156
.194*
.166
.189*
.198*
.162
.073
.114
.029
.105
.140
.117
.258**
.227*
.193*
.041
.021
.061
.081
.150
.145
.186*
.119
.175
.207*
.304**
Obtaining Foresight:
Analyze trends to identify potential
opportunities.
Keep track of trends that affect firm's
competitiveness.
Analyze issues that affect firm's
competitiveness.
Acquiring Insight:
Keep track of demand trends in the
industry.
Monitor changes in customers' needs.
Monitor competitors’ actions and
strategies.
Focus on creativity:
Flexibility to adapt to unanticipated
changes.
Use different approach to market
product.
Ability to anticipate surprises, threat
and crises.
Being Pragmatic:
Implement project only when the
expected return is sure.
Move into a different business if the
return is better than existing one.
Achieving Relative Advantage:
Periodic internal meeting to discuss
market strengths.
Anticipate competitors’ responses to
firm's
actions in the market.
Maintaining Focus
Share firm’s future direction and
mission with employees.
Adapt strategic direction based on
.076
.024
changes in customers' needs.
** Correlation is significant at the 0.01 level (2-tailed).
* Correlation is significant at the 0.05 level (2-tailed).
DISCUSSION AND CONCLUSION
This study initiated an attempt to investigate the relationship between strategic
thinking and performance of SMEs. Based on the analyses of the data collected from
125 SMEs, the results of the study indicate significant positive relationships between
strategic thinking and performance of the SMEs in the study. The results of the study
specifically show positive relationships between the six dimensions of strategic
thinking, namely; obtaining foresight, acquiring insight, focusing on creativity,
achieving relative advantage, maintaining focus, and the performance of SMEs as
measured in terms of ROE, ROA, ROS, equity, assets, sales, gross profit, and number
of employees.
On the basis of the results of the study, the following can be concluded. First, the
results of the study seem to indicate that the SMEs in this study adopted strategic
thinking practices as advocated in the literature. Second, at the general level, the
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empirical evidence from the study suggests a directional positive relationship exists
between strategic thinking and performance of SMEs.
This study has at least two important practical implications. The first implication of
the study is that owners and managers of SMEs should realize that the six dimensions
of strategic thinking are associated to different measures of performance. Second, the
results of the study also imply that owners and managers of SMEs need to be aware of
the relationship that exists between strategic thinking and performance. Given the
positive relationship between strategic thinking and performance, the owners and
managers of SMEs should strive to focus on developing their strategic thinking
capabilities to ensure that their firms would continue to perform.
Lastly, even though the study empirically indicates that strategic thinking is positively
correlated to the performance of SMEs, the correlation coefficients (less than 0.5)
suggest rather weak association between strategic thinking and performance. There is
therefore a need for more research to investigate strategic thinking in SMEs. Future
studies in this area of research may attempt to seek other directions. For instance, a
researcher may replicate this study by examining SMEs in only one particular
industry. By selecting SMEs from one specific industry, the study might be able to
help not only to further clarify the relationship as observed in this study, but also be
able to overcome the problem of generalizing the results of the study.
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