CHAPTER ONE INTRODUCTION 1.

0 Overview This chapter consists of overview, historical background, and statement of the problem, objectives of the study, research questions, as well as the justification or significance of the study. 1.1 Historical Background This study emanates from the marked increase of international, national, organizational, and individual emphasis and wish of having a business plan in businesses whether small, medium or large businesses. In fact, currently there is international, national and organizational fast and vast growing insistence on having business plans in businesses. This has gone far to the level of even designing business plans competitions. For example, Believe Begin Become, Tanzanias National Business Plan Competition (African Press Organization; March 6, 2009);The 2010-2012 Tanzanian National Business Plan Competition (NBPC) by the Tanzania Private Sector Foundation (TPSF), just to mention the few.

Business and strategic planning usually influence high performance and company success. Most veteran business leaders will tell you that business planning and performance are co-joined twins. Expecting high performance without proper planning is an exercise in futility. Achieving high-level performance in the absence of planning is more related to luck than business acumen. Business planning is the road map that helps you find your destination: superior performance. Understanding the process and connection helps you plan, then perform (Pirraglia W, 2005)

The writing of a business plan is an activity extensively endorsed by recent literature, venture capital firms, governmental support agencies, and universities (Ames, 1989; Hindle, 1997; Kahrs, 1995; Maitland, 1996). In fact, business planning can be considered to be one of the most widely regarded aspects of pre-startup planning. We define a business plan as a written document that describes the current state and the presupposed future of an organization (Honig & Karlsson, 2002). Despite their ambiguity, a serious research gap exists regarding why new organizations write business plans and what consequences result from them (Castrogiovanni, 1996). The value and positive effects of business plans have been taken for granted rather than critically studied. A business plan is a management development tool that guides business in achieving its goals. It helps business owners and managers to figure out issues about their business in relation to identified situations, competitive conditions and opportunities. Being an ongoing process, it should be kept up-to-date and revised to reflect changes to the business: it is a Road Map as it provides the business owner and his employees direction to follow in guiding the business through; it is a Performance Tool as such, it helps manage the business activities effectively and efficiently in terms of setting up realistic goals for the performance of the business. When properly used and maintained, it provides a basis for evaluation and overall business control; it is a Reality Check. To prepare a business plan is by itself a challenging task, sometimes daunting to a small business owner. Why? The preparation and actual writing of the plan compels the business planner to be objective in its entirety; and it Communicates the Business to Relevant Parties. This means that, the business plan communicates the business well-being not only to the employees but to outsiders. If the business, for example, wants to secure a loan from a financial institution, one of the first things the lender asks for is the business plan of the company (Asiado, 2010)

According to Hisrich, et al, (2007), planning is a process that never ends up for a business. It is extremely important in the early stages of any new venture when the entrepreneur will need to prepare a preliminary business plan. The plan will become finalized as the entrepreneur has a better sense of the market, the product or services to be marketed, the management team, and the financial needs of the venture. As a venture evolves from an early start-up to a mature business, planning will continue as management seeks to meet its short-term or long-term business goals. The business plan is valuable to the entrepreneur, potential investors, or even new personnel, who are trying to familiarize themselves with the venture, its goals, and objectives. The business plan is important to these people because: it helps determine the viability of the venture in a designated market; it provides guidance to the entrepreneur in organizing his or her planning activities; and it serves as an important tool in helping to obtain financing. The activity of creating a formal business plan consumes both time and resources. If it is to be undertaken and undertaken well, there must be an appreciation of the way in which the business plan can actually be made to work as a tool for the business. In principle, there are four mechanisms by which a business plan might aid the performance of the venture. Therefore, the business plan can act as a tool for analysis, synthesis, communication and call to action (Wickham, 2006)

1.2

Statement of the Problem

Currently, there is international, national and organizational fast and vast growing insistence on having business plans in businesses. Studies have tried to portray the positive and/or negative impacts of business plans in businesses especially on the relationship and correlation between planning and performance in business. For instance, Wickham, et al (2006: 374) argues that, the relationship between formal planning and business performance has been the subject of numerous statistical studies; however, no clear picture has emerged. The correlation between formal planning and performance is generally weak so it is possible to say with certainty that formal planning will improve the performance of a particular business. As result, there has been something of a reaction against formal planning in recent years, especially in relation to smaller businesses. Mintzberg (1994) has offered a profound criticism of at least a narrow approach to planning. However, a recent study by Perry (2001) indicated a negative correlation between planning and failure rates for small businesses in the U.S.A. Formal planning was not found to be common activity, but businesses that had planned were less likely to fail than those that had not. Schneider (1998) provides a general defense of planning for the smaller business. Despite those studies done outside Tanzanian context for example in U.S.A, there is contradiction between business planning and its performance. Researchers who have undertaken these studies, especially those of small firms, have drawn conflicting conclusions: some claim that businesses plans lead performance in small and medium businesses; others conclude that formal strategic planning has no potential payoff for small and medium businesses because it is a heady, high-level, conceptual activity suited solely to large firms and therefore has no effect on the performance of small and medium businesses. This controversy is interesting and hence there is a need to research the relationship between business planning and performance. In short, this study entails on a Comparative Study of Planning and Performance in Small and Medium Businesses in Mbeya City.

