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Abinet Tefera
Abinet Tefera
DEPARTMENT OF MANAGEMENT
COLLAGE OF BUSINESS AND ECONOMICS
DEBRE BERHAN UNIVERSITY
JUNE, 2019
DEBRE BERHAN, ETHIOPIA
STRATEGIC PLANNING PRACTICES AND ITS EFFECT ON
ORGANIZATIONAL PERFORMANCE, IN CASE OF COMMERCIAL BANK
OF ETHIOPIA IN DEBRE BERHAN TOWN, ETHIOPIA
BY: ABINET TEFERA
ADVISOR: HALIE YESHANEW (PHD)
A THESIS SUBMITTED TO THE DEPARTMENT OF MANAGEMENT OF
DEBRE BERHAN UNIVERSITY FOR THE PARTIAL FULFILLMENT OF
MASTER OF BUSINESS ADMINISTRATION
DEPARTMENT OF MANAGEMENT
COLLAGE OF BUSINESS AND ECONOMICS
DEBRE BERHAN UNIVERSITY
MAY, 2019
DEBRE BERHAN, ETHIOPIA
I
DEBRE BERHAN UNIVERSITY
SCHOOL OF GRADUATE STUDIES
Approval of the thesis
As member of board examiners of final MBA. Thesis open defense examination, we
certify that we have read and evaluate the thesis prepared by Abinet Tefera entitled
STRATEGIC PLANNING PRACTICES AND ITS EFFECT ON
ORGANIZATIONAL PERFORMANCE, IN CASE OF COMMERCIAL BANK OF
ETHIOPIA IN DEBRE BERHAN TOWN, ETHIOPIA and examine the candidate. We
recommended that the thesis be accepted a fulfilling the thesis requirement for the
degree of master of business administration.
Board of examiners
External examiner:
___________________________________________
Internal examiner:
___________________________________________
Chairperson:
___________________________________________
Date:
II
DECLARATION
Undersigned, declare that this thesis is my own original work and has not been
presented in another university. All sources of material used in this thesis have been
duly acknowledged.
Name: _______________________________________
Signature: ____________________________________
Date: ________________________________________
III
DEBRE BERHAN UNIVERSITY
SCHOOL OF GRADUATE STUDIES
As a thesis researcher advisor, I hereby certify that I have read and evaluate this thesis
prepared under my guidance by………………………………
entitled…………………………………………………………………………………
………..…………………………......I recommended that it be submitted as fulfilling
the thesis requirement for the degree of Masters of Business Administration.
IV
Acknowledgement
This thesis is a synergistic piece of work of many personalities. Firstly, I owe my
deepest gratitude to God. Secondly, I have come across to my advisor who generates
such an awe-inspiring positive reaction it was a pleasure working with you. Thirdly, I
feel a deep-seated form of appreciation to my family. Finally, I offer my sincere regards
to all who supported me in any respect during the writing of this thesis.
V
Table of Contents
Acknowledgement ......................................................................................................... v
INTRODUCTION ......................................................................................................... 1
VI
2.1.3 Other Dimensions of Strategic Planning..................................................... 15
RESEARCH METHODOLOGY................................................................................. 31
VII
4.3.1 Practice of Strategic Formulation in Commercial Bank of Ethiopia. ......... 41
VIII
4.6 Model Fitting Using Partial Least Squares ........................................................ 62
Reference ..................................................................................................................... 71
Appendices ................................................................................................................... 82
IX
List of Tables
Table 4. 1: Demographic Profile of the Respondents. ................................................. 38
Table 4. 2: Reliability of the Scales ............................................................................. 39
Table 4. 3: Descriptive statistics of Independent Variables ......................................... 40
Table 4. 4: One Sample t-test Result for Strategic Planning Practices. ....................... 40
Table 4. 5: Independent Samples Test on Perception of Strategic Implementation
Practice. ........................................................................................................................ 42
Table 4. 6: Independent Samples Test on Perception of Participating Employee in
planning........................................................................................................................ 44
Table 4. 7: KMO and Bartlett's Test Results for Study Variables. .............................. 45
Table 4. 8: Variables Representing Different Constructs used in this Study............... 49
Table 4.9: Correlations between Strategic Planning and organizational Performance 51
Table 4. 10: Regression using Backward Elimination on Objective Fulfilment ......... 57
Table 4. 11: Regression using Backward Elimination on Relative Competitive
Performance ................................................................................................................. 60
Table 4. 12: Composite Reliability and AVEs for the Model...................................... 64
Table 4. 13: Discriminant Validity of the Model ......................................................... 64
Table 4. 14: Path Coefficients and Predictability using PLS bootstrapping ................ 65
Table 4. 15: Model fit Summery using PLS ................................................................ 67
Table 4. 16: R square values using PLS ...................................................................... 67
X
List of Figures
Figure 1: Conceptual Model for Strategic Planning and Organizational Performance30
Figure 2: Breusch-Pagan Test for Heteroskedasticity ................................................. 53
Figure 3: VIF test for Multicollinearity on Independent Variables ............................. 54
Figure 4: Shapiro-Wilk Test for Normality ................................................................. 54
Figure 5: Normal-p plot Regression Standardized Residual........................................ 55
Figure 6: Ovtest for Omitted Variable bias.................................................................. 56
Figure 7: Regression Model Summary: Strategic Planning and Objective Fulfillment
...................................................................................................................................... 56
Figure 8: Regression Model Summary: Strategic Planning and Relative Competitive
...................................................................................................................................... 59
Figure 9: Confirmatory Factor Analysis using PLS .................................................... 63
Figure 10: Tested Model with Path Coefficients using PLS........................................ 66
XI
List of Appendices
Appendix 1: Strategic planning and Organizational performance questioner ............. 82
Appendix 2: Factor analysis results ............................................................................. 88
Appendix 3: Regression Assumption Test Results ...................................................... 94
XII
Acronyms
ANOVA: Analysis Of Variance
XIII
Abstract
The purpose of this study is to assess strategic planning practices and its effect on the
performance of banks in Ethiopia with reference to the operations of the commercial
bank of Ethiopia (CBE). The study use descriptive and explanatory research designs.
Using census sampling techniques our target population consists of managerial and
clerical (non-managerial) employees of commercial bank of Ethiopia in Debre Berhan
branches. A total of 164 employees selected and all of them are taken for this study
since they have manageable size. Primary data is utilized in this study, gathered with
the aid of questionnaires and 150 responses obtained. The data analyzed in descriptive
and inferential statistics using IBM SPSS v20 and STATA 14.2. The study also use
SMART PLS v3.0 for confirmatory factor analysis and structural equation modelling.
The results of the study shows a fairly high level of agreement for the practice of various
dimensions of strategic planning in CBE. Multiple regressions showed that
participating employees in strategic planning, implementation and evaluation have an
effect on the performance of CBE measured subjectively using two constructs namely,
objective fulfillment and relative competitive performance. The model test conceptual
framework of the study and the final model shows same result with regression analysis.
Finally, the study conclude that strategic planning has a positive effect on
organizational performance. The study recommends that all factors of the various
dimensions should be put into the right perspective so as to help the general workforce
of the bank to understand strategic plans in place to achieve the best organizational
performance.
XIV
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Globalization has purified universal extending exercises and progressively becomes
vital for the survival, development and achievement of present day firms (Spyropoulou
et al., 2011). All the while, the financial business has been experiencing real
solidification as of late, with various worldwide players rising through progressive
mergers and acquisitions (Konstantopoulos et al., 2009). Rivalry is commonly viewed
as a positive power in many businesses; it should positively affect an industry's
productivity, nature of organization and global aggressiveness.
Regarding this, The Ethiopian Banking Sector is right now involved a national bank
(The National Bank of Ethiopia or NBE), two governments possessed banks and sixteen
private banks. Under the Growth and Transformation Plan II (GTP II), NBE expanded
the base capital for banks to operate to 2 billion Birr ($90 million) and requires every
one of the sixteen as of now working private banks to build their paid up cash-flow to
that sum by 2020.
As of mid-2018, foreign banks are not allowed to give financial related managements
in Ethiopia and the market is shut to remote retail banks, yet the division might be liable
to change as the legislature of Prime Minister Abiy Ahmed seeks after expansive
financial changes. Presently, Ethiopia has enabled some foreign banks to open contact
workplaces in Addis to encourage credit to from their countries of origins. Chinese,
German, Kenyan, Turkish, and South African banks have opened contact workplaces
in Ethiopia.
Banking sector in Ethiopia, as per Admassu B. et al. (2014), is undeveloped and fragile.
They moreover expressed that the sector is exceptionally restricted, generally weak and
represented by a huge offer of state proprietorship. For them, the oppressive strategies
forced by the management are adversely influencing the performance of cash and
outside trade advertises and weaken private business banks. Regardless of the
previously mentioned troubles of the sector, the number of banks in Ethiopia is
expanding every now and then. This is coming about with the expanding in rivalries
1
among banks. This thus prompts sensational impact on the performance of banks,
especially in financial and technological advancements.
Think of that story in mind, banking industry assumes a critical job in the improvement
of national economies. Additionally, since borders between the economies of
independent nations are continuously losing significance, financial institutions are step
by step being fused into the worldwide economy. Their job and significance is
consistently expanding and today, they speak to real players available both at domestic
and global dimension (Central Banks Guide, 2015).
