Strategic Planning Tools among Firms in Saudi Arabia - Research Paper Example

Chapter One 1.1 Introduction This study investigates the use and effectiveness of strategic planning tools among firms in Saudi Arabia. The broad area of inquiry is the relationship between strategic management tools and firm performance, and in order to investigate that relationship fully, we must consider not only the different forms of strategic management tools, but also an appropriate context by which to define firm performance. This chapter presents the research background and research problem this study seeks to solve, which is manifested by a gap in existing studies of strategic management and planning tools and concepts wherein the connection to firm performance is unclear or missing. Following this, the research objectives and research questions suggested by the research problem are detailed. The remainder of the chapter will explain the organisation of the research project, its applications, and limitations. 1.2 Research Background The Saudi economy has expanded significantly over the past several years, and this has been reflected by the growth in Saudi businesses. However, an overall good business environment and the opportunities it presents has not been sufficient for all Saudi companies to prosper; a number of companies have actually performed more poorly than their environment suggests they should and have been forced to withdraw from the Saudi stock market. Clearly, there is a lack of adequate strategic planning to maintain basic performance standards, and thus to identify and suggest ways in which performance can be improved, the research exercise is a root cause analysis of the relationship between planning and performance outcomes. This is a gap in prior research, because while many studies have addressed the modelling and application of strategic planning tools, the correlation of the use of these tools to outcomes in firm performance has not been rigorously analysed or clearly defined. A wide range of strategic management tools have been developed and extensively studied during the past couple of decades. Strategic management tools can be generally defined as methodologies used by an organisation as part of the process of determining how the organisation will compete. The process is of course quite variable in the relevant specifics from one business to another, but includes some form of external analysis, assessment of internal capabilities, identification of opportunities and threats, determination of the organisation’s objectives, and then the specific means by which the objectives will be achieved. (Copacino & Rosenfield, 1986: 79-80) Narrowing the focus of the research to an appropriate number of the many different strategic management tools available presents something of a challenge, but a necessary one: because the focus of the research is on the relationship between strategic management tools – not the overall concept of strategic management – and firm performance, in-depth analysis of tools that are likely to be used within the Saudi Arabian scope of the study must be made. In order to select the tools for analysis, reference was made to three similar prior studies. Khan and Al-Buarki (1992) surveyed the use of 10 common strategic planning tools among 47 medium- to large-sized firms in Bahrain, using selection criteria of a workforce of 50 or more people, investments of $2.65 million or more, and the presence of formal planning activity. (Khan & Al-Buarki, 1992: 3-4) In a larger and widely-cited study, Al Ghamdi (2005) surveyed 72 of Saudi Arabia’s top 300 companies (based on annual revenue), and found that the formal use of strategic planning tools was rather low, with only a little more than one-fourth of the companies surveyed using such tools “regularly” or “frequently”. (Al Ghamdi, 2005: 379, 393) More recently, a study of hotels in Jordan found that formal use of strategic planning tools was relatively widespread, and directly correlated to the size of the organisation, i.e., larger hotels were far more likely to use planning tools than smaller ones. (Aldehayyat, et al., 2011), those of Khan and Al-Buarki (1992), who studied enterprises in Bahrain; Al Ghamdi (2005) who conducted a survey similar to the one in this present study among Saudi Arabian organisations; and Aldehayyat, et al. (2011), who studied the use of strategic management tools and techniques amongst hotels in Jordan. Based on a metric of being reported as used “regularly” or “frequently” by organizations in at least two out of the three studies, five tools were suggested by the prior research: SWOT Analysis Financial Analysis Critical Success Factors (CSF) Analysis Experience Curve Analysis “What-If” Analysis Since the most recent of the aforementioned studies is the narrowest in scope and the others are based on data which is six and twenty years old respectively, in order to provide a more comprehensive assessment of strategic management tools, to these five suggested by the earlier research are added Portfolio Analysis, PESTLE Analysis, Core Competencies Analysis, Balanced Scorecards, and Product Life Cycle Analysis. If strategic planning and management is, as Copacino and Rosenfield (1986: 79) put it, “the process of determining how the organisation will compete,” then another context in which to describe the ‘process’ is “how the organisation seeks to maximise competitive advantage,” in the sense of gaining competitive advantage, making the most of the competitive advantage it already has, or both. This early development of the linkage of strategy to competitive advantage was done by Michael E. Porter in the1980’s. Porter’s Five Forces, which he developed and published in 1980, is one of the best-known strategic management tools for assessing the market and competitive factors impacting a business. (Porter, 1980) The Five Forces model provided an external perspective which extended and complemented tools such as the Boston Consulting Group Matrix, which can be used to assess competitiveness of a company’s products from an internal perspective. (Boston Consulting Group, 1970) The essential objective of strategic management, then, is to maximise competitive