CHAPTER I THE PROBLEM AND ITS BACKGROUND Introduction In recent years, the world economy has changed drastically.

Unimpeded growth and stability have become updated concepts. The business environment is increasingly turbulent and complex as organizations now face intense competence fueled by the globalization markets. Furthermore, success often requires an early entrance into foreign markets. These conditions make it difficult for smaller firms with scarce resources to survive, let alone perform well. As mentioned by Hamel and Prahalad (1994), organization operating in traditional sectors of the economy are not sheltered from those new business conditions: they have to keep up with the trends of their market while keeping an eye on current and potential competition. However, an adequate positioning in todays market may not be enough from long term prosperity as the challenge is to pierce the fog of uncertainty and develop great foresight into the whereabouts of tomorrows market. Similarly, DAboise and Audet (2001) stressed that the inefficient economic structure inherited from the past, including unclear ownership, a chronic lack of funds, the instability of regulations on transactions and investments in economy, undefined macroeconomic coordination, non-entrepreneurial management of economy, have all contributed to the current, unfavorable position of small and medium-sized enterprises (SME) and entrepreneurs in the country. Democratic changes and the decision to adopt a market based economy encounter numerous obstacles in the insufficient stimulation of the business environment and economic policy measures towards encouraging the

SMEs sector or providing institutional infrastructure necessary for the successful development of SMEs. In the past the sector was tolerated rather that supported. There was no institutional, technological, legal, and financial support to small and medium sized enterprises. The emphasis was not on the development of this part of national economy, but primarily on large social owned enterprises. The process of transaction has exposed the structural disharmony, particularly in relation to the size of business and their functions, which had negative effect on their market, and technological and financial adaptability. Hence, in order for SME to succeed, Christensen, et al. (2000) posited that small business owners must, thus, develop flair sagacity and shrewdness in order to detect weak signals emanating from the environment. This can be done through strategic scanning activities so that untoward changes in the environment will be detected and identified. However, as important as strategic scanning activities may appear to the survival of the firm, very little is known about them in the field of small business management. Owing to many countries success in harnessing SME development as a growth strategy, a large share of development efforts have been directed to SMEs worldwide since it is widely accepted that small and medium enterprises play a very important and critical role in the economic and social development of a country. This impact of SMEs is attributed to the relative case in setting-up, the flexibility and lower capital cost per job creation, and its role in providing niche services that may not be viable for large businesses.

In the Philippines, SMEs are duly recognized as an important pillar in the economy and significant amount of developmental efforts and policy support have been directed to ensure its growth and development for the past decades. As a sector, the SMEs account for ninety nine (99.6%) of total establishments in the country, sixty-nine (69.6%) percent of number of employees, and thirty (30.2%) percent of total value added. National Statistics Office 2001 statistics on business establishments indicates that SMEs hold a combines share of 99.6% of the 811,589 establishments in the country. The size distribution highlights the importance of putting more emphasis on the development of micro and small enterprises, in view of their large numbers and the need for more efficient services and guidance for strategic growth. This is a positive trend considering that strengthening this group is essential to the growth of a healthy and competitive industrial sector as a whole. DAboise and Audet (2001) stated that strategic scanning is a concept that has not yet received the attention it deserves in the field of management. In this premise, the researcher was inspired to conduct this study with the hope that it may contribute in increasing the limited knowledge on this phenomenon, especially in SMEs in the second District of Bataan. It must be understood that there are few researchers conducted to assess or evaluate the SMEs in Bataan considering that these enterprises have attracted tourists, customers, and investors outside the province contributing immensely in the economic growth of Bataan. The influx of these economic gains made more interesting with the presence of the Bataan Economic Zone (BEZ) and the institution of Balanga as a component City of Bataan. Hence, a competitive market for SMes had been drawn in a larger scale. However, these SMEs lack a unique strategic

composite to really identify the threats and strengths of the market to sustain their growth as an SME. Through this study, the researchers believed that it would geared towards building up the capabilities of the SMEs and organizations by way of identifying relevant issues and problems that have been encountered by SMEs and creates ways in improving and enhancement of their competitiveness, thereby increasing the SMEs contribution to the countrys economic growth. This study could be utilized by the SMEs for the purpose of achieving competitive advantage. As mentioned by Choo (2001), strategic analysis could also help the organizations to understand the external forces of change so that they may develop effective responses which secure or improve their position in the future (Choo, 2001). Through the findings of this study, the researcher hopes to provide insights that will truly help SME owners manage their business effectively. Hence, the role of strategic analysis will be identified so that the SMEs will attain a sustainable competitive advantage. Statement of the Problem The main problem of the study is: How do profile and strategic analysis affect the performance of small and medium sized enterprises (SMEs) in the second district of Bataan during the fiscal year 2006? Specifically, the study sought answers to the following questions: 1. What is the profile of the small and medium-sized enterprises in terms of: 1.1 location; 1.2 nature; 1.3 working capital; and

1.4 years of operation? 2. How may the strategic analysis of the small and medium-sized enterprises be described in terms of the following areas: 2.1 industry structure; 2.1.1 rivalry among existing firms, 2.1.2 threat of new entrants and, 2.1.3 threat of substitute products or services? 2.2 industry profitability; 2.2.1 bargaining power of buyer and 2.2.2 bargaining power of seller? 2.3 positioning; 2.3.1 cost leadership and 2.3.2 differentiation?

3. What is the level of performance of small and medium-sized enterprise in terms of: 3.1 net income; 3.2 return on investment; 3.3 liquidity ratio and 3.4 debt to equity ratio? 4. How do the profile and strategic analysis of the small and medium-sized enterprise affect their performance? 5. Is there a difference in the performance of small and medium-sized enterprise when grouped according to their profit variables?

Significance of the Study The study is beneficial to the following entities: Department of Trade and Industry (DTI): The study will help them to identify other problems that have been encountere by SMEs especially in terms of financing and capital. With SMEs community sprawling in the Philippines, the results of this study can likewise serve as basis for designing and implementing guidelines in monitoring the economic survival of this industry. Moreover, proper resources and assistance could be extended by the agency in order to help SMEs. Small and Medium Enterprises Owners: The results of this study can serve as basis for SME owners in addressing issues and concerns relative to their businesses. By perusing its findings, SME owners will have a better understanding on how to improve their services to make them more competitive in the field. Moreover, it will be an avenue to identify ways and means to improve their planning and forecasting techniques based on the result of the study. It will also give the, concrete basis in formulating environmental scanning activities. Young Entrepreneurs: The findings of this study could help young entrepreneurs to enhance their knowledge on the importance of strategic scanning in their business. With this, proper planning could be taken to further improve the operation of their business, Moreover, the study could also serve as foundation for them in understanding industry structure and profitability as well as positioning so that they can attain economic edge among their contemporaries. Prospective Entrepreneurs: The study could serve as a guiding point for those who are planning to put up their own business in the future. Through this study, relevant

information could be taken that will help them for the start-up of their business. Likewise, the findings of this study can help those who are starting to put up business relevant ideas particularly on strategic analysis so that proper start-up of business can be attained. College and Universities: For college & universities offering entrepreneurial programs, the study could serve as reference materials with focus on strategic analysis of the business. The findings can also be of help for academic institutions to understand the present issues that bombard the business industry particularly the small and

medium enterprises. Hence, the students can have a better understanding of the entrepreneurship in view of SMEs flight. Faculty Members: For college and university professors handling strategic management, the result of the study will be a primary source of relevant information on what is actually happening among SMEs in the Philippines setting. Very few resources are available based on local scenario, and this study is an off-short to the problem on varying resources. Students: The study could serve as a basis for sound decision making if they will pursue business ventures in the future. Future Researchers: This study could also help other researchers especially those in the field of business administration. The findings related to the effect of strategic analysis to the performance of SMEs could be utilized for future researches.

Scope and Delimitation of the Study The researchers choice of this study was driven by a desire to acquire an extensive knowledge of strategic analysis performed in SMEs in Quezon City. For practical reasons, such a study had to be limited to a few organization in Quezon City. The population of the study, which are consisted of 71 SMEs with capitalization ranging from P/3 million to P/ 100 million, are composed of SMEs owners and the department involved in scanning external environment. They are selected using purposive or deliberate sampling method. The profile of the small and medium sized enterprises in terms of location, nature, working capital and years of operation were taken in consideration. Likewise, the strategic analysis of the small and medium-sized enterprises which were described in terms of industry structure which includes rivalry among existing firms, threat of new entrants and threat of substitute products or services; industry profitability which includes bargaining power of buyer and bargaining power of supplier and positioning which includes cost leadership and differentiation were also determined. Moreover, the level of performance of small and medium-sized enterprise in terms of net income, return on investment, liquidity ratio and debt to equity ratio were considered. The profile of SMEs was presented using the frequency count and percentage. The areas of concern of strategy analysis and performance of SMEs were presented using weighted mean and standard deviation. Descriptive measures for the level of financial performance of SMEs were presented using the weighted mean and standard deviation. Friedmans Two-way Analysis of Variance (ANOVA) and T-test were used in testing the hypothesis.