1.3 Objectives of the Study 1.3.1 Main Objective of the Study

The overall objective of this study is to establish the relationship between planning and performance in small and medium businesses 1.3.2 Specific Objectives of the Study

I. To examine the knowledge of small and medium businesses owner managers on business plans II. To identify whether small and medium businesses owner managers find any importance of business plans in their businesses III. To find out the difference in performance between the small and medium businesses with and without business plans IV. To determine the challenges of having business plans in small and medium businesses V. To derive useful lessons from the findings of this study

1.4 Research Questions I. Do the small and medium businesses owner managers have any knowledge and information on business plans? II. Do the small and medium businesses owner managers find any importance of business plans in their businesses? III. What is the difference in performance between businesses with and without business plans? IV. What are the challenges of having and using business plans in businesses? V. What is the lesson learnt from the result of the study?

1.5 Justification/Significance of the Study The study intends to establish the relationship between planning and performance of small and medium businesses in Tanzania. The study is anticipated to be of much value to a number of people and organizations as follows: I. It will help different organizations decisions makers, investors, Tanzania Private Sector Foundation (TPSF), Tanzania government, and other stake holders to understand the level of knowledge and information about business plans by various owner mangers of small and medium businesses II. It will help to explain to the society the roles played by business plans in small and medium businesses in their performance III. It will help to find out the difference in performance between businesses with and without business plans IV. It will aid in determining the challenges faced by the small and medium businesses owner managers in having business plans V. It will help researchers to identify viable areas for further research. Also, it will be used as an additional reference to researchers on planning and performance in businesses.

CHAPTER TWO LITERATURE REVIEW 2.0 Introduction This chapter covers the reviewed literature of the study. It starts with the conceptual definitions. The chapter proceeds with a presentation of literature theoretical and empirical framework on business planning and performance. The chapter finally shows the conceptual framework. 2.1 Conceptual Definitions The conceptual definitions involve meaning of terms that are used in this research proposal as follows: Small/Medium Business: Small business is defined differently by various scholars according to the nature of the countrys economy that associates it with the number of employees, capital invested, share capital, number of shareholders, total assets, turner, market share, geographical market coverage, organization (Leonard , 2009). According to http://en.wikipedia.org/wiki/Small_Small business, a small business is a business that is privately owned and operated, with a small number of employees and relatively low volume of sales. Small businesses are normally privately owned corporations, partnerships, or sole proprietorships. The legal definition of "small" varies by country and by industry, ranging from fewer than 15 employees under the Australian Fair Work Act 2009, 50 employees in the European Union, and fewer than 500 employees to qualify for many U.S. Small Business Administration programs. Small businesses can also be classified according to other methods such as sales, assets, or net profits.

Small businesses are common in many countries, depending on the economic system in operation. Typical examples include: convenience stores, other small shops (such as a bakery or delicatessen), hairdressers, tradesmen, lawyers, accountants, restaurants, guest houses, photographers, small-scale manufacturing, and online business, such as web design and programming, etc. As shown in table 1 below, SMEs in Tanzanian context are defined in terms of micro an enterprise that employs four (4) people in most cases and are family members, use up to 5.0 Tshs million and are informal sectors. Small enterprises are formalized, involving 549 employees with capital investment from 5-200 Tshs. million. A medium enterprise involves 50-99 employees with a capital investment from 200-800 million (URT, 2002) Table 1: Criteria for Categorizing Small and Medium Enterprises in Tanzania Country/ Institution Micro Enterprise Small Enterprise Medium Enterprise Large Enterprise Paid-Full Time Employees 1-4 5-49 50-99 Above 100 Maximum Total Investment Up to 5 Million Above 5 to 200 Million Tshs. Above 200-8000 Million Tshs Above 800 Million Tshs.