advantage. However, competitive advantage can be defined in a number of different ways, and in some respects the definitions can be contradictory. (Lovallo & Mendonca, 2007; Rumelt, 2003: 1-2) summarises a number of definitions from earlier research, wherein the authors variously define competitive advantage as ‘value a firm is able to create for its buyers that exceeds the firm’s cost of creating it’ (a definition found throughout Porter’s work); creating “economic profit” or “economic rent”, or a positive difference between the actual and expected value of resources (Barney, 2002: 9); superior financial returns compared to competitors; shareholder returns; or being in possession of some tangible or intangible scarce resource that others do not have. This latter view place strategic planning and strategic management within the context of the resource view of firms, defining the ability or talent for strategic management as an intangible resource with value – thus coming full circle, and defining competitive advantage as the exercise of planning and strategic management itself. (Powell, 1992) The differences in the way competitive advantage can be defined may be confusing, but nevertheless serve as an appropriate context for defining firm performance. Different firms have different measures of success, whether market share, revenues, shareholder returns, profits or profit margins, costs, operational efficiency, or some combination of those or other factors. Therefore, every firm would define competitive advantage in terms relevant to itself and its own aspirations. This provides the basis for the research problem: Strategic management is presumed to positively affect competitive advantage, and competitive advantage can be used as a relative measure of firm performance – a firm can be said to be performing well when it has competitive advantage in a context which is relevant to that firm. The use of strategic management tools is assumed to optimise strategic management, resulting in stronger competitive advantage, and therefore, higher firm performance. The research problem, then, is to explore this relationship, and to define how strategic management tools’ outcomes are reflected in firm performance. Prior research suggests that when the use of strategic management tools fails to give satisfactory results, the causes can be laid either to incomplete or poor planning and implementation of the strategy, or inherent flaws in the tools themselves that present unintended obstacles to successful use. Hahn and Powers (2010) demonstrated a correlation between strategic plan quality, plan implementation, and firm performance in a study of organisations with similar strategic orientations and performance-assessment philosophies. Spee and Jarzabkowski (2009) describe some of the problems of plan implementation in terms of the tools’ being “boundary objects,” wherein the analytical framework and language of particular tools is unfamiliar to people expected to implement plans based on the tools’ indications, either as a result of real organisational boundaries, or a lack of inclusiveness or participation among affected internal stakeholders in the planning processes. In that sense the research problem is one of examining performance management, but in the narrow context of use of specific strategic management tools. The difficulty for managers, however, is that many of the tools are, as Spee and Jarzabkowski describe them, imperfect; some tools can lead to confusion between what is legitimately strategic management with an objective to gain competitive advantage, and simply management of resources for efficiency without a clearly-defined strategic objective. (French, et al., 2004; Lovallo & Mendonca, 2007) Some strategic management tools, such as SWOT and PESTLE analyses, do not clearly indicate measureable actions that can be implemented to address the factors they describe, although the research literature indicates there are possible ways they can be enhanced through the application of various statistical analysis techniques. (King, 2004) Other tools which are sometimes considered strategic management tools such as, for example, functional cost analysis and experience curve analysis do not measure strategy as much as they do resource deployment. (Copacino & Rosenfield, 1986) Tools such as key driver analysis and critical success factors more closely identify aspects of a business’ operations needing improvement than perhaps other strategic planning tools, but again, do not necessarily suggest the actions or metrics to be followed. (Lieberman, 2001; Fryer, et al., 2007) One tool that does combine planning and performance measurement is the Balanced Scorecard, since specific objectives and targets are integrated in its design. (Sinha, 2006) However, even the developers of the Balanced Scorecard assert that it was originally designed as a performance measurement tool, that its architecture must be altered to make it effective for strategic planning, and that it is best used as a planning tool for the future, implying that at least one business cycle with a Balanced Scorecard used in the conventional way must be passed before strategic planning can be undertaken with it. (Kaplan & Norton, 2001) 1.3 The Research Gap While there is literature that clearly establishes the correlation between strategic management and firm performance (Spee & Jarzabkowski, 2009; Hahn and Powers, 2010), it is clear there is a research gap in the sense that the correlation is conceptual; no significant studies – as far as can be determined – have been done to empirically define the effectiveness of strategic planning tools in terms of firm performance. In some cases, the results of these studies were inconclusive, presenting contradictory findings and not clearly indicating a correlation between strategic planning and firm performance. (Grant, 2003: 492) Follow-up studies focused on the organisational processes of planning rather than the implementation of planning through performance management, and concerned themselves with comparing the efficacy of formal, rational planning processes with emergent processes. (Dutton & Duncan, 1987; Grant, 2003) Many of the studies of strategic management