Notes in Chapter 1

Gilbert Hamel and Prahalad, C.K. Competing for the Future. Boston: Harvard School Press, 1994. CR Christensen & GA Feldham. Managing Strategic Surprise by Response to Weak Signals. California Business: Revised Edition, 2000. Chun Wei Choo. Information Management for the Intelligent Organization: the Art of Scanning the Environment 3rd Edition. Medford, NJ: Information Today, Inc., 2001. Jose Audet & Gerald D Amboise. The Multi-site Study an Innovative Research Methodology. NJ Press, 2001.

THEORETICAL FRAMEWORK

This chapter presents the relevant theories, related literature, related studies, conceptual framework, paradigm, hypotheses of the study and definition of terms which have bearings and importance in the present study.

Relevant Theories This study is anchored on several theories relevant to the different variables of the problem. Foremeost are the Perceived Environmental Change Theory.

Outwardness Theory, Open System Theory, Contingency Theory and Strategic Information Theory. The perceived Environmental Change theory refers to the alteration in the pattern of events and relationships occurring in the companys outside environment, as perceived by managers, which may lead the company to adjust to the new conditions. Strategic change refers to the alteration of the companys course of action in order to create new conditions or adapt to new conditions. The perceived environmental changestrategic change connection translates the decisive role of top managers perceptions of environmental change upon their decisions to change their companies course of action. (Millliken, F.J., 1987). This theory is relevant to the present study on the premise that the theory proposes an interaction or interrelation between the environment and the strategic plans of the company. This can be viewed on the context that an organization changes its course of action in consideration with the events that are taking place in the

environment. The study also banks on understanding the effect of environmental factors like rivalry among existing firms, threat of new entrants and substitute products or services on the flow of operation of the small and medium-sized enterprises (SMEs). It can be deduced from the theory that SMEs react when the environment gets in the way. Another theory that has bearing on the present study is the Outwardness Theory. This theory states the openness of a company to the outside and permeability to external influences and is rooted in the concept of organizations as open systems. Exposure to information refers to the frequency of opportunities of contact with wellinformed people and information-rich contexts. It is also rooted in the concept of boundary spanning personnel, as people establishing the connection between their organizations and the environment, as well as in the concept of gatekeeping and information stars, and emerged as the individual face of the organization phenomenon of outwardness. (Lederer, 1996) The theory is relevant to the present study with emphasis on the economic idea of competition among SME. IT cannot be ignored that to attain the highest level of economic advantage among SME, monopolization of services must be abolished and allow new entrants to play in the economic field. The theory relates that the outwardness-exposure of an SME to the information connection translates the determinant weight of the organizational capacity to relate to the environment, upon the degree of exposure to information of individual. This is construed on the thrust of this research to identify how a certain SME reacts with an environment that is altogether growing and changing enormously.

The Open System Theory is another assumption that has point of relevance on the present study. As cited by Santos (1999), this theory views the social system as a complex and dynamic set of relationships among its actors interacting with one another. The organization is viewed as an open system with internal and external factors impinging on its subsystem making it very fluid, tenuous, dynamic and complex. Likewise, open system interacts with the external environment. This theory is relevant on the present study on the fact that because both the latter and the former suggest that managers of an organization constantly try to respond to changes in customers desires. They monitor what competitors are doing, then develop ways in which their organizations can deliver better quality and service at a lower price. This is also one of the focuses of the present study by venturing on understanding how SME reacts with the structure of the industry and how these factors affect the strategic plans of the SME to comply with the demands of its customers and the environment itself. Another theory that has bearing on the present study is the Contingency Theory which implies that organizations must be capable of adapting to situations under various circumstances. The notion of one best design for most companies is discarded in favor of design based on contingencies. Santos (1999) wrote that the theory categorized contingency factors into four basic concerns as follows: the organizations age and size, its technology and that of the industry and environmental forces. Basically, contingency theory asserts that when managers make a decision, they must take into account all aspects of the current situation and act to those aspects that are key to the situation at hand. Practically, its the approach that it depends. This is

similar with what McNamara (2005) asserted that the continuing effort is to identify the best leadership of management style might now conclude that the best style depends on the situation. The theory gives highlights to the reason why the researched included the profile of the SME in understanding its behavior and how it reacts with the competitive environment. Finally, the Strategic Information System Theory has also been considered as relevant to the present undertaking. It concerns itself with systems whose importance to the organization extends beyond merely assisting it to perform its existing functions efficiently, or even just effectively. A strategic information system is instrumental in the organizations achievement of its competitive or other strategic objectives. Hence, the point of relevance of the present study with this theory lies on assessing the level of performance of SME using the variables of net income, return on investment, liquidity ratio and debt to equity ratio. These factors constitute the whole system of the SME and are vital in understanding their growth or failure as an organization (Lederer, A., 1996) As earlier cited, relevant theories will be helpful as theoretical grounds in understanding the concept of strategic analysis and the need for the organizations particularly in SMEs in adapting the system in order to determine the stages of organizational development and the process of creating mechanism to address not only the current issues and problems but also the potential threats and opportunities that may arise from time to time. Similarly, the researchers believed that each organization specifically the top management must enhance their knowledge and be able to interact with the external environment and consider major elements that will have a great impact on the

organization and take in new inputs and learn about how its inputs are received by various important outside elements. Likewise, theories imply that the success of the organization lies not only on the leader but through the cooperation of the entire member. Furthermore, theories are somewhat relevant to strategic scanning as it all considers external environment as the main source for the growth and long-term survival of the enterprise and that all relevant activities of the business must be strategically planned and analyzed. Related Literature For this section, the researcher thoroughly scanned the relevant articles and write-ups to find out what has been written about the concerns of the present study. Level of Performance of Small and Medium-Sized Enterprise. The level of performance of small and medium-sized enterprise in terms of net income, return on investment, liquidity ratio and debt to equity ratio was given preferential discussions. Net Income. Every business, large or small, aims to gain from the business. To profit is a measure of success on the entrepreneurs side because all the hard works paid off and expatiated. As opinioned by Barkley and Henry (1997), the net income plays an important role for the companys survival or doomsday. In most cases, if the business fails to show strong return on investment, there is a higher risk that the business will close due to bankruptcy. In some cases, the business will course on borrowing or debt financing. This is similar with the contention of Goetz (1997) when he opined that return of the capital plus profit sets the tone of healthy start among new SME. This is very crucial

since it will determine the future of the enterprise. Failure and success determines the existence of the business. Diversification benefits and the improvement to the risk and reward characteristics of their investment portfolio lure investors into the private equity firms. This is because a private firms business risk may have a negative consequence with the market as a whole, creating a portfolio with lower overall variance. Success in greater equity investing involves selecting high growth firms in particular, because these firms are most likely to remit high returns. The implication is that growth in an SME creates financing pressures and as noted by Thadeus (2004) most growth opportunities are capital assets that contribute to the value of the firm, but dont necessarily provide adequate collateral for loans and dont generate current period income. Profitability and a firms recent financial success should also enhance a firms access to equity financing. The historical profitability of the firm and therefore the amount of earnings capable of being retained has been shown to be the contributing factor in capital structure. With more earnings available for investment, profitable firms will prefer to increase their equity financing. Andrews et al (1999) stated that the implication is that less profitable an SME is, and therefore the less self-sufficient it is through reinvestment of profit, the more likely it will need to depend upon debt financing for its assets. Return on Investment. Return on investment is an important starting point for the analysis of financial statements. According to McNamara (1995), the firms value is determined but its ability to earn return on its capital in excess of the cost of capital. While a firms cost of capital is determined by the capital markets, its profit potential is

determined by its own strategic choices: the choice of an industry or a set of industries in which the firm operates (industry choice), and the manner in which the firm intends to compete with other firms in its chosen industry or industries or the so-called competitive positioning. Business strategy analysis therefore, involves industry analysis and competitive strategy analysis. As mentioned by Choo (2001), strategy analysis allows the analyst to probe the economics of the firm at a qualitative level so that the subsequent accounting and the financial analysis is grounded in business reality. Business strategy analysis also allows the identification of the firms profit drivers and key risks. This, in turn, enables the analyst to assess the sustainability of the firms performance and make realistic forecast of the future performance. On the other hand, the profitability of the company is also expected to play a role in the capital structure. As posited by North and Smallbone (1996), more profitable companies are anticipated to have a higher cash flow and consequently the ability to service a loan. Companies with volatile earnings dont have the choice of either firm of financing and are therefore likely to bias their financing towards equity. Liquidity Ratio. For a bank, liquidity ratio is the cash held by the bank as a proportion of deposits in the bank. The liquidity ratio measures the extent to which a corporation or other entity can quickly liquidate assets and cover short-term liabilities, and therefore is of interest to short-term creditors. It is also called cash asset ratio or cash ratio. This is used to assess a companys ability to meet its short-term obligation and remain solvent. Lenders are keenly interested in this ratio. They are also concerned with leverage and coverage ratios (Santos, 1999). This ratio also expresses a

companys ability to repay short-term creditors out of its total cash. The liquidity ratio is the result of dividing the total cash by short-term borrowings. It shows the number of times short-term liabilities are covered by cash. If the value is greater than 1.00, it means fully covered. The role of finance has been viewed as a critical element for the development of SMEs. According to Milliken (1990), there is a limited access to financial resources available to smaller enterprises compared to larger organizations and the

consequences for their growth and development. Characteristically, smaller enterprises face higher transaction costs than larger enterprises in obtaining credit. Insufficient funding has been made available to finance work capital. This has been proven true by Brush (1992) when they opined that poor management and accounting practices have hampered the ability of smaller enterprises to raise finance. This is one of the focuses of the present study with the aim of understanding the complexities of SMEs operation. Earlier work on the internal workings of small and medium-sized enterprises was mainly concerned with the size of small firms and providing explanations for their growth. There are several reasons why small firms in low income countries initially grow rapidly before their share in total industrial activity begins to decline. Rapid growth of small firms could be explained where: demand was rising as rural incomes were growing and where infrastructure costs still favored small firms locating near fragmented markets; subcontracting and local assembly was common, as for example in varieties of machine-shop activities and where smaller firms produced a range of differentiated and innovative products serving small total markets.