Source: (Leonard 2009, Olomi 2001, SIDO 2007, URT 2002) Owner Manager/Entrepreneur: An entrepreneur is an individual who owns a firm, business, or venture, and is responsible for its development. Entrepreneurship is the practice of starting a new business or reviving an existing business, in order to capitalize on new found opportunities (Shukla , 2000) Business Plan: According to McKeever (2007), a business plan is a written statement that describes and analyses the business and provides detailed projections about its future. The plan also covers the financial and legal and liability issues aspects of starting the business. Performance : It is accepted that business performance is a multi-dimensional and highly complex phenomenon (Lenz, 1981; Venkatraman and Ramanujam, 1987). 8

Organizational performance is probably the most widely used dependent variable in organizational research today yet at the same time it remains one of the most vague and loosely defined constructs. The struggle to establish a meaning for performance has been ongoing for many years, and is not limited to the field of strategic human resource management. Over thirty years ago, Katz and Kahn dryly commented that, "The existence of the problem of developing satisfactory criteria of organizational performance is clear enough; its solution is much less obvious" (1966:150). Even twenty years ago Scott lamented the state of measures of organizational effectiveness, concluding, After reviewing a good deal of the literature on organizational effectiveness and its determinants, I have reached the conclusion that this topic is one about which we know less and less. (1977: 63). More recently, Murphy, Trailer & Hill, after reviewing measures of performance in entrepreneurial research, concluded that, " the lack of construct validity for what we call performance is so clear that we as a field should consider discontinuing the use of the term in research" (1996: 21). Within the strategy field, the focus of attention on the performance construct has been almost entirely on financial measures of performance (Rowe, Morrow & Finch, 1995). Conceptually, it has been viewed as the comparison of the value created by a firm with the value owners expected to receive from the firm (Alchian & Demsetz, 1972; Barney, 1997). Venkatraman and Ramanujam (1986) noted that a narrow definition of performance centers on the use of simple outcome-based financial indicators that are assumed to reflect the fulfillment of the economic goals of the firm, (1986: 803). They argued that the narrow performance construct of financial performance had dominated the strategic management literature, and proposed a broader performance construct of business performance that would include both financial and operational (new products, product quality, market share) indicators. In addition, they proposed a construct of organizational effectiveness which would consist of business performance plus account for the accomplishment of the super ordinate goals held by multiple stakeholders. Van de Ven (1976) stated that performance is the ultimate criterion in the assessment of organizations and it is a complex construct that reflects the factors used by decisionmakers to assess the functioning of an organization. He suggested three criteria or 9

categories of performance: 1) productivity, 2) employee morale, and 3) effectiveness. He further stated that the performance levels achieved by an organization constitute an input of information to its managers, which is likely to stimulate them to make adjustments in policies and modes of operation. In other words, performances are not simply a dependent end product; it is a dynamic variable. Ford and Schellenberg (1982) in their review of performance measurement identify three perspectives that pervade organizational performance literature.

The first perspective the goal approach, which assumes that organizations pursue ultimate and identifiable goals. Under this perspective, performance is defined in terms of goal attainment. The second perspective is the systems resource approach, which stresses the relationship between the organization and its environment. Performance is defined in terms of the organizations ability to secure limited and valued resources. The third perspective is the process approach and performance is defined in terms of the behavior of the organizations participants A key concern of this study is related with the conceptualization and measurement of performance. Overall the literature suggests that it is required a multidimensional scale. One approach that is increasingly relied upon is the aggregation of various performance measures into a single measure of performance. It incorporates this approach here by considering firm performance evaluation (Chakraborty et al.,2002). Firm Performance Firm performance is a well-established measurement in the marketing literature. It is measured through sales volume, profitability and market share for the current period (current firm performance), and perceived satisfaction with these measures when considering the previous year (past firm performance).In short, performance in this paper will not base on financial performance but will base on increase of employees number, innovativeness, introduction of new products/services, number of customers reached and the level of promotion.

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Challenges: these are defined as call to someone to participate or

fight to decide who is superior. They also mean a demanding task or situation. They are attempts to win a sporting contest or call to prove or justify something. Therefore, challenges in this case mean difficulties or problems but also can be opportunities to facilitate to do something in starting and operating food processing business with success (Leonard A. 2009)
2.2. Theories On Business Planning and Performance 2.2.1 The Root Canal Theory of Business Planning by Tim Berry (2009) Like root canals, business plans were something people dreaded, but needed.

Happily, things have changed. Unlike a root canal, modern-day business planning should not be painful, is not something you do all at once, and ought not to be a cure for anything like a toothache. Instead, it should be fun and interesting, and a regular process. Its preventative, not curative. I call it plan-as-you-go business planning. The plan stays alive. Its not painful to do, you like doing it because youre running your own business and the planning part of it is fascinating. Its your future, your life, and controlling your destiny This theory insists on the importance of business plans in businesses but people are always reluctant to prepare them. 2.2.2.Business Planning Theory by Iebestebooks Through http://iestebestebooks.hubpages.com/hub/business-Planning-Theory, this theory gives an overview that, business planning theory is concerned with practical, objective, and organized approaches when planning a business. Although subject matter pertaining to business planning theory is vast, five essential themes are always present: solidify the basics structure and premise of your business, having a marketing plan, having a operational plan, creating a financial plan, and formulating an objective risk analysis.