According to Harker and Zenios (2000), the banking industry has been constantly
changing in the most recent decades like different business organizations in light of the
fact that the earth it works in is dynamic and exceptionally fused.
Because of the dynamism of the present business condition organizations scan their
environment and inner capacities to create a strategic plan with the goal that they
accomplish their objectives and gain relative competitive performance. How well an
organization actualizes its approaches and programs and achieves its strategic goal as
far as its main objective and vision is of prevailing concern. So specialists have made a
significant effort to consider the relationship between strategic planning and
organization performance since understanding the idea of this relationship is urgent to
organizations and to the nation all in all (Aldehayyat and Twaissi, 2011; Gică and
Negrusa, 2011; Suklev and Debarliev, 2012).
As Drucker (2012) noted in his book The Practice of Management, we can't be content
with designs for a future we can predict. We should get ready for all conceivable and a
decent numerous incomprehensible possibility. We should have a useful answer for
whatever may come up. This underscored the requirement for strategic planning in each
organization; expanded or one specialty unit, huge or little. In this context, Strategy is
a key management instrument in any organization and it is a multi-dimensional idea
that different creators have characterized in various ways. As per Thompson (2012) it
is the match between an organization's assets and aptitudes and the natural open doors
just as the dangers it faces and the reasons it wishes to achieve.
As a result, in the strategic management field performance of the organization has been
examined over and again and the significance of evaluating the performance has been
2
generally perceived. The powerful job of strategic planning so as to improve
organizational performance is very much archived in the strategic management writing
(McIlquham-Schmid, 2010). Proof from the written works proposed that strategic
planning is one of the components that can improve the organization performance
(Sarason and Tegarden, 2003; Efendioglu and Karabulut, 2010; Arasa and K'Obonyo,
2012; Chavunduka et al., 2015).
The relationship between strategic planning and firms' performance has been
extensively considered in the past studies about (Aldehayyat and Twaissi, 2011; Gică
and Negrusa, 2011 and Suklev and Debarliev, 2012). In any case, it very well may be
said that, the findings are as yet uncertain. A portion of these studies has demonstrated
that strategic planning has relation to the firm's performance. For example, Aldehayyat
and Twaissi (2011); Suklev and Debarliev (2012), while different specialists finished
up the inverse, where there is no relationship exist between the two (Gică and Negrusa,
2011).
So as to clarify the uncertain findings from the past research, a few researchers
expressed that, the conceivable reasons adding to this insufficient findings are most
likely because of certain researches have given more consideration on the formality of
planning (Lyles et al., 1993; Kraus et al., 2006) while some different researches may
have ignored on another element of strategic planning, for example, the implementation
of planning itself (Hutzschenreuter and Kleindienst, 2006).
Findings from past researches show that there is a relation between strategic planning
and organization performance (Veskaisri et al.,2007; Aldehayyat et al.,2011;
Chavunduka et al., 2015) However, certain gaps are seen in researches that cause
inconsistent result, which whenever took care of, as indicated by the researcher could
give more knowledge into the relationship being analyzed.
In the first place, it has been seen that the researches concentrated on the immediate
relation between strategic planning and performance without taking an impression of
the way that there are different constructs that could impact the relationship being
analyzed (Delmar and Shane ,2003; Dincer et al., 2006; Rudd et al.,2008). The
dimensions used to define strategic planning in past studies were the following:
formality, sophistication, effectiveness, comprehensiveness, extensiveness,
completeness, importance, rationality, analysis, goal setting, scanning and analysis,
process, factors, systems, openness, innovativeness, characteristics, capabilities and
strategy.
Furthermore, the previous researches have proved and considered the relationship of
strategic planning with firm performance of high importance to business organizations.
But a review of the findings of previous studies suggests that the impact of strategy on
overall performance is not as clear-cut as one might expect. The empirical studies
investigating direct relationships between strategic planning and performance have
attracted criticisms. The main reason for criticism is the mixed results on the
relationship between strategic planning and business performances. Chinyamurindi
(2016) says there is the need to more investigations into the concept of strategic
planning on outcomes such as organizational performance. And as indicates there is
scant research that had been done in Ethiopia, especially on the effect of strategic
planning on performance of banks of Ethiopia.
Therefore considered gaps distinguished from the past studies in the branch of
knowledge and constrained study in our nation the researcher put its push to determine
strategic planning practice and its effect on organizational performance by taking five
dimensions of strategic planning(formulation, implementation, control, employee
participation and formality) and their effect on organizational performance in Ethiopian
setting, if there should be an occurrence of selected commercial banks of Ethiopia in
the Debre Berhan city branches, Ethiopia.
5
To analyze the effect of strategic implementation on organizational
performance.
To analyze the effect of strategic evaluation and control on organizational
performance.
To analyze the effect of strategic planning formality on organizational
performance.
To analyze the effect of employee participation in strategic planning on
organizational performance.
First, the findings of the research will likewise help Commercial bank of Ethiopia to
see how its strategic plans influence the level of performance. The banks will discover
the relationship between strategic planning and the overall performance. This might be
one path through which the bank can roll out any essential improvements to guarantee
synchronization between its strategic plans and performance.
6
Although, empower organizations in other sector business and in alternate parts of
Ethiopia to more likely understand the job strategic planning plays in improving the
performance. Organizations would profit by better seeing how its strategic plans
influence the performance of organizations.
The findings of this study are immensely useful to the CEOs and senior managers. This
study emphasizes the need for carrying out strategic planning in organizations. This
study indicates that planning helps organizations. The results of this study clearly
establish the importance of strategy implementation, evaluation and participating of
employee in strategic planning. Managers need to pay careful attention to properly plan
and prioritize the implementation of strategies, evaluating them and participating
employees in decision making for enhancing the organizational performance.
At last, it will help academicians and researchers keen on issues relating to strategic
planning, and its relationship to organization's performance, particularly in banks.
7
1.8 Organization of the Study
A brief outline of each chapter is given in order to provide the reader with an overall
summary of the content:
Chapter Two: The Strategic planning and organizational performance are defined.
Various definitions are provided and one of the most prominent definitions in the
academic literature is utilized as the framework for analysis. Furthermore, empirical
findings about strategic planning impact on performance and at last conceptual
framework for this thesis is derived intrust of the literature.
Chapter Three: The research methods are identified, and the reason why a quantitative
approach was chosen to fulfill the aims of this thesis will be analyzed in detail.
Chapter Five: All the findings are interpreted in order to answer the research question
and a critical evaluation of the thesis is provided. Finally, the author offers future
recommendations based on the outcome of this thesis.
In the next chapter the author critically evaluate all the relevant academic literature
dealing with the subject of Strategic planning and Organizational performance.
8
CHAPTER TWO
LITERATURE REVIEW
This section examines basic issues that structure the foundation of the examination. It
is sorted out deliberately beginning of the theoretical literature, principle talk, exact
proof of the connection between strategic planning and firm/organization's performance
lastly the applied structure or conceptual framework.
Strategic planning has additionally been conceptualized as the assurance of how the
organization's central goal, vision, objectives and targets, will be met (Kuria, 2014). It
can be characterized as the system of making and maintaining consistency between the
institution's objectives and assets and its moving prospects (Grant, 2014).
Strategic planning in expansive part, is a basic leadership movement. Despite the fact
that these choices are regularly upheld by a lot of quantifiable information, strategic
choices are in a general sense judgmental. Since strategic choices can't generally be
evaluated, managers must depend on "informed judgment" in settling for this kind of
choice (Mugadza, 2012).
In this unique situation, Mbogo (2013) contends that strategic planning choices submit
an organization to explicit items, markets, assets, and innovations over an all-inclusive
time frame and the recognized techniques are gone for deciding long term objectives.
Porter (2008) also says strategic planning is making choices amongst alternative actions
and finding the best options that suits and enhances a firm’s efficiency and productivity
to be executed through the efforts of the people, therefore making it competitive.
Strategic planning improves the process of people working together. It brings everyone
together to pursue opportunities for better meeting of stakeholder needs.
Hodgetts and Kuratko (2001) and Kraus et al. (2006) are of the opinion that strategic
planning can contribute to performance by generating relevant information, by reducing
uncertainty and by creating a better understanding of the important environment.
9
Strategic planning is part of strategic management, if unchecked, it often strangles
strategic thinking to death (Khan et al., 2014).
According to Dincer et al. (2006), the key aspects of strategic planning include the
formulation of a mission statement of the enterprise, establishing the objectives,
crafting and implementing the strategies, monitoring and controlling the progress in
strategy implementation.
The key constituents of strategic planning practices involve probing questions about
where the establishment intends to go, the current situation of the organization, how the
organization will get there and what alterations or fluctuations will occur in the
establishment’s environment (Guerras-Martina et al., 2014; Grant & Jordan, 2015).
Johnson and Scholes (2009) states strategy is the direction and the scope of an
organization over the long term, which achieves advantage for the organization through
its alignment of its resources which are at its disposal within a dynamic environment to
meet the market demand and stakeholders aspirations. This indicates that strategic
planning is a process that requires an organization to stay alert of its capacity and of the
operating environment if competitiveness is to be realized. The firm must match its
activities on the environment. Effective strategic planning involves the processes
10
which, when successfully implemented at all levels of the organization- corporate,
business and functional, can enhance efficiency and productivity. For strategic planning
process to be followed in an organization, consideration has to be given to both the long
term view and the short term requirements. The strategic planning process is evolving
in its response to the increasing rate of change in the business environment (Bryson,
2004).