On a similar note, Anderson(1982) reported that firms practically always begin as very small entities, with low amounts of capital drawn from the savings of the owner or borrowings from friends and relatives; initial levels of employment are low, typically less than a dozen, though the figure varies with the nature of the business; the social and occupational backgrounds of the owners varies greatly; and the firms that expand into medium or large scale activities do so continually or in steps. Expansion can be very fast for some firms, though the growth rates appear so broadly distributed as their final sizes. He concluded that the available empirical evidence suggested that a significant part of the growth of large scale enterprises was rooted in the expansion of once small firms through size distribution. This is true among low income countries whose works are directed towards the internal workings of enterprises which have been hampered by lack of basic data on the management and characteristics of smaller firms. Considerable effort has been expended on attempting to gather consistent and measurable information about small firms. Industrial censuses in a large range of low income countries have not been undertaken annually; they have concentrated on larger enterprises; they have only infrequently surveyed small enterprises and have often been published with long delays. As a consequence, useful time series data for smaller enterprises from official sources are largely absent. This is basically one of the reasons why the researcher embarked on this study. With so little backgrounder about the financial capabilities of SMEs, there has been a slow-faced understanding regarding useful time series data among smaller enterprises.

This has had implications for research efforts into small enterprises in low income countries in three important ways. First, a considerable amount of time has been spent on gathering baseline information on small firms. This has involved identifying universes and constructing samples; devising methods to deal with delinquent returns and editing the results in a consistent manner. Second, information collected tends to be more qualitative than quantitative because of the poor record keeping and lack of cross referencing sources through formal channels that can be used to confirm the reliability of surveyed data. This tends to limit their use in statistical analysis. Third, surveys are more often conducted on an ad hoc basis at a point in time. Mohan-Neill (1995) once mentioned that small and medium-scale enterprises in middle income developing economies, such as Singapore, Republic of Korea and Taiwan, have benefited from the industrial sector reforms. In this case, it is apparent that a relatively developed market, skilled workforces, technology-intensive production and public and private support mechanisms have assisted small enterprises in capturing niche markets and undertaking sub-contracting arrangements. In contrast, countries such as Malaysia, Thailand and, in particular, Indonesia, which have been relatively constrained by less developed markets, less-skilled workers and inadequate government support, have had less success in developing their small and mediumenterprise sectors. The lack of absorptive capacity amongst small-scale enterprises is seen as the largest constraint to their development. Factors such as lack of management, technological skills, basic technology and insufficient finance are seen to be significant, particularly where multinational firms are able to offer considerable

benefits to small-scale sub-contractors who are able to offer technology-intensive quality products. From the foregoing literatures, the absorptive capacity of SME is seen to be the largest hindrance to its eventual growth. This includes most important of all insufficient financing or the capability of the SME to stay financially capable in sustaining its operation as well as limiting its credit time. It is apparent that small-scale enterprises cannot always take advantage of the newly-created open markets and subcontracting agreements. According to Julien (1999), poorly developed market infrastructures put small-scale enterprises at a competitive disadvantage compared to larger enterprises largely because of the financial constraint of SME as compared to that of larger companies. Vertical integration within large-scale enterprises provides opportunities to lower transaction costs. Large workforces, together with access to credit and savings for technological and skill development, permit skill specialization in both technological production and support services. A greater capacity also exists for developing the necessary contacts with overseas suppliers and marketing agents and gives larger enterprises more clout in contract negotiations. In contrast, small-scale enterprises are frequently reliant on the market for support in areas such as accountancy, legal, marketing and transport services and, when institutional development is weak, suffer from high transaction costs. Moreover, most small enterprises lack human resource skills for product innovation and for sourcing and negotiating overseas contracts. Similarly, Beal (2000) opined that high transaction costs for registration and licensing are also found to constrain small-scale enterprise operations. High transaction costs

related to government procedures are seen to be particularly problematic in Bangladesh, Nepal and to a lesser extent in the Philippines. Complicated timeconsuming bureaucratic procedures, a lack of information regarding processes and the extra processing payments frequently required, all adversely affect small-scale enterprises relative to larger enterprises which, due to economies of scale and specialist staff, are able to absorb these costs more easily. Likewise, Christensen et. al. (2000) stated that small-scale enterprises in Malawi and Zimbabwe have been adversely affected by shortages and the high cost of raw materials which result from government policies that channel commodities to large-scale enterprises. Debt to Equity Ratio. Debt to equity ratio is the measure of companys financial leverage. According to Brush (1992), debt equity ratio is equal to long-term debt divided by common shareholders equity. Typically the data from the prior fiscal year is used in the calculation. Investing in a company with a higher debt equity ratio may be riskier, especially in times of risking interest, due to the additional interest that has to be paid out for debt. Debt to equity ratio also measures the debt relative to amounts of resources provided by owners. This ratio also indicates how much the company is leveraged in debt by comparing what is owed to what is owned. A high debt to equity ratio could indicate that the company may be over-leveraged, and should look for ways to reduce its debt. Business analysts have identified four significant differences between the debt financing of SMEs and that of large public companies. First, whereas large public companies are able to access various resources for debt financing, SMEs tend to use

short-term debt financing from commercial lenders, especially institutional lenders and, in essence, convert them to long-term debt financing through renewing these short terms lines of credit (Berger and Udell, 1995). Second, the informational asymmetry problems in SMEs are more serious than those in large public companies, and therefore the three traditional solutions to asymmetric information problems are not as effective as in public firms. Thus, traditional finance literature dealing with credit in small businesses distinguishes debt financing in small businesses from that in large public companies using long-term relationship between lenders and firm owners to deal with the agency problems caused by informational asymmetry. Third, in SMEs, governance structure and type of debt financing due to the private information generated and the use debt in SMEs capital structure. According to Harris and Raviv (1991), one special feature of monitoring in SME debt financing is that bonding, such as guarantee provided by the entrepreneurs and collateral, is widely used due to the high cost of monitoring. Agency theory suggests that managerial monitoring and pressure to meet interest payments can lower agency costs generated by informational asymmetry between lenders and owners (Shleifer and Vishny, 1997), while it is not clear that indeed accomplishes this for family-owned-andmanaged firms as firm owners may havedifferent and complex motives, rather than simply wealth accumulation, size expansion of their businesses, and professionalization of the management. Anderson, Mansi and Reeb (2003) contend that family businesses owners, especially founding family CEOs, tend to take higher risk by adopting a highly levered

capital structure because of their limited growth capabilities, desire to maintain control and a high degree of employee well-being, and the preservation of self-esteem. These complex motives are due to thetie between founding family CEOs personal wealth, including human capital, and the firm. Nevertheless, high leverage is not necessarily equivalent to a high probability of using short-term debt financing literature. The use of debt is measured by the debt-to-asset ratio in 2000 and the firm leverage is treated as a continuous variable. Cavalluzzo et. al. (2003) stated the debtto-asset ratio is derived by total liabilities divided by total assets. This is more suitable for small businesses, while current assets and/or current liabilities are excluded by some other studies for large public companies. The cost of debt financing is measured by the average interest rate paid by SME borrowers to commercial lenders 2000, and it is the ratio between the dollar value of financial expenses to the total liabilities in that year. The same as the debt-to-asset ratio, it is also treated. The characteristics of the firm seeking equity have several implications for designing financing contracts between the two parties. Six aspects of the firm have been isolated as having an effect on the preference to acquire equity. Hamel (1994) point out that causality between profitability and equity financing in these circumstances may not be valid due to other indirect effects resulting from the firms operation choices. Due to the issues involved with using profitability as a measure of financial health, other indicators such as current and total asset ratios have been used to measure liquidity and cash flow. On the other hand, Gilchrist and Himmelberg (1998) find that small companies, with presumably higher costs of obtaining external funds are more prone to liquidity

concerns than larger companies. This exposure to business risk inhibits the firms ability to service debt and thus influences their capital structure decision. Audet et. al. (2001) shows that firms with a weak balance sheet, hence restricted access to external finance will be more reliant on cash flow i.e. internal finance. Smaller firms are most susceptible to weak balance sheets and consequently obstacles when tapping into capital markets. As opined by Behr and Bellgardt (1998), SMEs strongly depend on liquidity to finance investment from internal finance. Asset structure measuring fixed (or noncurrent or long-term) assets also influences a firms capital structure. This is true according to Long and Malitzb (1995) find a positive relationship between leverage and the tangibility of a firms asset base. This interpretation implies that firms with lower levels of collateralisability will have less reliance on debt and a greater preference for equity. Profile of the Small and Medium-Sized Enterprises. This includes location, nature, working capital and years of operation. Location. According to Guggler (2003), small businesses are an important force for employment creation and poverty reduction too. Work in them accounts for an important share of employment in developing countries. In fact, for many people around the world, work in small businesses is their only possibility for a minimum living standard. In transitional economies (former state-run economies changing into market economies) small enterprises have the capacity to absorb at least part of the workforce thrown into unemployment as a result of public sector reform. But, according to Cavalluzzo et. al. (2003), small businesses need a conductive business environment to take full advantage of the opportunities before them. A