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Additionally, it stresses on

the Basics: Background Information that, when creating

a business, it's important to make clear what basic components are involved when planning your business. For example, determining what's the purpose of your business and how your business is going to be structured is critical, for instance: non-profit, sole proprietor, a partnership, publicly traded corporation, and creating a mission statement. Furthermore, determine what main products and services your business will be providing and how your business is going to distributed those products and services; during this process, an approximation of how many employees the business should hire will began to emerge following types of facilities involved in accomplishing the business' main objective. It further explains about the game i.e. use of Game Theory to shape strategy; thinking strategically, business planning for turbulent times; new methods for applying scenarios; reaching the goal and strategic navigation: a system approach to business strategy.

2.2.3. Chaos Theory and the Business Plan by Matt Weston Via http://microsite.businesslinksolutions.co.uk./news; the theory states on Business News: Business plan is more important than good idea, say budding entrepreneurs. Mathematician, James Yorke, on Chaos theory: the most successful people are those who are good at plan B. I have a friend who has spent 2 years (and counting) writing his plan A. Chaos theory deals with plans B to Z. In short, the theory emphasizes that, every idea of the business should be planned accordingly. 2.2.4 Three Sigma's Theory of the Business Model This model is an application of a model described by Peter Drucker as "the theory of the business". The central tenet of this theory is that many businesses decline and fail because the assumptions they make that form the basis for their fundamental business decisions (about society, markets, customers, products, technology, their mission, etc.)

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become obsolete or invalid. Since the future is uncertain and the social environment is constantly changing, even the soundest business theories eventually become obsolete. For this reason every business and organization should periodically examine their fundamental assumptions to see if they continue to reflect the current realities they face and if not, how should they be changed. This model provides the organization and structure to identify and examine those assumptions and change them if necessary. This model is applicable to business, government and non-profit organizations. It can also be used for new businesses and startups to identify, examine, and make explicit the assumptions that underlie their business planning. Briefly, this theory touches four parts of the model necessary in business planning and performance. These include Organizational Focus, the External Environment, Competitive Advantage and Core Competencies, and the Big Picture. 2.2.5 Other Theories and Theorists The business plan is valuable to the entrepreneur, potential investors, or even new personnel, who are trying to familiarize themselves with the venture, its goals, and objectives. The business plan is important to these people because: it helps determine the viability of the venture in a designated market; it provides guidance to the entrepreneur in organizing his or her planning activities; and it serves as an important tool in helping to obtain financing (Hisrich, et al, 2007) Veskaisri et al (2007) in Rue and Ibrahim (1998) maintain that, studies have generally shown that planning is not only important for large organizations but for SMEs as well. Berman et al (1997) found that firms that plan produce better financial results than firms that do not plan. Lerner and Almor (2002) contended that planning lays the groundwork for developing the strategic capabilities needed for high performance. Planning does not guarantee business success (Mintzberg, 1994). However, it is maintained that many of the contributing factors to business failures may be predicted and effectively address during the infancy of small business development when strategic planning is employed, thereby decreasing the failure rate for small business. Where strategic planning has been adopted, businesses usually report.

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Lumpkin (1999) in Roberts, 1983 stresses that; a vital assumption on which the entire field of strategic management is founded is that planning enhances firm performance. Armstrong (1982) argued that an explicit planning process rather than haphazard guesswork results in the collection and interpretation of data critical to maintaining organization-environment alignment. Similarly, Ansoff (1991) reasoned that planning generally produces better alignment and financial results than does trial-and-error learning. The intuitive appeal of these and similar arguments has led to the proliferation of academic and practitioner literature stressing the importance of planning, promoting models of the planning process, and offering normative advice on how to effectively design and implement strategic and operational plans. This advice has been explicitly extended to new ventures, where conventional wisdom dictates that entrepreneurs must engage in formal planning to develop well thought-out, written business plans (Gardner, 1997; Moyer, 1982). Kaplan and Norton (1993) discussed performance measurement in their work on the Balance Scorecard which seems to be the most popular among managers. The balanced scorecard presents managers with four different perspectives on performance: 1) financial, 2) customer focused, 3) internal analytical, and 4) innovativeness. Financial perspectives identify the key financial drivers in creating shareholder wealth. A common analytical approach is to decompose return on equity, a common representation of return on capital, into its component ratios (Slater et al., 1997). The major component ratios are profit margin, asset turnover, leverage, cash flow and working capital. Customer focused encompasses measures of corporate or brand awareness and image, customer satisfaction, customer retention and customer profitability.