Morgan and Strong (2003) concluded the findings of research that businesses with high
level of performances have well strategic orientations. Many empirical studies on the
role of strategic planning have proved that in creating better long term competitive
positions and better organizational performance of the company’s strategic planning
plays an important role and that strategic planning is essential for better business
performance and success (Suklev & Debarliev, 2012).
Strategic planning consists of a set of underlying processes that are intended to create
or manipulate a situation to create a more favourable outcome for a company (Akinyele
and Fasogbon, 2010). Strategic planning defined as the process of using systematic
criteria and rigorous investigation to formulate, implement and control strategy and
formally document organizational expectations (Mintzberg, 1994).
Mintzberg, and Shakun (1978) explained the developing enthusiasm with respect to the
management scientists in the topic of strategy formulation, to some degree since it has
turned out to be progressively clear that an organization’s effectiveness is highly
dependent on it.
Hitt et al. (1997) argue that when formulating strategies, thought must be given to
implementation. At the time of strategy formulation, it is not possible to enumerate all
the project possibilities that will be uncovered. Therefore, strategy formulation must be
11
based on highly aggregated, incomplete and uncertain information about courses of
alternatives.
Lumpkin & Dess (1995) defines strategic planning as a complex and participative
management technique of scanning the environment and the formulation of mission,
vision and strategies in order to improve the performance of the organization, and hence
its competitiveness in the market.
Strategy implementation is the sum total of the activities and choices required for the
execution of a strategic plan. It is the process by which objectives, strategies, and
policies are put in to action through the development of programs and tactics, budget
and procedures. Although implementation is often considered only after strategy has
been formulated, implementation is a key part of strategic management, strategy
formulation and strategy implementation should thus be considered as two sides of the
same coin (Wheelen & Hunger, 2015).
The challenges and problems faced in implementing strategies and the key attributes of
successful strategy implementation have been widely investigated (Alashloo et al.,
2005; Elbanna et al., 2015). Between the ideal of strategic planning and the reality of
12
implementation lie many difficulties. Beer and Eisenstat (2000) stated that “leaders
must engage in an honest conversation about the barriers and their underlying causes.
O’Regan et al. (2002), quoting several authors in the literature, noted that effective
implementation is vital for success of any strategic plan.
Kargar and Blumenthal (1994) analyzing the research of Lawless et al. (1989) cited that
firm performance is not so much a result of a company’s strategy, but of its capacity to
implement that strategy effectively. Walker & Brewer (2009) acknowledge that
organisations with excellent strategy implementation processes had much sounder
organisational performance compared to those with a poor or fair strategy
implementation process.
Wheelen and Hunger (2015) defines strategic control as the process used by firms to
control the formation and execution of strategic plans. They contend that it is a
specialized form of management control which differs from other forms of management
control in respect of its need to handle uncertainty and ambiguity at various points in
the control process. It focuses on achievement of future goals rather than the evaluation
of past performance. The point for strategic control is not to bring to light past errors
but to identify needed corrections so as to steer the firm in the desired direction (Pearce
and Robinson, 2009).
Apart from goal setting and motivation, strategy evaluation is needed to serve as tool
of providing information on how performance compares to the peers and other
standards. It highlights what is expected and what needs to be done to keep up
improving the performance. In this way strategy evaluation is used to establish a step
by step guidelines on future actions based on learning from the past and the
environment (Kvarnerud & Maspers, 2007).
The arguments are supported by an empirical study by Ajelabi and Tang (2010) which
saw strategy evaluation as a tool for strategic benchmarking. The process involves a
systematic process of evaluating alternatives, implementing strategies and improving
performance by understanding and adapting successful strategies from external partners
who participate in an ongoing business alliance.
In its connection with the dynamic changes of the environment, the strategic control
has an important role in controlling mechanism that is able to make the company
competes. Meanwhile, it also takes a significant role in processing the indecisive
environment and increasing performance (Desarbo et al., 2005). In its relation to
business environment, the company’s main ability to read its environment and able to
quickly adapt to changes will be able to generate the right competitive strategy
(Wijbenga and Witteloostuijn, 2007; Kariuki et al., 2012).
14
Gavetti and Ocasio (2015) argue that strategic control necessarily comprise a small set
of standard elements, the absence of any one of which makes strategic control
impossible to achieve. Short et al. (2016) agrees and advances four elements. One of
the elements is the articulation of the strategic outcomes being sought. The second is
the description of the strategic activities to be carried out in pursuit of the required
outcomes. Third is the definition of a method to track progress made against these two
elements. This is usually done through monitoring of a small number of performance
measures and associated target values. The last element is the identification of an
effective intervention mechanism that would allow observers, usually the
organisation’s managers, to change, correct or adjust the organisation's activities when
targets are not achieved.
The 21st century has seen a rise in the need to focus closely, not just on the production
of a strategic plan document but also have an intense and inclusive process which is
formal and comprehensive enough (Chavunduka et al., 2015). In light of this, it is not
just having a strategic plan for an organization but going through the strategic planning
process that counts since strategic planning process formality and employee
participation may have a possible effect on performance of organizations.
Many guidelines for implementing effective strategic planning suggest that the
planning process should be comprehensive, flexible, adaptable, efficient, realistic,
focused on the objective, and maybe the most important, it should be formalized in
written form. Besides, many definitions of strategic planning (some of them cited in the
previous section) the formality of the strategic planning process involves “explicit,
systematic procedures used to gain the involvement and commitment of those principal
stakeholders affected by the plan. The process includes detailed formats, quantification
of all inputs and rigid calendar of events.”(Pearce, Freeman and Robinson, 1987).
According to Mintzberg (1994) the formality of the planning process is connected with
procedures, so he defines formality as using a formalized procedure to produce
articulated result, in the form of an integrated system of decisions.
Phillips and Peterson (1999) mention that the strategic planning process is considered
formal when it is preordained, seeks others’ commitment, and results in written
documents. However, Glaister & Falshaw (1999) says strategic planning is ‘formal’
when the “process involves explicit, systematic procedures used to gain the
involvement and commitment of those principal stakeholders affected by the plan”.
Capon et al., (1994) indicated in a study that institutional performance may be improved
with a higher degree of sophistication of the strategic planning process. It is therefore
expected that formal strategic planners outperform financially than non-planners
(Glaister et al., 2008).
16
The formal strategic planning approach helps organizations adopt purposeful strategies
and initiatives to adjust and respond to the environment based on rational, logical, and
objective analysis (Boyne & Walker, 2004).
The measurement of formal strategic planning vary among organizations (Veliyath &
Shortell, 1993). Glaister et al. (2008) measure formality of a firm’s strategic planning
process with “The Planning Formality Scale”. O’Regan and Ghobadian (2007) adopted
a ‘written strategic plan’ as a surrogate measure of formality, while Veskaisri (2007)
determined ‘formality’ by the level/extent of strategic planning. Kargar (1996) used
five strategic planning system characteristics measures in studying small banks. These
are the degree of internal orientation; degree of external orientation; level of integration
within functional departments; extent of key personnel involvement; and extent of use
of analytical tools.
It has long been known that companies that involve employees in the strategy process
have a higher improvement in firm performance than companies that don’t (Floyd &
Wooldridge, 1990). The reasons are logical; if employees agree with the strategy they
helped develop, they are more willing to participate in and understand the change
process. Because information and knowledge in a company are dispersed, employees
add a lot to the strategy process (Childers et al., 2005).
17
Arasa et al. (2011) argue that a participatory approach by all employees including non-
managerial staff improves understanding and commitment by all to the strategic
planning process and reduces conflict and resistance to the implementation of
strategies. Hamel (1992) supports this by asserting that strategy should exploit both the
energy of the youth and the wisdom of age where majority of employees participate
through communicative and or consultative means.
Participate in strategy making clarifies responsibilities and roles. Pearce and Robinson
(1987) observed that employee involvement in the strategic planning process leads to a
better understanding of the productivity-reward relationship, and increases their
motivation.
Strategic leadership is seen as a key element in effective strategic management, and for
the strategic planning to be effective, there must be commitment and involvement from
top management (Elbanna, 2008).
Phillips and Moutinho (2000) have designed a model for calculating the strategic
planning effectiveness index, where these authors included several attributes concerned
with employee participation and they have seen them as very important for the strategic
planning effectiveness. One of the reasons for improving the strategic planning
effectiveness through the employee participation in the planning process is the
increased extent of motivation among the employees. The employees believe more in
the objectives when they participate in the formulating phase and when they know what
is expected from them in the implementation phase. Second, by the participation in the
planning process the employees strengthen their capabilities and skills and thus they
are more productive for their companies. Finally, the participation in the planning
process for the employees means greater authority in the planning and implementation
process, but in the same time greater accountability for the results achieved.
Despite its relevance, research into firm performance suffers from problems such as
lack of consensus, selection of indicators based on convenience and little consideration
of its dimensionality (Richard et al., 2009). Many studies measure firm performance
with a single indicator and represent this concept as unidimensional, even while
admitting its multidimensionality (Santos et al., 2012).