conductive environment means market acces and an advantage fiscal and regulatory climate. All small entrepreneurs need access to finance to start and expend their business. And one way to facilitate access to finance is through the provision of credit guarantees. Nature. According to Brush (1992), SME enterprises are found in practically all major manufacturing sub-sectors. However, they are concentrated within a fairly traditional range of product groups: the food sector, the organic and marine groups, the wearable sector where sub-groups of garments, fine and costume jewelries, footwear and accessories are lumped together, the leathergoods, the crafts and home furnishings lumps within the gifts, toys and houseware articles, sometimes known also as GTH (gifts, toys and housewares) or the G3H group (gifts, handicrafts, housewares, and), the furniture and the building materials, the micro-electronics and automotive and machine parts and components were tagged to be the most promising because of their competitive potentials and a presence of global demand which may be met by local based Philippine SMEs. These growth industries correspond to the ten identified revenue stream industries which are provided attention by the collective effrorts of government agencies because of high possibilities and strong domestic demand. There is a big potential for SMEs in terms of production output. It generates employment and contributes to poverty reduction. It also increases domestic demand for industrial products and forms the strong base for industrial development. All in all, the sub-sectoral structure of SME enterprises indicated strong participation in major groups of industries with continuing competitive and growth prospects. There also reflect the need to promote diversification into less-traditional

sub-sectors such as electronics, chemicals, plastics and others, to offer industrial structural transformation, to provide more employment and as well as reduce the risk of flooding the domestic market with imported goods that may be completely produced in the Philippines. In the Philippines, majority of the limitations of SMEs face are productivity performance and structural weaknesses of service and the business environment, which includes: outmoded, less productive methods of operations; insufficient use of professional know-how, insufficient and inaccessible financial sources; unappreciated and inadequate professional services; insufficient incentives and inability to meet regulatory procedures; insufficient access to information. Working Capital. Majority of SME enterprises in the Philippines had to rely on their own savings as the primary source of capital. Next to that are private loans (family and friends), most especially for initial investments and start-ups; formal institutional financing are used by only a small segment less than 10% mainly on reasons of fear of loan exposure, the inability to qualify for loans because of lack of collateral and lack of know-how on the credit sources and the procedures; this is aggravated by low access of SMEs to trade credits or from suppliers and little possibilities of sharing financing burden through customer advances. Long repayment terms of supermarkets, malls and marketing service networks adds to the financial burden. The low access to capital financing is corroborating factor that leads to low fixed assets of SMEs and their profitability prospects. The fund shortage explicates the inadequacy of major assets and the predominant use of non-power driven tools and machines that restricts growth; credit facilities are not available to the enterprise on

easy and favorable payment terms since most of the formal credit facilities to SME have limited outreach; granting loans to SME on credit worthy and sustainable terms, is not easy, and often times risky without the safeguards. According to Berger and Udell (2002), access to capital is an important factor determining how rapidly businesses grow over time. Typically, SMEs access to financing resources is limited when compared to larger firms that are able to access public debt markets. According to the data released by Groupe Secor and commissioned by Business Development Bank of Canada (BDC), the total value of debt financing grew by an average 7% per year from 1995 to 1999, while the GDP average annual growth was only 3.4% per year for the same period. However, 70% of SMEs did not approach financial institutions for new debt financing in that period (Thompson, 1998). This indicates that some barriers may exist which prevent or discourage some SMEs from seeking debt financing. Years of Operation. Developing countries value small and medium enterprises (SMEs) for the static and dynamic gains that these firms bring. From the static point of view, SMEs, on average, are believed to generate relativity large amounts of employment while also achieving decent levels of productivity. From the dynamic point of view, the sector is viewed as being populated by firms most of which have considerable growth potential, a contrast with micro enterprises that tend not to graduate from that size category (Leidholm and Mead, 1999). Many SMEs will grow significantly without exiting that size category while others will eventually become large, that is, the see-bed for large firms function of SMEs. Another aspect of the dynamics

of SMEs that distinguishes them from large enterprises is their high entry and exit rates/ The process of rapid turnover raises a set of issues about possible impacts on the economic efficiency of the sector and about policies that may curtail such efficiency losses as are associated with it. Finally, it is often argued that one advantage of SMEs is their flexibility, relative at least to larger firms. This is construed by some as aplus in industry and economies that, for whatever reason, face rapidly changing market conditions, including sharp macroeconomic downturns such as those that have bedeviled most of the countries of East Asia over the last few years. Survival rates of around 80 percent are not uncommon in the first year after foundation of the firm. Liu and Tybout (1996) report survival rates of 79 and 73 percent for large Columbian and Chilean firms after the first year, respectively, while Audretsch (1991) reports survival rates of 77 for new German firms after the first two years in operation.

Strategic Analysis Component of the Small and Medium-Sized Enterprises

Industry Structure. This variable includes rivalry among existing firms, threat of new entrants and threat of substitute products or services. Goetz (1997) stated that at the most basic level, the profits in an industry are a function of the maximum price that the customer are willing to pay for the industrys product or service. One of the key determinants of the price is the degree to which there is a competition among suppliers of the same or similar products. At one extreme, if there is a state of perfect competition in the industry, micro-economic theory predicts that prices will be equal to marginal cost, and there will be few opportunities to earn

super-normal profits. At the other extreme, if the industry is dominated by a single firm, there will be a potential to earn monopoly profits. In reality, the degree of competition in most industries is somewhere in between perfect competition and monopoly. Similarly, McNamara et. al. (1995) stated that there are three potential sources of competition in an industry: rivalry between existing firms, threat of new entry of new firms, and threat of substitute products or services. In most industries, firms complete aggressively, pushing prices close to and sometimes below the marginal cost. In other industries, firms do not compete on non-price dimensions, such as innovation or brabnd image. Hence, Andrews et. al. (1999) mentioned that the potential for earning abnormal profit will attract new entrants to an industry. The vey threat of new firms entering an industry potentially constraints the pricing of existing firms within it. Therefore, the ease with which new firms can enter an industry is a key determinant of its profitability. The third dimension of competition in an industry is the threat of substitute products or services. Relevant substitutes are not necessarily those that have the same from as the existing product, but those that perform the same function. The threat of substitutes depends on the relative price and performance of the competing products or services, and on customers willingness to substitute. Customers perform the same function for a similar price. If two products perform an identical function, then it would be difficult for them to differ fro each other in price. However, customers willingness to switch is often the critical factor in making this competitive dynamic work. McNamara et. al. (1995) argued that there are two factors that determine the power of buyers: price sensitivity and relative bargaining power. Price sensitivity

determines the extent to which the buyer care to bargain on price; relative bargaining power determines the extent to which they will succeed in forcing the price down. The analysis of the relative power of suppliers is mirror image of the analysis of the buyers power in the industry. Suppliers are powerful when there are only a few companies and there are few substitutes available to their customers. The greater number of SMEs sells products locally, mostly to final customers in their local communities. Marketing outside the local markets are usually limited to trade fairs with very few selling to main and permanent outlets such as supermarkets, department stores and market services because of the inability to meet volume requirements and the restrictive terms offered, oftentimes reaching up to 90-120 days repayment terms. Individuals and households are the main users SME products, mostly from the poor and middle class; only a small fraction caters to the rich consumers, the large enterprises industrial users, and small segments are bale to reach inter-regional and foreign markets. With exception of some export craft sectors and garments, subcontracting is not significantly applied. Many are producing similar goods and services and are very much affected by competition while a few that innovated were more successful as independent business ventures. Subcontracting applications were constrained also by limited know how of SMEs and the misunderstanding and inequitable terms between contracting parties. Some of the marketing problems are linked to other weak points including scarcity of financing and low levels of technology, and low access to market information and various types of market services, including packaging and brand

labeling, distribution and shipping. Hence, with these scenarios, franchising by SME as franchisor or a franchisee is picking-up. Limited knowledge of SMEs and the public on its possibilities and the intricacies of the business constrained its potential as a good business. Industry Profitability. The bargaining power of both the buyer and supplier are considered under this variable. As mentioned by Maloni and Benton (2000), small firms acquire many of their resources from external sources and therefore the successful management of their supplier relationship is critical. Strong buyer-supplier relationships have a significant positive effect on manufacturing performance and a positive impact on the performance of the entire supply chain. Similarly, Monezka et. al. (1998), the rationale for the choice of suppliers remains a key issue in supply chain management research. Business relationships are a challenging research area because of the multifaceted characteristics of relationships, the inherent presence of a time element and the complex interactions that covered a wide range of functions and activities in the firms. This is true according to Tan et.al. (1998), when they opined that academics and practitioners have recognized that a firms relationship orientation is critical to its market competitiveness and has a positive impact on its entire supply chain. Hakansson and Snehota (1995) mentioned that the traditional approach to studying business activities focused on the type of product being exchanged and this directs attention towards the activities performed inside the firm. From a relationship perspective, the focus is on the two firms engaged in business activities and how they perform interdependently. The development of buyer-supplier relationship has been