Internal analytical is primarily concerned with the efficiency of the entire business system while Innovativeness is concerned with how effectively the business can adapt to

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changing conditions. The Balanced Scorecard model retains financial measures that confirm the results of past actions and decisions, but it also adds leading indicators for factors that will drive future financial and operating performance (Cobbold et al., 2004). This model has been widely embraced by business writers as a breakthrough in performance measurement and reporting (Goulian and Mersereau 2000). Given an environment in which an organization operates, the choice of appropriate strategies and their effective implementation should intuitively lead to better performance than the alternative (Murthy 1994). Neely et al (1995) defined performance measurement as the process of quantifying the efficiency and effectiveness of action. According to Covin et al (1994) firm performance is a multidimensional construct that can be conceptualized and assessed in any number of ways. In their study of 364 non-diversified firms, a financially based measure of firm performance was adopted. Establishing common dimensions for performance measures will support their sustained use and applicability by business managers, aligning them with dimensions of their business activities (Capps and Hattery, 2000). Net profit, operating performance and returns on assets (ROA) are often used in research (Hoskisson, 1987; Dimara et al., 2004), while growth measures are useful performance measures particularly when the sample includes small, privately held firms (Dess and Robinson 1984). Hofer and Schendel (1978) suggested sales growth as one reflection of how well an organization relates to its environment. Brigham (1985) stated that profitability measures such as return of assets (ROA), return on investment (ROI), return on equity (ROE), etc, are subject to the accounting techniques of individual firms. They are unable to differentiate between increases of profit margins on sales, inventory turnover rates, and use of leverage and therefore, they may not be the best measures for inter-firm comparison if used alone. Hence, sales volume was utilized to evaluate firm performance for this study. This measure evaluates the performance of the organization in terms of International Journal of Economics and Management. Usage of assets and the organizations performance in competing with other establishments within the same market place.

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SMALL AND MEDIUM BUSINESSES Business Plans 16

Absence of Business plans in SMEs

Presence of Business Plans in SMEs

Business Plans Implemented

When

Business Plans When Not Implemented

High Performance e.g.

Poor Performance e.g.

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-employees number increase - innovativeness increase -new products/services introduction -number of customers increase -high level of promotion Focused Projection

-No employees increase -No increase

number

innovativeness

-No new products/services introduction -No number of customers increase -Low level of promotion Difficult to Make Future Projection

2.3Past Research on Formal Planning and SMEs Performance In the last fifteen years, there have been at least six reviews of the literature on the effects of formal planning on financial performance. The first was Hofer's broad review of strategic planning research (Hofer, 1976), the purpose of which was to point to gaps in knowledge rather than compare findings across studies. In this vein, Hofer reviewed the literature addressing costs and benefits of formal planning and concluded that formal planning probably had a beneficial impact on the content of plans. Hofer did, however, express concerns over the lack of rigor in this stream of research and suggested that future research should employ methods that would allow cross study comparisons. Armstrong's 1982 review of twelve strategic planning and performance studies included a detailed examination of the formal planning independent variable. Armstrong compared studies as to whether they considered five component parts of the formal planning process: (1) setting of objectives, (2) generating strategies, (3) evaluating strategies, (4) monitoring the process, and (5) commitment to the process. Armstrong also compared studies on the bases of the situation and results, and then used the ratings of experts to

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assess the results of formal planning, cautiously concluding that formal planning benefited firms. Shrader, Taylor, and Dalton (1984) came to a different conclusion from Armstrong. Their comprehensive review of over sixty studies classified the planning and performance literature into three categories: formal long-range planning and performance, planning typologies and performance, and planning salience and performance. They reviewed types of samples and performance measures as well, and concluded that there is no apparent systematic relationship between formal planning and performance and that there is great disparity in the measurement of formal planning across studies. Shrader et al. recommended the use of hierarchical scales and uniform measurement for future research. Robinson and Pearce (1984) authored a comprehensive review of the literature examining the effects of formal strategic planning on performance for small firms. They argued that knowledge about strategic issues is the domain of large firms, that small firm knowledge of strategic planning is, on the whole, inadequate, and that formal strategic planning has not been a popular practice among small firms because they have neither the time nor staff to invest in strategic planning. Rather, the manager of a small firm must be more concerned with the day-to-day operational problems of running the firm. Moreover, they indicated that research on the value of formal planning for small firms has been largely inconclusive simply because many small firms do not plan. Similar to Robinson and Pearce, Wortman (1986) reviewed a set of small business planning/performance studies in the context of a broad survey of the methodologies employed in the small business/entrepreneurship literature. The purpose of Wortman's review was to develop typologies and not to focus on the particular issue of the effect of formal strategic planning on small firm performance. However, he clearly addressed the need for continued refinement in several streams of research--including planning/performance relationships--and recommended the use of sophisticated statistical techniques for addressing such substantive research questions. The most recent review, by Pearce, Freeman, and Robinson (1987), is similar to Shrader et al., except that it

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included detailed information on the perceived substantive contributions of each of the eighteen studies in the review. Again, these reviewers indicated that integrating the findings across studies is difficult due to the methodological differences of the studies. Taken together, these reviews have produced a large number of potential topics for future research. They have not, however, been tremendously illuminating as to the basic question of how formal strategic planning affects firm performance. Part of this problem is due to the sheer number of studies involved. It is difficult to draw consistent conclusions from the traditional narrative discursive method of most literature reviews.