have, at least in part, their theoretical grounding in the resource view of firms, considering strategic management as something which adds economic value; the problem with this, however, is that this particular resource is not unique – it can be substituted, and competitively imitated, which seems to partly explain the inconclusive results of studies on its impact on firm performance. (Powell, 1992: 553) The present study, by contrast, looks at strategic management as a process whose value is dependent on the manner in which it is performed, and from this perspective identifies the components of strategic management which contribute to firm performance, thus filling the research gap in this respect. A gap of a more practical nature exists in that very little research on strategic management tools has been conducted among Saudi enterprises, with the exception of the 2005 study by Al-Ghamdi; the present study greatly extends that earlier work into areas not previously examined in the Saudi Arabian context. 1.4 Research Objectives The aim of this research project is to investigate the application of 10 strategic management tools among companies listed on Saudi Arabian stock exchange, and to assess the effectiveness of those tools. As suggested by previous studies, the strategic management tools to be examined are SWOT Analysis, Financial Analysis, Critical Success Factors (CSF) Analysis, Experience Curve Analysis, and “What-If” (spreadsheet) Analysis; in addition, other widely-used strategic management tools will be examined as well, and these include Portfolio Analysis, PESTLE Analysis, Core Competencies Analysis, Balanced Scorecards, and Product Life Cycle Analysis. The research project has three main objectives. First, to investigate which types of strategic management tools are used by Saudi-listed companies. The 10 tools selected for deep analysis represent the range of strategic management tools used by the enterprises surveyed for this study. The second objective is to explore the effectiveness of the strategic management tools as applied by the surveyed organisations. And finally, the third research objective is to identify internal and external conditions of firms which contribute to the effectiveness of these strategic management tools. These objectives lead to a number of specific research questions, which are detailed below. 1.5 Research Questions The research answers seven key research questions, which are as follows: 1. Which strategic management tools are used by the surveyed organisations in Saudi Arabia? As noted, the ten strategic management tools that are analysed in-depth represent the variety of tools used by the Saudi-listed enterprises that have been surveyed; this question establishes the comparative “popularity” of the different tools among organisations, and in what combinations different tools are used. 2. How are these strategic management tools used? Strategic management tools can be used in different ways and at different points in the strategic planning process. This question seeks to establish the perspective organisations take towards the use of strategic management tools and what value the organisations place on them. 3. To what extent strategic management tools are used without modification? As is explained in the following chapters, each of the strategic management tools has a specific design and nominal mode of use; almost all strategic management tools, however, can be modified to suit an organisation’s specific needs and circumstances. This question is designed to explore the comparative effectiveness of using strategic management tools “as designed” against using them in a modified form. 4. To what extent are the tools effective in addressing organisational performance? In the broadest sense, this study is investigating whether use of strategic management tools universally correlates to better firm performance, but in order to make that assessment, measures of organisational performance that can be used to assess the effectiveness of strategic management tools in an empirical way have to be identified and defined. 5. Which of these tools are most effective? Or put another way, are there strategic management tools which are clearly superior to others in terms of their impact on firm performance? 6. To what extent do organisations use the same tools consistently over time? The question here is whether organisations use the same strategic management tools from one planning period to the next, or if there is an inclination among some firms to experiment with different strategic management tools and planning methods. 7. To what extent does the organisational context contribute to the effectiveness or failure of strategic management tools? Because there is a strong indication from previous research that planning and implementation are more likely culprits in the failure of strategic management tools, organisational design, management philosophy, processes, human resources management, the external environment, and other factors may all play a role in the success or failure of strategic management tools. The organisational context comprising these factors, therefore, is a critical component of firms’ decisions about strategic management processes and tools. 1.6 Rationale for This Study The inspiration for this study comes from the circumstances in the business environment in Saudi Arabia. Although the Saudi economy has had remarkable positive growth and increasing diversity over the past several years, not all Saudi businesses have been as successful. For example, a recent review of companies listed on the Saudi Stock Exchange revealed that at least 12 companies have either been suspended from the exchange by the regulatory authorities or are under threat of suspension due to losses exceeding the prescribed percentage of capital. (Tadawul, 2011) Some of the affected companies are not insignificant or small companies. Zain KSA, the Kingdom’s third-largest telecoms company with affiliates throughout the Middle East, was recently obliged to develop a comprehensive capital restructuring plan to reduce accumulated losses, which are currently more than 40% of capital, and net losses. (Arab News, 2011) So apart from the academic value in analysing strategic management concepts that this research provides, it addresses a practical aspect of the problem of Saudi enterprises not performing well in what is an otherwise-healthy business environment. The primary focus and application for the outcomes of this proposed research is on firm performance in the context of choosing and implementing strategic management tools; using the findings and recommendations that will be developed by this research, a firm should be able to choose relevant strategic planning tools to help achieve positive results in specific performance measures. The results can have great value to firms and in particular to the selected study sample for this project, firms listed on the Saudi stock exchange. 