conceptualized by researchers working on interaction, relationships and network in the fields of purchasing, supply chain management, and industrial marketing. On a similar point, Dickson and Hadjimanolis (1998) stated that the size of organizations has been found to be an important and distinctive determinant of the characteristics of dyadic relationships. Small and medium enterprises have been found to be particularly influenced by the personal and social acquaintances of the owners and managers. Such businesses, according to Loasby (1998), face problems of economies of scale and dependence because of their smallness but geographical and psychological proximity facilitates learning and diffusion of knowledge. Heide and John (1998) stated that within a transaction cost perspective buyers view relationships as a governance mechanism aimed at safeguarding against the potential opportunistic behavior of suppliers. An inter-organizational relationship is an alternative mode to a market or an organizational hierarchy of organizing transactions. The transaction cost framework focuses on mechanisms that support economic transactions. This is true with the resource dependence theory which argues that organizations have limited resources and must acquire these from external sources in order to survive. Inter-organizational relationships are one way of engaging with the external environment. The role of resources affects the behavior within relationships. It provides the impetus for, and determines the level of, buyer-supplier interaction. Transactional exchanges are characterized in terms of narrow content, short-term goals and limited communication, whilst, relational exchanges are multidimensional in nature.

Lembe et al (2000) further subdivides each type of exchange along a continuum. Transactional exchanges vary between discrete and repeated transactions. Relational exchanges vary between two polar types depending on the number and levels of relational attributes: interimistic and enduring exchanges. Interimistic relational exchanges have fewer attributes because they are fast-developing and short-lived. Partners entering such relationships would have had prior experiences in other relationships, a reputation for fair dealing or would have given pledges of commitment. Enduring relational exchanges are long-term and have developed attributes such as trust, commitment and adaptations which have developed gradually. Three elements constitute the dependence that one organization has on another: the importance of the required specific resource, the extent to which one party exercises control over the resources, and the extent of available alternatives or substitutes. On the other hand, Penrose (1995) views an organization as a bundle of resources which teams up through relationships with outside resources. A relationship is a resource viewed as an inference between organizations; a quasi-organization emerging as a governance mode for organizing and coordinating the resource ties between the two interacting organizations. A well developed relationship is one of the most important resources that an organization can process. It is one of the most valuable resources. Relationships are a means through which resource bundles are combined to create efficient processes. It should be treated as an investment. Therefore, for a relationship to exist, it has to be perceived and acknowledged by both parties. Partners will know when one exists. A relationship is a future orientation

founded on the belief that a long-term coordinated activities with a partner would lead to economic gain. This will also be part of the study. Positioning. This variable includes cost leadership and differentiation. Cost leadership enables a firm to supply the same product or service offered by its competitors at a lower cost. It is often the clearest way to achieve competitive advantage. In industries where the basic product or services is a commodity, cost leadership might be the only way to achieve superior performance. There are many ways to achieve cost leadership, including economies of scale and scope, economies of learning, efficient production, simpler product design, lower input cost, and efficient organizational processes. If a firm can achieve cost leadership, then it will be able to earn above-average profitability by merely charging the same prices as its rivals. Conversely, a cost leader can force its competitors to cut prices and accept lower returns or to exit the industry. According to McNamara et. Al (1995), the profitability of a firm is influenced not only by its industry but also by the strategic choices it makes in positioning itself in the industry. While there are many ways to characterize a firms business strategy, there are two generic competitive strategies: cost leadership and differentiation. Both these strategies can potentially allow a firm to build a sustainable competitive advantage. Strategy researchers have traditionally viewed cost leadership and differentiation as mutually exclusive strategies. Berger and Udell (2002) mentioned that firms that straddle the two strategies are considered to be stuck in the middle and are expected to earn low profitability. These firms run the risk of not being able to attract price

conscious customer because their cost are too high, there are also unable to provide adequate differentiation to attract premium price customers. Firms that achieve cost leadership focus on tight cost controls. They make investments in efficient scale plants, focus on product designs that reduce manufacturing cost, minimize overhead cost, make little investment in risky research and development, and avoid serving marginal customers. They have organizational structures and control systems that focus on cost control. On the other hand, differentiation strategy, according to Tan et. Al (1998), involves providing a product or service that is distinct in some important respect valued by the customer. For differentiation to be successful, the firm has to accomplish three things. First, it needs to identify one or more attributes of a product or service that customers value. Second, it has to position itself to meet the chosen customer needs in a unique manner. Finally the firm has to achieve differentiation at a cost that is lower than the price customer is willing to pay for the differentiated product or service. Strategic Analysis. SWOT Analysis is a planning exercise in which manager identify organizational strengths (S), weaknesses (W), environmental opportunities (O), and threats (T) (Goetz, 1997). The first step in SWOT analysis is to identify an organizations strengths and weaknesses. The task facing managers is to identify the strengths and weaknesses that characterize the present state of their organization. The second step in SWOT analysis begins when managers embark on a fullscale SWOT planning exercise to identify potential opportunities and threats in the environmental that affect the organization at the present or may affect it I the future.

There are various ways in formulating plans and strategies. One is formulating corporate-level strategy, a plan of action concerning which industries and countries an organization should invest its resources in to achieve its mission and goals. Managers of most organizations have the goal of growing their companies and actively seek our new opportunities to use the organizations resources to create more goods and services for customers. In addition, some managers must help their organizations respond to threats due to changing forces in the task or general environment. For example, customers may no longer be buying the kinds of goods and services a company is producing bulky computer monitors or televisions, or other organizations may have entered the market and attracted away customers. Top managers aim to find the best strategies to help the organization respond to these changes and improve performance. In formulating business level strategies, there is a need to plan to gain a competitive advantage in a particular market or industry. According to Porter, managers must choose between the two basic ways of increasing the value of an organizations products: differentiating the product to add value or lowering the cost of value creation. Porter also argues that managers must choose between serving the whole market or serving just one segment or part of a market. Based on those choices, managers choose to pursue one of four business-level strategies; low-cost, differentiation focused low cost, or focused differentiation. On the other hand, formulating functional-level strategies is a plan of action to improve the ability of an organizations functions to create value. It is concerned with the actions that managers of individual functions such as manufacturing or marketing can

take to add value an organizations products. The more customers value a product, the more they are willing to pay for it. There are two ways in which functions can add value to an organizations products: functional managers can lower the costs of creating value so that an organization can attract customers by keeping its prices lower than its competitive prices and functional manager can add value to product by finding ways to differentiate it than the products of other companies. Small and Medium-Sized Enterprises. In the Philippines, an SME is defined as any business activity or enterprise engaged in industry, agriculture, and or services whether single proprietorship, cooperative, partnership, or cooperative with total assets inclusive of those arising from loans but exclusive of land on which the particular business entitys office, plant and equipment are situated. SMEs have an asset size of between P/3,000,001 P/15,000,000 and between P/15,000,001 P/100,000,000 respectively. It has an employment of 10 99 persons and 100 199 personnel respectively. The SME Development Plan (2004 2010) is a six-year strategic development plan geared towards building up the capabilities of the Philippine SMEs and organization by way of providing relevant services for the enhancement of their competiveness, thereby increasing the Philippine SMEs contribution to the countrys economic growth. The planning period is from 2004-2010. It succeeds and integrates parts of the current short and medium term focus of programs being administered, along with creative approaches adopted from SME model programs. It is composed of the past successful approaches and some entirely new innovative programs that were

designed as part of overall measures that will assist the SME sector to become a critical and lead component of a vibrant economy. It consists of a three-year roll-out period, an evaluation and reprogramming process in between, tracked by another three-year intensified program. The sequence builds flexibility and enhancement of the process. The Plan lays down the goals strategies and programs of the sector in the effort to bring-up the level of business and operational performance of the sector enterprises at par with the Asian average, and aims to develop itself to achieve excellence. The plan is intended to boost SME performance and lay the ground work to develop a sustainable and globally competitive SME sector from 2004 and beyond. It defines specific Action Programs and a Framework for Implementation of the identified strategies. It defines specific and realistic strategies that shall fit the 2010 timeframe of transformed SME system and allows the selected sectors to absorb assistance and show significant transformation. The play lays down the program to assess services and define what worked, as well as identify issues that affect its implementation to further work on the areas that needs to be improved. It-builds in flexibility through an institutional implementation set-up and roll-out mechanism that allows emerging opportunities and challenges to be addressed. Even with the significant presence of the SME sector in the economy comprising of large portion in terms of total establishments (99.6%), the workforce (?), and the total value added (25%) the various promotions policies and programs did not produce significant impact in the development of the sector. The sectors actual value added reflects decreasing trends in the recent years. The local SMEs had productivity far below the performance of non-SME establishments. These low-productivity small and