Historically the most common way to measure to performance has been through the
financial indicators which is the objective approach (White, 1996). Yet again, Ibrahim
(2015) states performance measurement frameworks center is around financial
measures.
19
There are arguments on the use of subjective and objective performance measures.
Ketokivi and Schroeder (2004) states critics of the subjective approach emphasises that
subjective performance is dependent on human perception which might be influenced
by the individuals own perception and guesses. However, Richard et al. (2009) says we
used subjective measures, but not for convenience they allow for the assessment of non-
financial criteria.
Furthermore, Fisher and McGowan (1983) even argue that objective performance
approach are imperfect and is not appropriate for research purposes. Even though the
objective has been commonly used in history the use of subjective performance has
been more popular in the field of strategic planning and performance (Greenley and
Foxall, 1997).
Even though studies that have adopted both the measures have revealed a strong
relationship between the two measures (Dess and Robinson, 1984). Ondoro, (2015)
states that, there is no single, ‘one best’ approach to performance measurement but the
need for balance between quantification and relying on the numbers versus qualitative
evidence. When telling the ‘performance story’ should not escape researchers minds.
There are variety of performance measures, both financial and nonfinancial. These
measures can be classified into three different categories: market measures, accounting
measures and combinations of measures (Rouse & Putterill, 2003).
The market measures are reflecting stock prices or shareholder returns. Accounting
measures include such measures as operating profit, residual income or return on
investment. Combinations of measures can include measures from the summary
20
measures mentioned above or non-financial measures such as market share or customer
satisfaction (Rouse & Putterill, 2003).
In all of these categories there is both positive and negative side. Market and accounting
measures are timely, precise, understandable and cost effective, just to name a few.
Negative side in the market measures is that they reflect the future expectations of the
firm value and not the realized performance. Accounting measures on the other hand
can lead to myopia, e.g. Investments that are important for the future firm value are
postponed due to pursuing short-term profits (Merchant, 2012).
Many studies rely on subjective measures that are evaluated by respondents. Scholars
have discussed the necessity to use subjective performance measures as a substitute for
objective measure, and the pioneering study for these discussions is that of Dess and
Robinson (1984).
The use of subjective measures can reduce the dependence on objective measures,
particularly when the research is executed at business units of multi-industry firms and
privately held firms (Dess & Robinson, 1984). Besides, the evaluation of performance
through subjective measures is necessary to attain flexibility and consistency of
performance, as objective measures can vary based on industry and can obscure the
relationship between independent variables and business performance (as a dependent
variable) (Dawes, 1999).
Again, Subjective measures allow comparison across firms and contexts, such as
industry types, time horizons, cultures or economic condition (Song et al., 2005).
Indeed, it can be a good alternative if the measures focus on the firm’s current condition
21
and the objective data may not be compatible with the intended level of analysis (Wall
et al., 2004).
Referring to this issue, managers can use the relative performance of their industry as a
benchmark when providing a response (Dawes, 1999), and these subjective measures
can also be cost-effective for the researcher when data can be collected through
questionnaire and/or interview methods that simultaneously elicit information on
practices (Wall et al., 2004).
Putting forward the view that subjective (perceptive) measurement may change
depending on the different personality traits or various organizational position and such
a measurement would cause incoherence and doubts in drawing comparison with
competitors, so that the researchers prefer the objective method in the measurement of
business performance (Lin et al., 2009).
22
Concerning the connection between parts of the strategic planning process, (for
example, formulation, implementation and evaluation) and organization performance,
blended outcomes seem to exist. A surge of work seems to propose that these parts of
the strategic planning process are connected to performance measurements inside the
organization (e.g. Arabzad et al. 2015). Chavunduka et al. (2015) found that there was
a positive connection between strategic planning and organizational performance
measures, for example, overall gain, net income, return on investment and market share,
among others.
Taiwo and Idunnu (2010) examined the impact of strategic planning on organizational
performance and survival. The study evaluated the planning-performance relationship
in organization and the extent to which strategic planning affected performance of First
Bank of Nigeria.
Perry (2001) led a study in United States and find positive connection among planning
and firms performance and furthermore concluded that very little formal planning goes
on in U.S. small businesses. However, the non-failed firms accomplish more planning
than comparable failed firms did before disappointment.
Stonehouse and Pemberton (2002) deduced in a study on 159 SMEs directed in United
Kingdom that a sum of 92 % organizations showed that they attempt strategic planning,
either very organized or of a general sort. While Stewart (2002) directed a study in 100
private ventures in Atlanta Metropolitan Statistical Area and found that those
organizations which practice formal business planning strategies were more fruitful
than those organizations which were not utilizing those procedures.
The aftereffects of the study of Morgan and Strong (2003) demonstrated that
organizations' accentuation upon analysis, defensiveness, and futurity in strategic
orientation were identified with business performance. Another study directed with 121
entrepreneurs and administrators of firms situated in the metropolitan Atlanta territory
by Stewart (2003) indicated huge relationship between strategic planning and
development linkage suggested that the little firms rehearsing effective formal business
planning will upgrade their development.
Delmar and Shane (2003) examined the relationship between planning and enterprise
development on the basis of 211 Swedish new ventures and found that planning reduces
23
the probability of enterprise dissolution and thus leads the firms towards success and
better performance and increase the probability of survival.
French et al. (2004) directed a study with 145 usable reactions in Australian little firms
and demonstrated no significant relationship between the performance measures and
factors identified. But a significant relationship between net profit and informal
planning was emerged. No relationship was found between any of the factors, i.e.,
vision, mission, latent abilities, competitor orientation and market orientation and the
performance of firms in Australian context.
Gibson and Cassar (2005) explored causal connections among planning and
performance using a longitudinal database with reactions from the equivalent 2,956
organizations over a four-year time span with study created by the Australian Bureau
of Statistics . Their outcomes affirmed the relationship between movement of planning
and performance and that is likewise clear in most extant literature. Anyway they
provide reason to feel ambiguous about the customary impression of the causal
arrangement of those affiliations. Dincer et al. (2006) in a study led in Turkey by found
that there is a solid negative connection between formal strategic planning and firm
performance.
The study of Kraus et al. (2006) conducted in Austria with a random sample of 1,497
firms drawn from a population of 19,477 firms whereas (n = 290), showed that Planning
formalization has a positive and highly significant impact on the probability of
belonging to the group of growth firms, whereas other aspects of strategic planning
(time horizon, strategic instruments, and control) did not contributed to performance.
24
The findings of a study of Veskaisri et al. (2007) conducted in Thailand indicated that
the level of strategic planning is positively associated with the growth of the small and
medium enterprises (SME). This conclusion is very significant for SMEs because it
shows them the usefulness and benefits of practicing strategic planning. Furthermore,
their resulted reveal that certain demographic factors, such as age and education level,
were significantly and positively related to the decision to use strategic planning.
However, neither the gender of the SME decision maker nor the age of the SME
business was related to the decision to use strategic planning.
The study of Rudd et al. (2008) conducted in United Kingdom reported in findings that
two types of flexibility in planning mediate the relationship between strategic planning
and financial performance, while the other two types mediate the relationship between
strategic planning and non-financial performance. Both operational and financial
flexibility mediate the influence of strategic planning on financial performance, while
structural and technological flexibility mediate its influence on nonfinancial
performance. These were new insights that have not been empirically investigated in
the literature.
Glaister et al. (2008) conducted a study in Turkey with 135 usable questionnaires
received from largest manufacturing companies and reported the findings that there is
a good deal of support for the study’s hypotheses. A strong and positive relationship
was formed between formal strategic planning and firm performance, which tends to
confirm the arguments of the prescriptive strategic management literature. The test
results also verify the moderating roles of environmental turbulence, organization
structure and firm size on the strategic planning-performance link.
Karabulut and Efendioglu (2010) in their study with 71 returned responses in Turkey
purported that while observing the impact of different components/activities in a
strategic process and their impact on company performance, the only two that were
correlated (positively influenced) and statistically significant were “involvement of top
management in the process” and “having a mission statement”. Both of these strategic
process components identify and define the importance of the process in the
organization and had significant impacts on the profitability of the firms in their study.
In Nigeria Alaka et al. (2011) conducted a study with eighty (80) respondents including
heads of departments and executive management staff of selected insurance companies
25
and revealed that strategic planning has positive impact on insurance companies’
profitability.
In Finland Kohtamaki et al. (2012) using data from 160 small and medium-sized
Finnish IT companies presented in their results of study that participative strategic
planning positively affects personnel commitment to strategy implementation, which
thereby increases company performance. However, according to their analysis, the
participative strategic planning does not impact organizational learning and although
organizational learning does have a positive impact on company performance.
Arasa and K'Obonyo (2012) conducted a study in Kenya and reported in their findings
that the correlation analysis results indicate the existence of a strong relationship
between strategic planning and firm performance. Further, all the strategic planning
steps (defining firm’s corporate purpose, scanning of business environment,
identification of firm’s strategic issues, strategy choice and setting up of
implementation, evaluation and control systems) were found to be positively related to
company performance.