For example, Cooper and Rosenthal (1980) found that reviewers using narrative methods came to different conclusions from those using quantitative methods, even when the number of studies reviewed was quite small. Given that most of the reviews of planning and performance have been rather ambitious in both depth and scope and that the nature of the phenomena under consideration is extremely complex, it is easy to understand the difficulty in drawing conclusions from research results using simple narrative processes. Furthermore, these reviews underscore the importance of the basic issue. The relationship between strategic planning and company performance lies at the very heart of the discipline, yet no clear summary statement has been made about the numerous empirical findings dealing with this subject. Planning has also been a popular topic for empirical investigation. Numerous studies have examined planning processes and planning content among a wide array of businessesall based on the implicit assumption that planning is good. In addition, countless studies have sought to discover the impact of planning on firm performance. Although there is evidence that strategic planning can positively influence a firms survival and performance (e.g., Bracker, Keats & Pearson, 1988; Capon, Farley & Hulbert, 1994; Hills, 1984; Robinson & Pearce, 1984), some studies have reported nonsignificant or negative relationships (e.g., Robinson & Pearce, 1983; Rue & Fulmer, 1973). Given inconclusive and sometimes contradictory findings, several scholars have undertaken extensive critical reviews of the literature in an effort to gain insights.

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Armstrong (1982) reviewed twelve planning and performance studies and cautiously concluded that formal planning benefited firms. Shrader, Taylor and Dalton (1984) reviewed over 60 studies and concluded there was no systematic relationship between formal planning and performance. Pearce, Freeman and Robinson (1987) reviewed 18 studies and concluded that the planning-performance link was tenuous.

Meta-analyses conducted by Boyd (1991) and Schwenk and Shrader (1993) concluded that planning positively, but modestly, correlated with several measures of firm performance. Miller and Cardinal (1994) synthesized the results of 26 prior studies using a multiple regression technique and also concluded that planning positively, but modestly, affected performance. Nearly all of these researchers concluded that the individual studies they reviewed appeared to underestimate the true relationship between planning and performance and were plagued with theoretical, measurement, and methodological difficulties that appeared to mask that relationship (Boyd, 1991; Schwenk & Shrader, 1993; Pearce, Freeman & Robinson, 1987). Recurring criticisms involved the failure to consider the impact of firm size and stage of development on the planningperformance link, a focus on formal planning to the exclusion of informal planning, and failure to distinguish between strategic planning and operational planning. In their review of the literature, Pearce and his colleagues (1987) argued that formal planning does not capture the essence of the planning activity, especially for small firms. Citing Lindsay and Rue (1980) and Robinson & Pearce (1983), they concluded that small firms should be considered separately in planning studies because small firms are more likely to enhance performance through informal application of basic strategic decisionmaking practices. This is consistent with the arguments of other scholars that small firms are often innovative and challenging to manage strategically (Braker & Person, 1986; Carter, 1990; Dollinger, 1985; Schwenk & Shrader, 1993). Others have asserted that formal planning is more strongly related to the performance of large firms than small

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firms because of its role in integration and control. Large firms are more complex and tend to be more difficult to integrate and control. Therefore, planning and other tools that assist these activities are more critical for large firms (Miller & Cardinal, 1994).

In addition to size, prior research indicates that a firms stage of development has an important bearing on the planning-performance link (Schwenk & Shrader, 1993; Robinson et al., 1984). McGrath and MacMillan (1995) suggest that planning for new ventures is entirely different from planning for firms in other stages of development. These scholars argue that new ventures begin with a high ratio of assumption to knowledge and inevitably experience deviations from original targets that require fundamental redirection. Thus, new ventures must practice more discovery driven planning. All of these arguments suggest that flexibility is critical to the success of planning among young and small firms. Indeed, one of the most widely circulated criticisms of formal planning is that it yields too much rigidity (Miller and Cardinal, 1994). Proponents of this view maintain that plans channel attention and behavior to an unacceptable degree, driving out innovations that are not part of the plan. Mintzberg, for example, argued that all organizations must deal with uncertainty and that it is therefore dangerous for them to articulate strategies because explicit strategies are blinders designed to focus direction and block out peripheral vision (1990: 184). According to Mintzberg, Setting oneself on a predetermined course in unknown waters is the perfect way to sail straight into an iceberg (1987: 26). Taken as a whole, these arguments suggest that the performance of young and small firms is more likely to be improved when those firms engage in informal planning and analysis. However, the majority of previous research has addressed issues of formal planning. This same reasoning can also be used to argue that the performance of young and small firms would more likely be enhanced by engaging in operational planning rather than more long-term strategic planning, an argument that has been supported by prior research (Shrader et al.,

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1989). However, research on operational planning has largely been ignored in favor of research on strategic planning.