medium enterprises exist alongside the more productive large enterprises and other foreign controlled companies operating in the Philippines. In the global business arena, many of the SME sctors that used to have prominence in exports are experiencing ? competition. Other competing nations are nibbling the competitive edge of the Philippines SME export sectors. As a result, SME companies face a threat to its sustained growth and even to its continued existence. SME products are not only facing the harsh competition in the export market but also in the local scene where imports of all kinds of products are flooding the local market. The pressures of changing market conditions and the fast pace of technological changes upset the balance by which the SME sector operates. This requires a concerted effort to make SMEs perform better and ensure that they can keep pace with the rest of the world and thereby sustain their contribution to economic growth. Given these challenges, there is a pressing need for need for the funds and resources to be concentrated to strategic policy programs that are carefully selected in order to maximize its impact. There is a need for co-ordination and co-operation among the support agencies along the clear national strategy framework. In line with this pressing need, it is but timely and critical to develop a consolidated and comprehensive roadmap for SME support programs the SME Development Plan in cooperation with the Small and Medium Enterprises Development Council, the Department of Trade and Industry, and the various agencies involved in SME development. Owing to many countries success in harnessing SME development as growth strategy, a large share of development efforts have been directed to SMEs worldwide since it is widely accepted that small and medium enterprises play a very important and

critical role in the economic and social development of a country. This impact of SMEs is attributed to the relative case in setting-up, the flexibility and lower capital cost per job creation, and its role in providing niche services that may not be viable for large businesses. In the Philippines, SMEs are duly recognized as an important pillar in the economy and significant amount of developmental efforts and policy support have been directed to ensure its growth and development for the past decades. SME enterprises are found in practically all major manufacturing sub-sectors. However, they are concentrated within a fairly traditional range of product groups: the food sector, the organic and marine groups, the wearable sector where sub-groups of garments, fine and costume jewelries, footwear and accessories are lumped together, the leather goods, the crafts and home furnishings lumps with it the gifts, toys and house ware articles, sometimes known also as the GTH (gifts, toys and house wares) or the G3H group (gifts, handicrafts, house wares, and), the furniture and he building materials, the micro-electronics and automotive and machine parts and components were tagged to be the most promising because of their competitive potentials and a presence of global demand which may be met by local based Philippine SMEs. These growth industries correspond to the ten identified revenue stream industries which are provided attention by the collective efforts of government agencies because of high export possibilities and strong domestic demand. There is a big potential for SMEs in terms of production output. It generates employment and contributes to poverty reduction. It also increases domestic demand for industrial products and forms the strong base for industrial development.

All in all, the sub-sectoral structure of SME enterprises indicated strong participation in major groups of industries with continuing competitive and growth prospects. These also reflect the need to promote diversification into less-traditional sub-sectors such as electronics, chemicals, plastics and others, to offer industrial structural transformation, to provide more employment opportunities and as well as reduce the risk of flooding the domestic markets with imported goods that may be competently produced in the Philippines. Compared to other Asian economies, the Philippine SMEs fall below the average productive performance. In terms of number of establishments and employment, Philippine SMEs are within the relative band width in most developing economies. However, the Philippine had less productive contribution as reflected by value added contributions of the SME sector. Related Studies A review of different studies local or foreign is deemed necessary to assess the effect of strategic analysis on the level of performance of SMEs particularly in Quezon City. To provide direction and framework to the present study, this section includes previous studies undertaken by other researchers that are mostly similar about the effect of strategic analysis in the performance of SMEs. The environmental scanning practices of small and medium-sized enterprises (SMEs) have received a little attention from researchers, despite the fact that such practices are considered critical to the growth and long-term survival of the firms. This

gap in is all the more relevant given recent government policy related to the encouragement of high growth SMEs. McNamara et. al. (1995) give an excellent summary of nine separate studies of business location decisions by larger manufacturing firms. Several variables were found to be significant in more than one study. These included interstate highway access significant in five studies; populationfour; the unemployment rate; wage rate; property tax rate, public site ownership, and fire protection rating-three each; and distance to a standard metropolitan statistical area, distance to a four-year college, site quality, and public school expenditures- two each. McNamara et al. divided these factors into two categories: those that a community can influence and those that it can not. Of those that were found to be significant in more than one study, only a few fall into the first category. The factors were quality of the site, level of public school expenditures, and property tax rate. This suggests that communities interested in attracting business investment might found beneficial to focus on those factors that have some influence over and target businesses that place less emphasis on factors that the community cannot control. In addition, Crone (1997) identified variables related to manufacturing firms business locations decisions, without examining the influence of the firm size. The variables examined in their study were accessibly to the market, facilities, the region, and cost of some important inputs, labor costs, energy prices, and taxes. As well, Glaser and Bardo (1991) cited access to key quality personnel as important for business growth. OFarrell and Hitchens (1990) suggested that the range, quality, and

price competitiveness of the local infrastructure of producer services impacts small- and medium-size business, and thus regional economics. Another study by Moore, Tyler and Elliot (1991) described key factors associated with European small- and medium-size businesses location decisions. The key factors were regional development assistance, quality of the labor supply (including wage rates), and the potential for future expansion. The small and medium- sized business in this study placed relatively low importance on general infrastructure. Results from this study were consistent across industry sectors. In contrast, Goetz (1997) suggested that rural countries trying to attract some types of fat-processing plants should consider upgrading their transportation infrastructure. Another study by G. Natacha (2001) Small and Medium-sized Enterprises (SMEs) are the cornerstone of the French economy and job creation. However, they lack human and financial means, so they generally do not search for environmental information by themselves. Therefore, they often consider environmental issues as a constraint instead of a potential benefit. They do not invest in money neither time to reduce their environmental impacts and they remain in an inactivity cycle. Their global environmental impact cannot be neglected and their interested parties are more and more worried about it. One of the most studied factors in business location decisions is the importance of proximity to an airport. Reeder and Wanek (1995) surveyed the literature related to the importance of airport access in business location decision, but the results are not conclusive. They disagree with the conventional wisdom that airport access is crucial for rural development, concluding that airports will not make or break a rural communitys

well being. They point out, however, that recent studies show that high-tech industries rate airport access very highly, and in fact locate in close proximity to airports. In a study conducted by Aguilar as cited by Costa (1995), they high lightened the significance of scanning operation of firms in three main ways. Firstly some studies have indicated that scanning is critical to the success of new ventures and that the failure of many such ventures is related to not carrying out sufficient environmental scanning. Secondly, scanning is a crucial to the strategic planning process because the external firms operate in is usually in flux, to a greater or lesser degree, depending on the industry among other things. In order to survive and indeed flourish, it is posited that businesses need to adapt their operations to make best use of opportunities that may arise while at the same time dealing with potential threats identified during the scanning process. As Bergoron (2000) points out, information has become a resource that needs to be managed and be used strategically in order to maintain or increase organizational competitiveness. Having said this, some authors have suggested that the data gathering step may be the most important in the information processing process. Similarly, a number of studies have found a positive relationship between environmental scanning and performance, however, this link is not direct. Instead, it is believed to be a consequence of the improved strategic management that effective environmental scanning enables. As Strandholm and Kumar (2003) explain, it is generally agreed that organizations that align themselves with the environment out perform those that do not maintain this alignment.

The type of information required to carry out the strategic planning so identified is generally classified into two main areas; namely, industry related information and macro information (Brush, 1992). In the former case, companies are concerned with information related to their customers, competitors, suppliers, distributors and the like while in the latter, they are concerned with national and international economic, sociocultural, technological and other trends. Industry related information then, is generally more immediate and relates to the day to day operation of the firm, while macro information relates to issues and concern of a more general nature that tend to be less immediate in nature and have more indirect effect on the company. Strandholm and Kumar (2003) opined that the environments organization must scan in order to obtain these two types of information have been classified as the task or immediate environment for industry related information and the remote or general environmental for macro related information. The terminology is useful when the sources of environmental information and the methods used to extract it are examined. For instance, previous studies have shown that the sources and methods used by SMEs often vary between environments. Typically, SMEs use personal sources when gathering information on the immediate task environment and impersonal sources when gathering information on remote general environment (Sawyerr et. al., 2000). The personal sources of the former case are usually contacts in the industry such as customers, suppliers and the like, while the impersonal sources are most often business magazines, journals and other similar publications.

The sources of information utilized by SME have also been categorized as either internal or external. That is, sources originating from within the organizations in contrast to those outside it. The scanning process used to gather this environmental information has been examined in terms of its scope and in terms of its frequency, among other things. The scope of scanning refers to the number of different environmental sectors a firm monitors while scanning frequency relates to how regularly a company carries out the scanning function. Broad environmental scanning, that is, prevent them from missing opportunities that may arise. Conversely, such scanning may also provide timely warnings regarding potential threats. A number of studies have concluded that the scanning practices carried out by SMEs are contingent on the firms external context (Raymond et. al., 20010 therefore, as the firms context changes so does its scanning and information sources use do not exist in a vacuum; rather, they are influenced by the characteristics of the external environment within which organization exist. Typically, the environmental characteristics deemed most likely to impact on scanning practices are environmental uncertainty and perception of the environment, industry life cycle, the entrepreneurs profile, the firms information network and the firms characteristics. An issue derived from this area of inquiry is the evolution of scanning practices as firms developed. According to Costa (1995), as companies grow in size and complexity, their need for formal strategic planning increases accordingly and with it, the need for a systematic approach to the environment scanning. This growth linked development of scanning practices has been advanced by other researchers who have identified theee of four distinct scanning stages for different types of firms as they grow.