26
In Republic of Macedonia, Suklev and Debarliev (2012) conducted a study and
concluded in their findings that strategic planning can generally contribute to
organizational effectiveness. The comparative analysis conducted in this study refers to
useful knowledge conclusions for the specifics of strategic planning effectiveness in the
emerging and developing countries and indicates the probable reasons for potential
differences in strategic planning effectiveness in different countries.
Khan and Khalique (2014) based on dubious findings on the connection between
strategic planning and firm performance and the contrasting idea of little and medium
ventures (SMEs) from that of extensive organizations, out of the blue proposed an
empirical study which combines strategic planning with that of intellectual capital. This
is one of the first studies in which any researcher has combined the literature of strategic
planning with that of intellectual capital in any empirical research.
The aftereffects of studies are viewed as unsure and conflicting, with no unmistakable
ends (Mintzberg, 1994; Grant, 2003; Falshaw et al 2006). For example, Sarason and
Tegarden (2003) found a positive connection between rational strategic planning and
firm performance, Fredrickson and Mitchell (1984) a negative relationship, and Pearce
and Robinson (1983) finish up there is no critical relationship by any means.
In African Context, Adegbie and Fakile (2013) examined strategic planning and
performance: catalyst for sustainability and stability in the Nigerian financial sector
utilizing Multivariate Analysis of variance (MANOVA) model. The findings from the
observational examination uncovered that strategic planning was not legitimately
organized and at times missing in the financial sector which made difficult issues for
the country.
In a related improvement, Falilat (2013) analyzed strategic marketing planning and the
Nigerian financial industry. Utilizing Chi-square strategy, he found that marketing
division is the principle income creating an office in the financial business. Hence, he
27
presumed that for a bank to effectively accomplish its objectives and target for
preparing an expansion in long-run benefit, it needs to build up a decent marketing plan
and strategy.
Arasa and K'Obonyo (2012) noticed that there is a positive connection between
strategic planning and organizational performance. The two creators further pressure
that the achievement and great performance of organizations are fixated on how usage,
control and assessment of the strategic planning process is led.
Right off the bat, the formality of the strategic planning. Formality of strategic planning
is a standout among the most every now and again contemplated by past researchers.
Concentrates demonstrated that formality of planning has a positive organization with
firms' performance (Suclev and Debarliev, 2012).
28
case, a great formulated strategy does not naturally imply that the organization
accomplishes the goals set in the strategy. To guarantee the accomplishment of
organizational objectives, the formulated strategy should be actualized at all
dimensions of the organization. Another element of strategic planning is the control of
the strategic plan (Kraus, et al., 2006).
29
Figure 1: Conceptual Model for Strategic Planning and Organizational Performance
30
CHAPTER THREE
RESEARCH METHODOLOGY
This chapter covers and present the research design, approach, strategy, target
population and sampling technique, the data collection instruments and the procedure
that is used, and method for data analysis to configure the responses to the research
questions.
The research take advantages of descriptive research like its effectiveness to analyze
the issues and the possibility to observe the phenomenon in a completely neutral and
unchanged natural environment. The descriptive research design has been
conceptualized as a design used to describe characteristics of objects, people, groups,
or organizations (Mugenda, 2003). Saunder et al. (2007) further indicates that the
purposes of the descriptive method of research is used to gather information about the
present existing condition where the researcher interacts freely with the respondents;
the emphasis is on describing rather than on judging.
But, Descriptive studies are not helpful in identifying cause behind described
phenomenon, so to confront this gaps this research use extra research method called as
explanatory research. It is conducted in order to identify the extent and nature of cause-
and-effect relationships. When the focus is on cause-effect relationships, the study can
be explanatory explaining which causes produce which effects (Yin, 1994). Our
concern in casual analysis is how one variable (strategic planning) affects, or is
responsible for changes in another variable (organizational performance).
31
The deductive methodology owes more to positivism and inductive methodology owes
more to phenomenology (Saunders, 2000). Deductive approach is appropriate for the
research at hand as there are hypotheses deduced and checked and the approach is more
rigid and scientific in its entirety. It is the most common way to link between theory
and research. In the view of Cooper and Schindler (2008), the researchers collect data
to evaluate hypothesis or hypotheses related to an existing theory. Then the result of
the finding will modify theory or verify the theory.
During this research, the research questions are created. Research techniques are
structured and research questions are addressed as needs be. Along these lines, it very
well may be reasoned that the examination approach is deductive.
As Saunders et al. (2000) brought up that there are a few research strategies that can be
utilized in the examination, for example, experiment, survey, case study, grounded
theory, and action research. The most important step is that the appropriate strategy for
the research question (s) and destinations be picked.
The research strategy would react to a general arrangement of how the analyst will
approach addressing the research questions that have been set (Saunders et al., 2009).
Yin (1994) has separated strategies as per three conditions. These conditions are the
kind of research questions, the degree of control an agent has over real social occasions
and furthermore the level of spotlight on contemporary rather than authentic occasions.
In this examination, the research questions begin with 'what'. Additionally, this
32
examination is on contemporary occasions and with no control on the practices. Along
these lines, survey strategy is suitable and chosen for this study.
CBE has 6 branches in the Debre Berhan Town and the total number of managerial and
non-managerial staff is 164(Managerial staff=23, Non-Managerial (clerical) =141).
33
Employee participation in planning) respectively. Lastly part G is about organizational
performance consist of (Objective fulfillment and relative competitive performance).
The questionnaire had various indicators to measure this, the strategic planning
practices and organizational performance measured using a five point Likert scale
where 1 = strongly disagree while 5=strongly agree. A 5 - point Likert-type scale was
used to increase response rate and response quality along with reducing respondents’
“frustration level” (Babakus and Mangold 1992).
Strategic formulation part of questionnaire covered the essential content, process and
views of strategy formulation in CBE. In this study Strategy Implementation considered
as Degree of emphasis given to implementing Strategies and providing a set of variables
which could be used to measure the success of strategy implementation. The scale
adopted from Hickson et al. (2003).
Strategic control and evaluation part of questionnaire indicate the degree to which
respondents agree or disagree with the statements regarding strategy evaluation at CBE
adopted from Ondoro (2015) and Ketchen and Short (2016).
Glaister et al. (2008) measure formality of a firm’s strategic planning process with “The
Planning Formality Scale” used for this study. Employee Participation part of
questionnaire uses Phillips and Moutinho’s (2000) lists of attributes that are important
in calculating the strategic planning index, we utilized the indicators to assess the
employee participation.
Harman's single factor score, in which all items (measuring latent variables) are loaded
into one common factor. If the total variance for a single factor is less than 50%, it
suggests that CMV does not affect your data, hence the results. Note that, Harman's
approach is to test for CMV, but not to control for CMV (Podsakoff et al., 2012).
According to this test all the variables of interest are entered into a factor analysis
moreover, all 55 variables were loaded on one factor to examine the fit of the
confirmatory factor analysis model using SMART PLS v3.0. If common method
variance is largely responsible for the relationship among the variables, the one-factor
confirmatory factor analysis (CFA) model should fit the data well (Podsakoff et al.,
2012). The results indicated that the factor loadings of 36 out of 55 variables were below
0.5 and the Average Variance Extracted (AVE) value obtained was 0.158. Hence a
single-factor model did not fit the data well. While the results of these analyses do not
preclude the possibility of common method variance, they do suggest that common
method variance is not of great concern and thus is unlikely to distort the interpretations
of results.
Using Partial Least Squares (PLS) the composite reliability and convergent validity of
the measures were assessed. The discriminant validity of the measures was also
assessed using PLS. If the measures have both convergent validity and discriminant
validity, it implies that these measures have construct validity.
3.7 Method of Data Analysis
The data collected analyze using both descriptive statistics and inferential statistics
(Multiple regression, correlation analysis), Graphs, charts, pie charts, figures and tables
are used to present the findings and interpreted in light of the study objectives.
35
Descriptive statistics and one sample t tested were used to assess the extent of strategic
planning practices in commercial bank of Ethiopia using IBM SPSS v20.
In this study, the process of data reduction is carried out in three stages. First of all the
reliabilities of all the variables measuring a construct are examined. Then an
exploratory factor analysis is conducted to examine the loadings of the variables using
IBM SPSS v20. Finally confirmatory factor analysis (CFA) is carried out using Partial
Least Squares, and the composite reliability which is a measure of internal consistency
similar to Cronbach's alpha, convergent validity and discriminant validity of the
measures were assessed. PLS-Graph (Version 3.0), a Graphical User Interface software
program developed by Wynne Chin and Tim Frye was used to implement the PLS
technique. The acceptable level of composite reliability is 0.7 and an AVE of 0.5
indicated convergent validity.
Correlational analysis used to see the relationship between strategic planning constructs
(strategic formulation, strategic implementation, strategic evaluation and control,
formality of strategic planning, employee participation in strategic planning) and
organizational performance measured in two constructs namely objective fulfilment
and relative competitive performance using IBM SPSS v20.
Regression analysis were used using STATA v14.2 to determine the impact of strategic
planning on organizational performance. Most of the studies have examined bivariate
relationships and this could be one of the main drawbacks of the studies. The
relationships may change if more variables are studied together. Structural equation
modelling technique using SMART PLS v3.0 is used to examine multivariate causal
relationships.
The research participant ought not to be exposed to hurt in any ways at all.
