The influence of organizational strategy and institutional factors on performance of small and medium enterprises (SMEs) in Kenya

Abstract

The influence of institutional factors (structure, organizational culture and leadership) and strategy on performance of SMEs remains unclear. Also, the moderating effect of institutional factors on the relationship between strategy and performance of SMEs has not been established. Therefore, this study was motivated by the desire to fill these gaps in knowledge. The specific research objectives were to establish the relationship between strategy and performance of SMEs, the relationship between each institutional factor and performance of SMEs, the joint effect of institutional factors and strategy on performance of SMEs, the influence of each of the institutional factors on the relationship between strategy and performance of SMEs and lastly, the joint effect of institutional factors on the relationship between strategy and performance of SMEs. A disproportionate stratified random sampling technique was used to select a sample of 116 firms drawn from a population of 166 small and medium enterprises in Nairobi. Structured survey questionnaires were administered to collect the primary data. The response rate was 46 percent, representing 53 respondents drawn from manufacturing and service sectors. Descriptive statistics, correlation and regression techniques were used to analyze the data. The results of the study show that 87 percent of Kenyan SMEs employ strategic plans in their businesses, contrary to the findings of the previous research which indicated that small and medium sized enterprises (SMEs) barely plan their strategies because of lack of resources. It was also found that the relationship between organizational culture and performance of SMEs was positive and significant. This implies that organizational culture has influence on the performance of SMEs. The results further show that the relationship between strategy and performance is moderated by leadership. This is demonstrated by the positive effect of the interaction between leadership and strategy on performance. Transformational leadership style was found to be dominant. However, SMEs combine both transformational and transactional leadership styles. The ultimate practical implication is that for any SME to survive and make profit in a turbulent environment, it must put in place strategic plans and align strategies to the institutional factors. This is consistent with classical view (Whittington. 2001) which states that SMEs should have a rational process. emphasize on analysis order and contol to achieve long term advantages and maximize profit. Despite the foregoing, this study had inconclusive results on four fronts: the joint effect of strategy and institutional factors on performance of SMEs, the moderating effect of organizational culture on the relationship between strategy and performance, the moderating effect of structure on the relationship between strategy and performance of SMEs and the combined effect of the three moderating variables on the relationship between strategy and performance of SME's. It is recommended that further research be done to compare the results and thus establish the source of these differences. The study has emphasized the importance of strategy and the institutional factors in improving performance. Therefore it is recommended that policy makers to come up with a policy framework to support the small and medium enterprises to enhance the quality of their strategies and institutional factors so that SMEs can survive and improve their performance in a competitive environment.