Having said this, it reminds that SMEs do not necessarily evolve linearly from stage to stage, meaning that certain stages can be bypassed when a rapidly changing situation requires it. This brings us back full circle to the contextual influence on the scanning practices of SMEs. Hill and Jones as cited by Santos (2006) explained that a companys external environment can be broken down into two parts: the industry environment that the company competes in the macro environments. A companys industry environment consists of elements that directly affect the company, such as competitors, customers, and suppliers. The macro environment consists of the broader economic, social, demographic, political, legal, and technological setting within which the industry and the company are placed. When one is buying, it is annoying to find that a desired item is out of stock. Within a firm, too, running out of needed parts and materials is not only frustrating but it spells economic cost, it may mean the stoppage of work, inability to deliver on time and the worst, the lost of a customer. Stock out can be avoided and this is through an effective material management system. Studies from Africa highlight similar mixed result. The study by Osei et. al. (1993), focused predominantly on enterprises at the smaller end of the small-scale sector in Ghana, shows evidence of only limited use of linkages between small and large-scale enterprises. Only 15 per cent of small enterprises surveyed produced for large-scale enterprises. Similarly, linkages between small-scale enterprises were found in only 18 per cent of cases. In contrast, Dawsons (1993) comparative study of Ghana and Tanzania showed that small-scale enterprises in Ghana showed a greater capacity for

technological and quality improvements and for developing beneficial links with largescale enterprises in the growth sectors than those in the less sophisticated sector in Tanzania. Access to equipment from government auctions following the break-up of large-scale state enterprises in Ghana, together with the movement of retrenched skilled government staff to the small-scale sector, assisted in this process. The clustering of firms in urban areas in Ghana allowed these more sophisticated firms to enhance the collective efficiency of the sector as a whole through the development of further linkages between these and other small-scale firms. Finally, this study could look further on the profile variables of SMEs, strategic analysis and effectiveness of strategic analysis to determine how this component will affect the performance of SMEs. Furthermore strategic analysis and strategic scanning is somewhat similar in nature as enterprises scan in order to analyze the business. Information asymmetries associated with lending to small scale borrowers have restricted the flow of finance to smaller enterprises. In spite of this claims however, some studies show a large number of small enterprises fail because of non-financial reasons (Liedholm, MacPherson and Chuta, 1994). SME performance is a function of industry structure, strategy, and organization structure. It has been said that the effects of industry structure, business strategy, and organizational structure to be consistent across the two SME performance measures, growth rate and return on sales. Any model of SME performance should recognize the critical nature of the environment, strategy and organizational structure. First, the development and growth of SME involves a choice among industries. Results suggest that the structure of the entered industry is critical to SME survival and success.

Second, the performance of SME will largely depend on the competitive strategies within the chosen industry. Third, a competitive strategy is only as good as the structure SME chooses to implement. The top management teams of the high performing firms are formed of individuals who share the same vision: to innovate and lead in the field. As far back as the early days of the firm, they showed penetrating insight, the ability to identify trends and windows of opportunity before anyone else in the industry. Strategic scanning activities are thus motivated by a strong desire to precede trends and rapidly identify opportunities. In fact, this controlled boldness lead them to embark on ambitious and technically challenging projects on several occasions. The time horizon of their scanning is rather long, as would be expected for the type of information required for such strategic actions. Indeed, scanning is directed towards the distant future. On another level, it can be said that members of the top management team strategically manage their information networks. That is, specific stakeholders or players in the industry have been targeted by virtue of the information they can provide to the firm. Responsibilities for building a personal network and gathering information is divided between top management team members, taking into considerations factors such as prior ties with the milieu, affinities and personal interests. Each member is expected to report back to the group any relevant piece of information gathered. Developing such networks is of prime importance as the information they provide allows these high performing SMEs to innovate and lead their field. DAboise and Audet (2001) In the studies conducted by the Department of Trade and Industries it can be viewed that Small and Medium-Sized Enterprise plays a vital role in the Philippine

economy. Thus, the researchers believed that this study concerning the effect of Strategic Analysis on the Performance of SMEs could help in strengthening the operations of SMEs particularly in Quezon City. Furthermore, insights can be develop in creating a road map on addressing issues and problems of SMEs and how the local government, LGUs and other concerned agencies could further extend their assistance on SMEs. Conceptual Framework Figure 1 presents the paradigm of the study. The first frame presents the independent variables, which contain the profile of the small and medium-sized enterprises in terms of location, nature, working capital and years of operation were taken into consideration. Likewise, the strategic analysis of the small and medium-sized enterprise which were described in terms of industry structure which includes rivalry among existing firms, threat of new entrants and threat of substitute products and services, industry profitability which includes bargaining power of buyer and bargaining power of supplier and positioning which includes cost leadership and differentiation are also included. On the other hand, the second frame presents the level of performance of small and medium-sized enterprise in terms of net income, return on investment, liquidity ratio and debt to equity ratio. It is hypothesized that the independent variables affect the dependent variables.

Independent Variables

Dependent Variables

A. Profile Variable of SMEs Location Nature of Business Working Capital Years of Operation B. Strategic Analysis Component 1. Industry Structure Rivalry among existing firms Threat of new entrants Threat of substitute product or services 2. Industry Profitability Bargaining power of the buyer Bargaining power of the supplier 3. Positioning Cost leadership Differentiation Level of Performance of SMEs in terms of: Net Income Return on Investment Liquidity Ratio Debt to Equity Ratio

Figure 1. Paradigm of the Study

Hypothesis of the Study The following null hypotheses were tested: 1. The profile variables and strategic analysis of SMEs have no effect on the performance of SMEs in terms of net income, return on investment, liquidity ratio, and debt equity ratio.

2. There is no difference in the performance among SMEs when grouped according to their profile variables. Definition of Terms: The following terms used in the study were defined conceptually and/or operationally. Bargaining Power of the Buyer. As used in the study, this term refers to the power of the buyer to dictate the price. The moment that they will not buy products or services there would be no sales. This is the bargaining power of the buyers they can influence the decrease of selling prices. Bargaining Power of the Supplier. Operationally, this term pertains to the power of the supplier or the producer to control the price. They can turn it higher or lowering it accordance with the prevailing conditions that may contribute to their competitiveness. Cost Leadership. This term refers to the clearest way to achieve competitive advantage which focus on tight cost controls and is characterized by efficient scale plants, product designs that reduce manufacturing costs, have organizational structures and control systems. This is the ability of the SMEs to lead in the pricing schemes of products or service. Debt to Equity Ratio. This term refers to the measure of companys financial leverage. Debt equity ratio is equal to long-term debt divided by common shareholders equity. Typically the data form the prior fiscal year is used in the calculation. Investing to a company with a higher debt equity ratio may be riskier, especially in times of rising interest, due to the additional interest that has to be paid out for debt.

Debt to equity ratio also measures the debt relative to amounts of resources provided by owners. This ratio also indicates how much the company is leveraged or indebted by comparing what is owned to what is owned. A high debt to equity ratio could indicate that the company may be over-leveraged that is they operate from borrowed funds, and should look for ways to reduce its debt or else earnings is due to creditors as payment for financial obligations. Differentiation. This term refers to a business strategy that involves providing a product or service that is distinct in some important aspect like the product attributes as design qualities valued by the customer. Liquidity Ratio. This is the total value of cash and marketable securities divided by current liabilities. For a bank, this is the cash held by the bank as a proportion of deposits to borrow or loans in he bank. The liquidity ratio measures the extent to which a corporation, or other entity can quickly liquidate assets and cover short-term liabilities, and therefore is of interest to short-term creditors. It is also called cash asset ratio or cash ratio (InvestorWords.com, 2005). This is used to assess a companys ability to meet its short-term obligation and remain solvent. Lenders are keenly interested in this ratio. They are also concerned with leverage and coverage ratios (Santos, 1999). This ratio also expresses a companys ability to repay short-term creditors out of its total cash. The liquidity ratio is the result of dividing the total cash by short-term borrowings. It shows the number of times short-term liabilities are covered by cash. If the value is greater than 1.00, it means fully covered, meaning for a peso loan, these is a corresponding peso asset for its immediate payment.