Respect for the nobility of research participant ought to be prioritized.
Full assent ought to be gotten from the participant preceding the study.
The security of the protection of research participant must be guaranteed.
Adequate dimension of secrecy of the study information ought to be guaranteed.
36
Anonymity of people and associations taking part in the study must be
guaranteed.
Any misdirection or misrepresentation about the points and targets of the
exploration must be evaded.
Affiliations in any structures, wellsprings of subsidizing, just as any conceivable
irreconcilable circumstances must be pronounced.
Any kind of communication in connection to the research ought to be finished
with genuineness and straightforwardness.
Any kind of misdirecting data, just as a portrayal of essential information among some
of the ethical issues I expect to come across on my thesis elaboration are summarized
as follows:
The respondents may have little interest in reflecting information on their finance and
talking about personal attitude on performance indicators about the firm and regarding
the questionnaire creation, respondents would prove difficult to deal with elaborated
and sophisticated questions. To avoid those potential pitfalls, I clearly present at the
beginning to my participants how the research is confirmed and structured, selling its
benefits and adding confidential clauses to be sure that at any time there is a
maintenance of confidentiality and protection of candidates anonymity and voluntary
participation of respondents in the research is important. Moreover, participants have
rights to withdraw from the study at any stage if they wish to do so.
Acknowledgement of works of other authors used in any part of the dissertation with
the use of the APA referencing system and maintenance of the highest level of
objectivity in discussions and analyses throughout the research is considered.
37
CHAPTER FOUR
Participant Gender
Frequency Percent Valid Percent Cumulative Percent
Male 89 59.3 59.3 59.3
Female 61 40.7 40.7 100.0
Total 150 100.0 100.0
Years of Experience
Frequency Percent Valid Percent Cumulative Percent
0-5 44 29.3 29.3 29.3
6-10 90 60.0 60.0 89.3
11-15 13 8.7 8.7 98.0
Above 15 3 2 2 100.0
Total 150 100.0 100.0
Participant position in the Bank
Frequency Percent Valid Percent Cumulative Percent
Managerial 28 18.7 18.7 18.7
Clerical Non
122 81.3 81.3 100.0
Managerial
Total 150 100.0 100.0
As the above table shows from the total of collected questioners 40.7% respondents
were female. Also 18.7 % of the respondent have managerial position and others are
non-managerial clerical staff members of CBE. The result also shows around 70.7 %
38
of respondents are in the bank more than 5 years. It illustrates that the study collected
credible information on strategic planning practices and performance of CBE.
Reliability Statistics
Cronbach's Cronbach's N of Items
Alpha Alpha Based
on
Standardized
Items
Formulation .722 .723 6
Implementation .718 .719 9
Evaluation .759 .760 9
Formality .721 .716 9
Participation .717 .725 7
Objective fulfillment .711 .709 7
Relative competitive performance .712 .714 8
Overall questioner .897 55
39
values for asymmetry and kurtosis between -2 and +2 are considered acceptable in order
to prove normal univariate distribution (George & Mallery, 2010).
As indicated in the above table the means of each constructs are normally distributed.
The mean value of each construct accurately represents the center of distribution and
sample size is large enough, so this study consider a parametric test.
One-Sample Test
Lower Upper
40
Strategic Formulation 34.618 149 .000 1.28889 1.2153 1.3625
Strategic
30.487 149 .000 .98296 .9193 1.0467
Implementation
Employee Participation
27.466 149 .000 .95143 .8830 1.0199
in Planning
Strategy formulation thus begins with scanning of the external as well as internal
environment of the organization. Analysis of the external environment helps to identify
the possible threats and opportunities while analysis of internal environment helps to
identify strengths, weaknesses and the key people required within the organization to
meet its objectives (Moss Kanter, 2002).
41
Table 4. 5: Independent Samples Test on Perception of Strategic Implementation
Practice.
Lower Upper
Equal
variances 2.287 .133 -1.206 148 .230 -.13466 .11167 -.35534 .08602
Implem assumed
entation Equal
variances -.999 34.061 .325 -.13466 .13478 -.40855 .13923
not assumed
As can be seen in Table 4.5 the significance levels obtained are not less than or equal
to 0.05, so the results are not significant. According to these results there is no
statistically significant difference in the perception of both managers and non-managers
regarding practices related strategy implementation in CBE.
The implementation of strategy is arguably the most important stage in the process of
strategic planning for one reason: Without successful implementation, an
organization’s strategy is really nothing more than a fantasy. Hence, if CBE did not
implement the strategies they identified what was the purpose of strategy formulation?
It is simply a waste of time, talent and energy as well as other resources.
42
4.3.3 Practice of Strategic Evaluation and Control in Commercial Bank of
Ethiopia.
When we see the overall mean (in Table 4.3) for strategic evaluation and control
practices by CBE is 3.8733. Which indicate, CBE gives more attention to evaluation
and control than other strategic planning process activities. There were formal ways of
evaluation which had been used by the bank to gauge whether it was on the right path
towards the achievement of the goals of its strategic plan.
Most of the respondents were of the opinion that evaluation and control practices have
enabled the CBE to improve its services. These practices gave organization a
competitive edge over other banks.
43
Table 4. 6: Independent Samples Test on Perception of Participating Employee in
planning
Independent Samples Test
Lower Upper
Equal
variances .012 .914 -.809 148 .420 -.07201 .0890 -.24790 .10387
assumed
Participatio
Equal
n
variances
-.819 40.89 .418 -.07201 .0879 -.24961 .10558
not
assumed
As it’s shown in above table the perception towards employee participation in strategic
planning in CBE both managerial and non-managerial staff members have no
significant difference. Contrary to these findings, the literature suggests that successful
strategic planning is inclusive, allowing every major stakeholders-the management,
non-managerial staff (Hayward et al., 2003).
44
is to summarise the information contained in a number of original variables into a
smaller number of factors without losing much information.
Three types of checks are generally carried out for determining whether the data is
suitable for factor analysis or not. As a first step the correlations between the variables
measuring a construct is examined to see whether they are correlated or not. Another
method is to do the Bartlett's test of sphericity to examine the presence of correlations
among the variables using one measure. It provides the statistical significance that the
correlation matrix has significant correlations among at least some of the variables. The
third method which can be used to assess the inter correlations among the variables and
the appropriateness of factor analysis is the measure of sampling adequacy (MSA). The
value of this measure ranges from 0 to 1 and 1 indicates that each variable can be
perfectly predicted without error by the other variables. According to the guidelines
provided by Kaiser (1974) the MSA values can be interpreted as follows: Above 0.80 -
excellent, above 0.70 - good, above 0.60 - average, above 0.50 - miserable and below
0.50 - unacceptable.
The results of the KMO measure of sampling adequacy and Bartlett's Test of Sphericity
for all the seven constructs are shown in Table 4.3. The results indicate that the variables
used can be factor analysed, Principal Component’s analysis was carried out separately
on all the five strategic planning constructs and other two constructs of organization
performance.
The best combination of variables loaded on factor 1 and factor 3(See Appendix2,
A2Ttable 3). The composite reliability and convergent validity of this measure was
assessed using PLS. After excluding the items one by one on the basis of factor
loadings, it was possible to obtain a composite reliability value of 0.763 and an AVE
value of 0.517 with three variables namely Strategic Implemn1, Strategic Implemn4
and Strategic Implemn9. However six out of nine variables measuring this construct
had to be excluded for obtaining acceptable levels of composite reliability and AVE.
46
4.4.3 Strategic Evaluation and Control Construct
Even though the rotated component matrix indicates that three factors could be formed
with these variables, when Cronbach's alpha values were calculated for the variables
belonging to these factors, it was found that only the first factor had a satisfactory value
(0.792). (See Appendix2, A2Ttable 4). These three factors Strategic Evaluatn4,
Strategic Evaluatn2 and Strategic Evaluatn7 has composite reliability (.879) and AVE
(.707) using PLS. It was decided to take the mean of the summated scale of these
variables as a measure of the strategic evaluation and control construct.
47
4.4.6 Objective Fulfilment Performance Construct
Organisational performance was measured using two constructs namely objective
fulfilment and relative competitive performance. The scale used to measure objective
fulfilment had a Cronbach's alpha value of 0.612 and the scale used to measure relative
competitive performance had a Cronbach's alpha value of 0.675 after factor analyzed.
The KMO measure of sampling adequacy for the objective fulfilment measures is 0.728
and for relative competitive performance measures the value is 0.723.The Bartlett's test
of sphericity is significant for both the performance measures. Hence the variables
corresponding to both the measures can be factor analysed.
Principal components analysis with varimax rotation was conducted on the variables
measuring Objective Fulfillment performance (see Appendix2, A2Ttable 7). All the
variables are strongly loaded on the second component indicating that these variables
measure the Objective Fulfillment construct. This was ascertained by examining the
composite reliability (.749) and AVE (.563) using PLS. It was decided to take the mean
of the summated scale of all these variables (Objective Fullfilment1, Objective
Fullfilment3, and Objective Fullfilment6) as a measure of the objective fulfillment
construct.
Factor analysis was conducted on the variables in order to facilitate data reduction. Both
Principal Component Analysis (PCA) and Factor Analysis (FA) were used for
conducting the factor analysis on the variables. As a result the variables which should
be used as measures for each construct were identified. The details of these variables
including their Cronbach's alpha, composite reliability and AVEs are summarised
below.