In the exploratory study done by Paul A. Phillips (1999), the planning-performance relationship among a sample of small firms consisting of both new ventures and established firms. It examined whether there were performance differences between these venture types, whether they differed in their emphasis on formal written plans, whether they differed in reliance on specific operational plans related to marketing and organization, and whether they differed in their use of external analysis. Finally, it examined whether planning and analysis were related to performance, whether formal planning mattered, and whether those relationships differed between new and established small businesses.

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CHAPTER THREE RESEARCH METHOLOGY 3.0 Introduction 3.1 Area of the Study This study will be conducted in Mbeya city which is one of the commercial cities in Tanzania. Mbeya city is the capital city of Mbeya region located in Southern Highlands Zone of Tanzania. It is also a city with many local business individuals and foreign business individuals from neighboring countries such as Zambia and Malawi, among many. It lies between latitudes 8 50-8 57 East of Greenwich and longitude 33 30`-35 3535`. It is almost surrounded by Mbeya District council in all directions. The city covers an area of 214 sq km. It is situated at an elevated land to an altitude of 1700ft above the sea level. The climate is influenced by its altitude receiving mean annual rainfall of 1200mm (November May) accompanied with mean temperatures ranging between 11c-25c. (http//tzonline.org/pdf/mbeyareg.pdf/ pg 1). According to Mr Mwaikinda, the environment officer, Mbeya City is composed of thirty six (36) Wards, namely:- Iyunga, Iwambi, Igawilo, Itezi, Isanga, Ilemi, Itiji, Iziwa, Isyesye, Iganzo, Iduda, Itende, Tembele, Mwansanga, Kalobe, Mwansekwa, Ntagano, Nsoho, Nonde, Iyela, Uyole, Nzovwe, Iganjo, Nsalaga, Mabatini, Ruanda, Sinde, Manga, Majengo, Ghana, Ilomba, Mwakibete, Mbalizi-Road, Forest, Maendeleo and Sisimba. Mbeya city is selected for this study due to the following reasons: it is where the most of formal and informal businesses activities are located; it is a place with business owner mangers who are informed on business plans; it is place with financial institutions pioneering business plans to the SMEs owner mangers; it has a better social and physical

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infrastructure compared to other regions in Southern Tanzania such as transportation network and presence of communication network like radios, newspapers, and internet; all these facilitate flow of information and promotion of marketing campaigns likely to lead to SMEs performance. Finally, presence of SIDO branch, various bank branches, SACCOS and other regional offices from which different training programmes and the importance of business plans are carried out. 3.2 Research Design The three research designs will be applied in this study including exploratory, descriptive, and explanatory research designs: 3.2.1 Exploratory Research Design: This kind of research always aims at formulating problem for precise investigation so as to discover new ideas and insights [Leonard (2009) in Kothari (2004) & Saunders et al (2005)]. This design will be used to get more knowledge of the problem and identify the groups and the business owner managers to be studied. 3.2.2 Descriptive Research Design: This design will be used in order to find out the main challenges of having and using business plans in small and medium enterprises/ businesses. It will point out the cases to be studied and the factors of the model as explained in the conceptual framework 3.2.3 3.2.4 Explanatory Research Design: This research design will be used to demonstrate the causal relationship between independent and dependent variables The Case Study Research Design: Mbeya City is selected as a case study design for comparative study of planning and performance in small and medium businesses. In this case study, hotel, hardware shops, retail shops and wholesale shops will be studied representing all other small and medium businesses. The case study is taken into account as it is exhaustive, provides depth of the study, and will enable more than one research method (questionnaire, interview and observation) to be used, and new knowledge will be created. 4.0 Study Population The population to be studied will be small and medium owner mangers. This will include hotels owner managers, Hardwares owner managers, retail shops owner managers, and

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owner managers. Furthermore, some other information will be accessed from financial and business supportive institutions loan officers e.g. banks, SIDO and SACCOS. These officers will be inquired in order to identify the business owner mangers with business plans in their businesses. The others will be different employees from SMEs and customers buying from the very businesses. 5.0 Sample Size and Sampling Procedures This study is expected to use probability sampling with intention of identifying small and medium businesses owner managers such as hotel, hardware shops, retail shops and wholesale shops. It is also used to get loan officers from financial and business supportive sectors e.g. banks, SACCOS, and SIDO On the other hand, non-probability sampling will be used in order to get respondents who are employed by owner managers in operating their businesses. These employees will probably give the hidden information that could not be provided by the owner managers. The customers as respondents will also be got through this way. 5.1 Sample Size For this research, a sample will be taken from small and medium businesses owner managers. These businesses cover hotel, hardware shops, retail shops and wholesale shops representing other small and medium businesses in Mbeya city. The given businesses are considered in this because they are vastly and rapidly growing in Mbeya. In short, the sample size to be studied is sixty four (64) people who are small and medium owner mangers. This will include Eight (8) hotels owner managers, fifteen (15) Hardwares owner managers, twenty (20) retail shops owner managers, and eight (8) wholesale owner managers. Furthermore, some other information will be accessed from financial and business supportive institutions such as banks, SIDO and SACCOS. In so doing, five (5) different SACCOS officers, seven (7) bank loan officers, and one (1) SIDO officer. Lastly, twelve (12) employees will be interviewed to get the hidden information that could not be provided by the owner managers. The summary of the sample size is presented in Table 2