1.7 Research Limitations Confidentiality is a critical ethical consideration for this study, and presents some restrictions on the amount of fine detail about the internal processes and perspectives of many organisations. Although the focus of the research is on publicly-listed firms which are bound by public disclosure requirements, some of the information sought about planning processes and internal organisation falls outside the purview of those legal requirements. In the case of organisations which are not performing well, there is an understandable reluctance to discuss information that is perceived to put the firm in an uncomplimentary light. These considerations present some challenges to the design of the survey. In a more general sense, the research is limited because of the narrow scope in focusing solely on Saudi exchange-listed organisations. Cultural differences and differences in organisational contexts and environments in other countries may limit the applicability of these results elsewhere, although there is much in the findings that non-Saudi organisations may find valuable. 1.8 Organisation of This Study The primary research of this study is a survey of firms listed on the Saudi Arabian stock exchange. This part of the research consists of three main components: First, an identification of the organisations’ strategic management methodology and the strategic management tools utilised. Second, identification of the organisations’ plans developed from these tools, with a particular focus on the implementation steps created, and the manner in which the planning process was conducted. And third, the survey gathers information to conduct an assessment of the organisations’ performance outcomes following the deployment of strategic management tools and the resulting planning/implementation processes. A key part of the research analysis investigates the manner in which performance metrics are related to the subsequent year’s planning, as suggested by the study of internal and external influences on planning processes done by Dutton and Duncan (1987). The way in which this latter analysis is done is by comparing descriptive terms is performance results and planning indicators, which is then subjected to statistical analysis using the Mann-Whitney U Test. (Shier, 2004) Even though this and other statistical techniques are used to establish the validity and confidence of the results, because the research is essentially an inductive process, it must be considered qualitative in nature. The study is organised as follows: A comprehensive literature review and analysis of secondary sources is presented in the next chapter, and concentrates on the following key areas: 1. Identification and description of the 10 selected strategic management tools, in particular prior research which focuses on the effectiveness and contexts of use for specific tools. 2. Thorough review and analysis of the relevant prior research concerning firm performance in the context of strategic management and planning. Following the literature review, the research methodology and rationale is detailed, and the results of the primary research, a survey of executives and managers of Saudi exchange-listed firms, is presented. Analysis of the results includes presentation of information about company performance gathered from secondary sources such as news reports and required public disclosures, in order to verify information provided by surveyed firms and to fill any information gaps. Finally, recommendations about the use of strategic management tools developed from the research findings are presented for the benefit of Saudi firms. 1.9 Summary This study seeks to define the effectiveness of strategic management tools in the context of firm performance, and addresses a broad gap in the existing research literature wherein the correlation between strategic management and firm performance is established, but not defined in an empirical or practically-applicable way. The study also addresses a gap in existing research in that analysis of this nature has not been conducted within the scope of organisations in Saudi Arabia. This has very practical applications, because there is much evidence that many Saudi firms are not prospering in a vibrant business environment that suggests they should be. The research problem addressed by this study, then, is to define how strategic management tools’ outcomes are reflected in firm performance. Findings from earlier research suggest that it is the development of planning and implementation of the strategic direction suggested by the use of strategic management tools that determines whether or not those outcomes will be successful; this study seeks to confirm that relationship of strategic management to performance management and firm performance outcomes, and define the role of strategic management tools in that context. In order to find a solution for the research problem, primary research involving a survey of firms listed on the Saudi stock exchange has been developed, and these finding are presented. The main limitations to the research are the restrictions on available information from the surveyed firms, and in a broader context, the limiting of the scope of the research to firms in Saudi Arabia, which may have characteristics and organisational contexts quite different from firms in other parts of the world. References Al Ghamdi, S.M. 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