48
Table 4. 8: Variables Representing Different Constructs used in this Study
49
According to Babbie (1992), Cronbach Alpha values are classified based on the
classification in which the reliability index of 0.90-1.00 is very high, 0.70-0.89 is high,
0.30-0.69 is moderate, and 0.00 to 0.30 is low. The results showed that the Cronbach
Alpha for this instrument is on the classification of high and very high, higher than 0.70.
Composite reliability was calculated in addition to the Cronbach’s alpha, because the
number of variables used influence this reliability index less. According to Sekaran
(2003), Cronbach Alpha value must be greater than 0.5 after factor analyzed. Composite
reliability should be at least 0.7 (Hair et al., 2005). So that can the instrument used is
reliable and valid.
50
Table 4.9: Correlations between Strategic Planning and organizational Performance
Correlations
Form Imple Evalu Forma Partici Objective Relative
ulatio mentat ation lity pation Fulfillment Competitive
n ion Perfo. Perfo.
Pearson
1 .297** .230** .099 .243** .310** .107
Formulation Correlation
Sig. .000 .005 .226 .003 .000 .194
Pearson
Implementatio .297** 1 .316** .259** .271** .371** .383**
Correlation
n
Sig. .000 .000 .001 .001 .000 .000
Pearson
.230** .316** 1 .155 .347** .492** .396**
Evaluation Correlation
Sig. .005 .000 .058 .000 .000 .000
Pearson
.099 .259** .155 1 .147 .070 .089
Formality Correlation
Sig. .226 .001 .058 .072 .397 .277
Pearson
.243** .271** .347** .147 1 .386** .333**
Participation Correlation
Sig. .003 .001 .000 .072 .000 .000
Objective Pearson
.310** .371** .492** .070 .386** 1 .581**
Fulfillment Correlation
Performance Sig. .000 .000 .000 .397 .000 .000
Relative Pearson
.107 .383** .396** .089 .333** .581** 1
Competitive Correlation
Performance Sig. .194 .000 .000 .277 .000 .000
**. Correlation is significant at the 0.01 level (2-tailed).
The results indicate that there is a correlation between the variables under study. The
researcher made use of correlation as a statistical measure since correlation best
describes the strength and direction of a linear relationship between two variables
(Graham 2009).
51
Strategy evaluation and control with objective fulfillment performance have the highest
correlation value of 0.492 and significant at 0.01 level. The second highest correlation
occurs between participation of employee in strategy planning and objective fulfillment
performance which is 0.383 and significant at 0.01 level.
The correlation result shows that, strategic formulation and objective fulfillment
performance has lowest correlation value of 0.31 and significant at 0.01 level.
Although, in relation with the dependent variable relative competitive performance,
formulation correlation squared is 1.14%, means variance in one variable accounted for
by the other variable is weak and the relation is not significant at p=0.05 level.
As the results obtained in the correlation analysis, the study found a relation exists
between strategic planning consisting of (formulation, implementation, evaluation and
participation of employees in strategic planning) and the dependent objective
fulfillment performance. And three of strategic planning variables (strategic
implementation, evaluation and participation of employees in strategic planning) are
significantly correlated with performance measured in relative competitive
performance.
Finally, the inter-correlations for the two performance constructs, understandably, are
relatively high; however, not so much so as to undermine the independence of each
measure. So the traditional assumptions for multi-variate analysis should hold.
52
variables) that are determined by ordinary least square (OLS) will have a number of
desirable properties, and usually known as Best Linear Unbiased Estimators (BLUE).
Hence, the following sections discuss results of the diagnostic tests (i.e.,
heteroscedasticity, autocorrelation, multicollinearity and normality test) that were
conducted to ensure whether the data fits the basic assumptions of classical linear
regression model or not.
53
4.5.2.2 Multicollinearity Test
Multicollinearity means the existence of a “perfect” or exact, linear relationship among
some or all explanatory variables (Gujarati, 2004). As noted in (Gujarati, 2004) if
multicollinearity is perfect, the regression coefficients of the explanatory variables are
indeterminate and their standard errors are infinite. A (variance inflation factor) VIF>
10 or a 1/VIF< 0.10 indicates trouble and our VIF value for independent variables result
have acceptable value that multicollinearity in this study.
54
The null hypothesis is that the distribution of the residuals is normal, here the p-value
is 0.22 we failed to reject the null (at 95%). We conclude then that residuals are
normally distributed. The Shapiro-Wilk test of relative competitive performance and
standardized residual presented in Appendix 3.
The null hypothesis is that the model does not have omitted-variables bias, the p-value
is higher than the usual threshold of 0.05 (95% significance), so we fail to reject the
null and conclude that we do not need more variables.
The regression model result shows that three of the independent variables are
significantly affects organizational performance measured in objective fulfillment
performance. But the coefficient of formality is changed to negative which contradicts
with the result of correlation analysis.
The confusion is coming from, when that relationship between independent variable
and dependent variable is changing from simple to multiple linear regression. The effect
called suppression.
56
A more general definition of a suppressor variable was advanced by Darlington (1968).
Darlington defined suppression as occurring when all predictor variables have positive
pairwise correlations with each other and with the dependent variable, but the
suppressor variable receives a negative estimated coefficient in the regression model.
According to Cohen et al., 2003, Suppressor variables are predictors that in isolation
correlate weakly (or zero) with the outcome variable but are strongly correlated with
one or more predictors that are correlated with the outcome variable. In our case
formality of strategic planning with both performance measures and strategic
formulation with relative competitive performance measure (see Table 4.9).
When there is suppressor effects in regression model. Thompson (1992) point out
researchers that, interpreting only beta weights seriously risk neglecting information
about critical relationships between the variables. So to make the model better by
eliminating the variables which do not have much impact on objective fulfillment
performance. The researcher apply backward elimination for multiple linear regression
using SPSS.
Model Summary
Coefficientsa
57
Model Unstandardized Standard t Sig. Correlations
Coefficients ized
Coeffici
ents
Now coming to our scenario, we want our predictions to be more accurate and we have
to decide which independent variables to consider for making a final model. Formality
of planning is excluded from the model in the second iteration. Then, the new original
model is our selected model.
The model summary presented in a good R Square value of 0.346. This indicates that
34.6 % of the variance in Performance measured in Objective Fulfillment is explained
by Strategic Planning.
58
Y = α + β1x1+β2x2+β3x3 + β4x4 + β5x5
Where:
α = Constant or intercept
X1 = Formulation [form]
X2 = Implementation [impl]
X3 = Evaluation [eval]
X4 = Formality [frmt]
X4 = Participation [parti]
Y = 0.184impl+ 0.332eval+0.226parti
As Mintzberg et al. (2005) indicated no organization anywhere in the world has ever
added a single penny to its profits from making plans: the rewards are only realized
when plans are implemented . Thus in this study formulation of planning has positive
but not significant effect on performance measured in terms of objective fulfillment.
The constant term in this regression model is not significance means if all the values of
strategic planning variables are zero no objective fulfillment performance is achieved.
Model Summary
Coefficientsa
Model Unstandardized Standardiz t Sig. Correlations
Coefficients ed
Coefficien
ts
B Std. Error Beta Zero- Parti Part
order al
(Constant) 2.150 .311 6.914 .000
Implementation .222 .067 .255 3.337 .001 .383 .266 .238
Evaluation .202 .062 .254 3.238 .001 .396 .259 .231
Participation .173 .076 .176 2.272 .025 .333 .185 .162
a. Dependent Variable: Relative_Comp_Per
60
The beta value corresponding to the strategic planning variables (participation in
planning, strategic implementation and strategic evaluation) which are significant at the
0.05 level. This regression analysis indicates that Strategic planning has a significant
positive impact on performance measured in terms of relative competitive performance.
Coefficient of determination explains the extent to which changes in the dependent
variable can be explained by the change in the independent variables or the percentage
of variation in the dependent variable (commercial bank performance) that is explained
by all the independent variables (strategic planning dimensions) is 25.7%.
Where:
α = Constant or intercept
X1 = Formulation [form]
X2 = Implementation [impl]
X3 = Evaluation [eval]
X4 = Formality [frmt]
X4 = Participation [parti]
The findings of the regression results provide confirmatory evidence to reject the null
hypothesis 2, 3, 5 at p value of 0.05 level. The strategic implementation, strategic
evaluation and employee participation in the planning helps organizations to improve
their performance to some extent.
61
4.6 Model Fitting Using Partial Least Squares
Using PLS it is possible to test the measurement and structural components within the
context of one structural equation model. Unlike other structural equations modelling
techniques such as LISREL and AMOS, PLS does not need to satisfy assumptions like
multivariate normality and independence of observations. PLS combines regression,
path analysis and principal components analysis and avoids the problems of factor
indeterminacy and inadmissible solutions (Buchan, 2005). Because of the reasons cited
above it was decided to use PLS for testing the model.
PLS can relate the set of independent variables to multiple dependent (response)
variables. On the predictor side, PLS can handle many independent variables, even
when predictors display multicollinearity. PLS may be implemented as a regression
model, predicting one or more dependents from a set of one or more independents; or
it can be implemented as a path model, handling causal paths relating predictors as well
as paths relating the predictors to the response variables.