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Table 2: Number of Prospective Respondents BUSINESS 1. Hotel 2. Hardware Shops 3. Retail Shops 4. Wholesale Shops 5. SMEs Employees Total TOTAL POPULATION 08 15 20 08 12 63 PERCENT 12.7 23.8 31.7 12.7 19.1 100

6.0 Data Collection Method The study will utilize both primary and secondary data. Secondary data will be collected from various reviewed literatures (books, journals, reports, papers, newspapers, dissertations TV and Radio programs) related to business plans preparation competitions, small and medium businesses, their challenges, their performance when having the business plans, just to mention the few. On the other hand, Primary data will be collected from the questionnaires and through the foresaid Focused Group Discussions.

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6.1 Questionnaires White (2002) defines a questionnaire as a series of questions, each one providing a number of alternative answers from which the respondents can choose. In this study, three different types of self administered questionnaires will be used: one will be for the business owner mangers, one for the financial and businesses supportive institutions and the other for employees of different small and medium businesses. Questions will be written on each questionnaire and each respondent will be asked to fill it by choosing the most correct answer, out of the listed answers. 6. 2 Focused Group Discussion The focused group discussions will be conducted in hotels. The participants are expected to be employees in the discussions who are randomly selected from those who fill the questionnaire. In so doing, five (5) females and seven (7) males will participate in the discussion in hotels. The issues to be discussed during the discussions will be the same questions which appeared in the questionnaires. 6.3 Structured Interview: The research will include structured interview to interrogate two (2) different SACCOS officers, three (3) bank loan officers, and one (1) SIDO officer. This will be done through physical participatory.

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3.7 Administration of Research Instruments The questionnaires were originally planned to be filled by the respondents themselves but due to problems of illiteracy, some had been filled by the interviewers after reading the question to the respondent and the respondent giving the response. In some cases, interviewers had to give narrative explanations to questions which were not clear to the respondent and in other times, the interviewers had to ask the questions in Maasai language (in situations where the respondents were not conversant with Kiswahili). The structured interviews (focused group discussions) were conducted when the individual interviews were over. However, the questions asked were not limited to only those listed in the interview guide. In some cases, the responses given generated new questions which were also asked. Language used during the discussions was Maa. This helped to get the information which was either not captured at all by the questionnaires during the individual interviews. During such discussions, Data was mainly collected through notes taking and tape recording. The data in tapes was later transcribed and entered into the data base for analysis. 3.8 Validation of Research Instruments Before going to the field, the three sets of questionnaire were developed and translated to Kiswahili. There after followed a pilot study which aimed at testing the validity of the tools. Ten copies of each of the three sets of questionnaires were produced and administered to the thirty randomly selected respondents (the respondents included ten Masters of Arts students at the University of Dar es salaam). The respondents were asked to fill the questionnaires first and thereafter asked to give their comments on the questionnaire (the questions asked, how they are asked, ambiguity in the questions). The

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comments given were incorporated in the second version of the questionnaire, which were re-administered to some of the former respondents and asked to give their comments. The given comments were incorporated and the final version of the questionnaire was developed, which was used to develop the data-base for analysis using the SPSS program. Data processing and Analysis In processing, the data to be collected will be edited, coded, classified, tabulated, and computed in order to search for patterns of relationship that exist between them. Descriptive statistics will be used by cross tabulation, frequency distribution tables for comparing data in SMEs planning and performance will also be employed. Data will be edited to secure quality standard on the data by coding the data entry and analysis on SPSS programme. The classification basing on categories will be done in order to reduce the volume of raw data to be collected hence this becomes the main tool. In addition to that, the classified data will be tabulated for easy statistical computation. Specific Analytical Techniques Chi-square will be used to show the relationship between independent variables and dependent variable. This will be done by a computer using the programme Statistical Packages of Social Science (SPSS) whereby the frequencies to be observed and expected especially on response of the respondents opinions will be used in order to reject the null hypothesis and accept the alternative hypothesis. Chapter Summary this chapter in on research methodology covering on issues such as area of study, research design, study population, sample size and sampling procedures, data collection methods and data processing and analysis. All these are done in order to research out the comparative study of planning and performance in small and medium businesses in Mbeya city.

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TITLE: A COMPARATIVE STUDY OF PLANNING AND PERFORMANCE IN SMALL AND MEDIUM BUSINESSES (A CASE STUDY OF MBEYA CITY)

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