Thus, when the suppressor phenomenon occurs in a path analysis, it is usually not
anticipated. A variable expected to have explanatory value suddenly appears to play
only the role of suppressor variable. The suppressor variable may substantially correlate
with the dependent variable but also shares with the other explanatory variable much
information that is irrelevant to the dependent variable. In our case formality of
planning and strategic formulation with the dependent variable relative competitive
performance are suppressor variables. If the suppressor variable and the explanatory
variable are substantively strongly related, then one can drop one of the two or both the
variables for reasons of parsimony (Cohen, 1975).
The analysis carried out using partial least squares, a structural equation modelling
technique is explained here. In the first stage of the analysis the composite reliability
and convergent validity of the measures are assessed. In the second stage of the analysis
the structural model is tested by assessing the path coefficients and predictability of the
model. Finally the discriminant validity of the fitted model is assessed.
All the variables corresponding to each construct were included in the first run of PLS
while testing the models. For improving the composite reliabilities and AVE values
certain items were excluded in the subsequent runs. The items for exclusion were
chosen by examining the factor loadings, communality estimates and t-statistic
corresponding to each item. The indicators with the outer loading of .4 to .7may also
be retained. While dropping the indicators, check if after removing the indicator every
time the AVE and composite reliability. If it does not increase either of the two, then
retain the indicator in this range. Necessarily drop the items below .4 (Hair et al, 2006).
Finally the items representing each construct were selected when acceptable Composite
Reliabilities and AVE values were obtained. Above figure 9 shows the last PLS result.
Factor loadings of all the items shown in figure 9 are above 0.5 and most of them are
either above 0.7 or very dose to 0.7. The ‘t’ values most of the items are significant and
the construct's composite scale, reliability, which is a measure of internal consistency
63
similar to Cronbach's alpha is used as another measure of reliability. Convergent
validity was assessed by examining the average variance extracted for each of the
constructs.
For assessing the discriminant validity of the model, the AVE values are plotted as
diagonal items and Squares of the correlations obtained from the PLS output are plotted
as off-diagonal items as shown in Table 4.11. If the amounts shown in the off-diagonals
are less than the diagonals the measures have discriminant validity. The measures have
construct validity if they have both convergent validity and discriminant validity.
The result in above Table 4.14 shows the relationship path coefficients between two
performance measures and strategic planning variables. As indicated above the p values
for strategic planning are significant which almost same result found using regression
analysis. However, testing is accomplished by resampling methods such as the
bootstrapping as illustrated by Davies (2001) bootstrapping, which involves taking
random samples and randomly replacing dropped values, will give slightly different
standard error estimates on each run.
65
Figure 10: Tested Model with Path Coefficients using PLS
The model indicates that relative competitive performance predicted by using the
variables in this study is less than objective fulfillment performance. Performance
measured in both objective fulfillment and relative competitive performance can be
effectively predicted using strategic planning. The model also indicates that strategic
planning has significant positive relationships with performance.
Henseler et al. (2014) introduce the SRMR as a goodness of fit measure for PLS-SEM
that can be used to avoid model misspecification. A value less than 0.10 or of 0.08 (in
a more conservative version; Hu and Bentler, 1999) is considered a good fit. For the
approximate fit indices such as SRMR and NFI, we may directly look at the outcomes
of a PLS-SEM or PLS-SEM model estimation (i.e., the results report) and these
criteria's values with a certain threshold (e.g., SRMR < 0.1 and NFI > 0.90). So we can
say our model fits and it’s shown in below table.
66
Table 4. 15: Model fit Summery using PLS
Fit Summary
The analysis for testing the structural model was carried out as follows. In the model
shown Objective Fulfillment, Relative Competitive Performance has R2 values at the
5% level of significance.
Table 4. 16: R square values using PLS
Partial Least Squares has been used to test the conceptual model used in this study. By
testing the structural model, confirmatory evidence was obtained for rejecting the null
hypotheses H2, H3 and H5. The model indicates that relative competitive performance
cannot be effectively predicted by using the strategic formulation and formality
involved in this study. However objective fulfilment can be effectively predicted using
strategic formulation, implementation, evaluation and control, and participation of
employee in planning but not with formality of strategic planning.
67
CHAPTER FIVE
5.1 Conclusion
Performance in this study was measured using two constructs namely objective
fulfillment and relative competitive performance. This indicates that strategic planning
helps organizations to achieve its set of objectives and make a contribution towards
improving organizational performance in comparison to its main competitor. The
results taken together indicate that strategic planning helps organizations to improve
their performance.
It was found that the degree given to strategic implementation and evaluation and
participating employees in strategic planning helps organizations to process
information using analytical tools and arrive at consensus through participative
decision-making. Also Planning helps firms to identify the threats arising out of these
unfavourable factors through systematic analysis resulting in improved performance.
Strategic planning gives bank the ability to predict future trends in the business, the
capacity to resolve Problems and avoid problem areas which leads to improving short-
term performance of the bank. Additionally, strategic planning leads to better ROA,
ROE, ROI, and overall performance and success of the commercial bank of Ethiopia
relative to its competitors.
By testing the structural model, confirmatory evidence was obtained for hypotheses.
The results of the PLS analysis provided support for rejecting null hypothesis. The
model indicates that relative competitive performance and objective fulfillment
performance can be effectively predicted by using most of the strategic elements
involved in this study. And Strategic planning is an effective way of improving
performance of organizations.
68
5.2 Recommendation
The findings of the study show that strategic planning has positive effect on
organizational performance and result are from strategic implementation, evaluation
and control and the involvement of employee in strategic planning.
In the light of the above, the researcher wishes to make some recommendations, which,
if taken into consideration, might bring some positive changes to the current approach.
Having the right planning process is key. Executives should be aware of this
aspect so that planning outcomes get higher a few points as a result.
It’s recommended that banks in Ethiopia should embrace the use of strategic
planning as a tool and a concept to be used in achieving organisational
performance.
69
5.4 Indications for Further Research
The study also suggested that the response rate should be broadened to cover a larger
population so as to have more inclusive findings to make better conclusions and
recommendations from Strategic planning practices and its effect on performance.
Objective financial data were not used to measure organizational performance in this
study. Further research in to other industries with different performance measures and
the use of longitudinal design are possible areas for further research to enhance
generalization of current findings.
70
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Appendices
Appendix 1: Strategic planning and Organizational performance questioner
SURVEY QUESTIONNAIRE
MBA Program
Dear respondent,
Please take a few minutes to complete this questionnaire. Your honest opinion will be
completely anonymous. Your views are extremely important in this research. All the
information provided will be kept strictly confidential and will only be used for the
purpose of the study. This study is about “Assessment of Strategic Planning Practices
and its effect on organizational performance: The Case of Commercial Bank of
Ethiopia”. I highly appreciate your participation and prompt response to the following
questions and please do not hesitate to contact me via mail or phone, if you face any
difficulty while responding to the below listed questions.
Abinet Tefera
2. Age 18- - - -
From PART B – PART G of the questioner please respond for each statements by circle
the given alternatives to your personal opinion.
Indicate the degree to which you agree or disagree with the following statements
regarding strategy formulation at CBE.
1 2 3 4 5
5 The generate strategies are important and deal with issues of the 1 2 3 4 5
bank
Indicate the degree of emphasis given to planning first while implementing strategies
in CBE.
83
5 What was done during the implementation process was acceptable 1 2 3 4 5
to those involved
Indicate the degree to which you agree or disagree with the following statements
regarding strategy evaluation at CBE.
84
8. Strategy evaluation has been used as a tool at CBE for comparing 1 2 3 4 5
performance to industry standards
Indicate the degree to which you agree or disagree with the following statements
regarding to formality of strategic plan at CBE.
Indicate the degree to which you agree or disagree with the following statements
regarding employee participation in strategic planning at CBE.
85
3 The bank use a variety of motivational factors to encourage good 1 2 3 4 5
planning
Indicate the degree to which you agree or disagree with the following statements
regarding the performance of CBE by comparing the last five years with their main
competitors' performance. Use a scale of 1-5 where 1 is strongly disagree, 2 disagree,
3 neutral, 4 agree and 5 strongly agree.
86
There is Enhancement in development of bank 1 2 3 4 5
management
87
Appendix 2: Factor analysis results
Component Matrixa
Formulation 6 .791
Formulation 5 .684
Formulation 1 .679
Formulation 3 .583
Formulation 2 .574
Formulation 4 .567
a. 1 components extracted.
Factor Matrixa
Factor
Formulation 6 .768
Formulation 5 .587
Formulation 1 .579
Formulation 3
Formulation 2
88
Formulation 4
Component
1 2 3
89
A2Table 4: Component Matrix for Strategy evaluation Variables
Component
1 2 3
Component
1 2
90
Employee Partic5 .670
Factor
1 2
Employee Partic5
Employee Partic2
91
A2Table 7: Component Matrix for Strategy formality Variables
Component
1 2 3 4
Component
1 2
92
Objective Fullfilment5 .716
Component
1 2
Relative Performance2
93
Extraction Method: Principal Component Analysis.
94
A3Figure 2: Heteroskedasticity test for relative competitive performance regression
95