Industry Structure. It is the organization of the business with respect to rivalry among existing films, threat of new entrants and threat of substitute products or services, factors which affect the competitive advantage of the company. The SMEs are existing in an industry competing with one another. Industry Profitability. It is the productivity of the business environment as indicated or influenced by the bargaining power of buyer and bargaining power of supplier. Level of Performance of SMEs. As used in this study, this term pertains to condition of business competitiveness of small and medium-sized enterprises in Bataan which are reflected in their net income, return of investment, liquidity ratio and debt to equity ratio. Location. It is the accessibility of SMEs to their market and the viability of the business to its customers and clientele. Location also refers to the place in which buyers and sellers interact with one another. The convenience of location of business poses important factors in the patronage of the clients. Nature Business. Operationally, it refers to the economic or business activities of SMEs and its classification or features. In the study nature pertains to which the SME is of the buying and selling concern, whether it converts raw materials into finish products or whether it provides intangible goods which satisfy customers specific needs. It also refers to the type, sort, description or characteristics of SMEs in the second district of Bataan. Net Income. In business, this term refers to what remains after subtracting all the costs namely, operating expenses, and depreciation, interest, and taxes forms of

companys revenues. Net income is sometimes called the bottom line. This is also called earnings or net profit. For an individual, gross income minus taxes, allowances, and deductions. As individuals net income is used to determine how much income tax is owed. Primary Urban Centers. As used in this study, this term refers to towns or municipalities in Bataan which are either classified as first class or second class like city of Balanga, Mariveles and Limay. Positioning. Operationally, it includes the ability of the SME to attain the status and cost leader and maintain product or service differentiation- that is what they offer can meadily be distinguishes from competition. Return on Investment (ROI). As used in the study it refers to the measures of income or profit divided by the investment required to help obtain the income or profit. It is also a measure of corporations profitability, equal to a fiscal years income divided by common stock and preffered stock equity plus long term debt. ROI measures how effectively the firm uses its capital to generate profit; the higher the ROI, the better, (InvestorWords.com, 2005). More generally, this is the income that an investment provides in a year, which is clearly understood as the amount of money earned for every peso invested in the business. Rivalry Among Existing Firms. This term refers to the competition among existing firms or industry, it is the means how each firm is able to induce buyers buy or patronize their store/outlet. Secondary Urban Centers, Operationally. This term refers to the towns in Bataan which are classified as third class and below like Pilar and Orion. Although

secondary in nature, businesses like SMEs are sprouting here which indicative of its growth and development. Threat of New Entrants. It refers to the competitive force that affects the business strategy analysis caused by potentials of earning abnormal profits decline in expectation because new stores owned by their people were established in the same locality operation. The new entrants that are entering the business the structure and eliciting command over a considerable number of customers. Threat of Substitute Product. This term refers to a competitive force that affects the average level of profitability of a company. These forces are the existing business that offer the same products render same services. That causes brand shifting or changing. Small and Medium Sized-Enterprise (SMEs). As used in the study, it refers to the enterprise in the Second District of Bataan engaged in business industry, agriculture, and or any other services with a capital ranging from P/ 3 million to 1 million. Strategic Analysis. Operationally, this is an important starting point for the analysis of financial statements because it allows the analyst to probe economics of the firm at a qualitative level. Strategy analysis also allows the identification of the firms profit drivers and key. Working Capital. As used in the study, this term refers to current assets minus current liabilities. Working capital measures hoe much in liquid assets a company has available to build its business. The number can be positive or negative, depending on ho much debt the company is carrying. In general, companies that have a lot of working capital will be more successful since they can expand and improve their operations.

Companies with negative working capital may lack the funds necessary for growth. This is also called net current assets or current capital. Years of Operation. Operationally, this term refers to the number of years that a particular SME is in the business.

CHAPTER III

METHODS OF RESEARCH This chapter prevents the methods and techniques of the study, population and sample of the study, research instruments, data gathering procedure and statistical development of data which is used in the present study.

Methods and Techniques of the Study The study made use of the descriptive survey method. According to Sanchez (1999), this method is used in the researches which are directed towards ascertaining the preailing conditions, that is, facts that prevail in a group of cases chosen for study. This methos is essentially a technique of quantitative description of the general characteristis of the group. This approach to problem-solving seeks answers questions as to the real facts relating to existing conditions. Fabra (1999) defines it as a fact and adequate interpretation, which is something more, and beyong just data gathering, which means that the data collected should be reported form the point of view of the objective and the basic assumption of the project under way. He further stressed that data form a descriptive survey maybe used as basis for the inferences in aid of solving practical problems. According to Polit and Beck (2004), descriptive research has its main objective, which is the accurate portrayal of the characteristics of person, groups and/or frequency with which certain phenomenoa occur. Burns and Groove (1998) share the same

thought when they conclude that the objects of descriptive research are accurate observation. and assessment, which arise from the data that ascertain in the nature and influence of prevailing conditions and precautions or description of objects, processes and persons. Population of the Study The population of the study is based on the number of Small and Medium-Sized Enterprise in the 2nd District of bataan registered in Department of Trade and Industry (DTI) Bataan Provincial Office. It is consisted of 71 enterprises selected in the second district of bataan. The researcher employed the non-scientific purposive or deliberate sampling because the SMEs were chosen on the basis of capital ranging form P/3 million to P/1 million only because based on several literature the available capital determines the productivity of the enterprise. Table 1 presents the population and sample of the study. Table 1 Population and Sample of the Study Towns/City Owner Percentage Mariveles 31 100 Limay 3 100 Orion 6 100 Pilar 2 100 Bagae 2 100 City of Balanga 27 100 Total 71 100 It could be gleaned from the table that all of the identified SMEs in the target localities were made respondents of the studies. There were 31 SME- respondents in Mariviles, three (3) from Limay, six (6) from Orion, two (2) each from Pilar and Bagac and 27 from the city of Balanga.

Resesarch Instrument The researcher used the survey-questionnaire as the main for the gathering of data needed in identifying the profile of the enterprise and their perceptions on the effect of Strategic Analysis on the performance of SMEs. According to Burns ans Groove (1998) questionnaire is a printed self-repot form designated to elicit information that can be obtained through written or verbal responses of the subject. This is tend to be used in descriptive studies designed to gather a broad spectrum of information of subjects, such as facts about the subjects or about persons known by the subject and level of knowledge or intention of subjects. The questionnaire for enterprises consisted of three (3) parts. Part 1 is composed of company profile aimed to gather particular details about the companies such as registered name, the location, nature of business, and working capital of the business year in operations. Part II dealt with the areas of concern of the strategic analysis of SMEs which were described in terms of industry profitability which includes bargaining power of buyer and bargaining power of supplier and positioning which includes cost leadership and differentiation. Part II was measured using the following Likert Scale: Industry Structure Range Level of Effectiveness

61-75

(HE) Highly Effective

46-60 31-45

(VE) (E)

Very Effective Effective

16-30 1-15

(LE) (I)

Less Effective Ineffective

Industry Profitability Range 61-75 46-60 31-45 16-30 1-15 Positioning Range 61-75 46-60 31-45 16-30 1-15 Level of Effectiveness (HE) Highly Effective (VE) (E) (LE) (I) Very Effective Effective Less Effective Ineffective Level of Effectiveness (HE) Highly Effective (VE) (E) (LE) (I) Very Effective Effective Less Effective Ineffective

Summary of Strategic analysis of SME in relation to industry Structure, Industry Profitability and Positioning

Range 61-75 46-60 31-45 16-30 1-15

Level of Effectiveness (HE) Highly Effective (VE) (E) (LE) (I) Very Effective Effective Less Effective Ineffective

The scale states that the highest possible answer that a respondent can give is HE which have a descriptive rating of highly effective. The succeeding answers are VE answer is I which means ineffective. Part III is consisted of the level of financial performance in SMEs in terms of net income, return of investment, liquidity ratio, and debt to equity ratio. This is done in order to assess the profitability of the enterprises. Part III was measured using the following Liker Scale: For Net Income Less than P/ 500,000 More than P/500,000 but not over P/ 1 million More than P/1 million but not over P/ 5 million More than P/5 million but not over P/ 10 million P/ 10 million and above For return of Investment 10-20 percent 21-30 percent 31-40 Qualitative descriptions Not Satisfactory Less Satisfactory Satisfactory Very Satisfactory Outstanding Qualitative descriptions Not Satisfactory Less Satisfactory Satisfactory

41-50 51-60

Very Satisfactory Outstanding

For Debt to Equity Ratio Less than 10% More than 10% but not over 20% More than 20%but not over 30% More than 30% but not over 40% More than 40% and above

Qualitative descriptions Not Satisfactory Less Satisfactory Satisfactory Very Satisfactory Outstanding

For Debt to Equity Ratio Less than 10% More than 10% but not over 20% More than 20%but not over 30% More than 40% but not over 50% More than 50% and above

Qualitative descriptions Not Satisfactory Less Satisfactory Satisfactory Very Satisfactory Outstanding

Consturction and Validitation of the Instruments The survey-questionnaire, as designed by the researcher, includes items form books, articles of various SMEs topics from the World Wide Web. The bases of the questionnaire were the objectives, the problem and the conceptual framework of the

study. Aside from these bases, some parts of the questionnaire were adopted form of studies conducted by Dr. Chris Peterson, but the rest of questions were formulated by the researcher herself with the guidance of the adviser and critics and the reviewed literature. The constructed instrument was shown to persons of authority for validation. Based on the comments and suggestions of these persons, a final draft was prepared. However, before the survey-questionnaire was finalized, it was subjected to a dry-run to selected enterprises not included in the study. All the respondents were requested to answer all questions completely and to indicate items that appeared ambiguous or inappropriate. This was done to identify the weak points of the instrument. After revising the identified weak points and upon the approval of the researchers adviser, critic and dean of the graduate school, the instrument was reproduced for administration.

Data Gathering Procedure Upon careful validation of the researcher instrument by Bataan Peninsula State University (BPSU) authorities, the researches secured a permit to conduct the study from the Office of the University President. The researcher then proceeded to the actual interviews to the SMEs respondents in the 2nd District of Bataan. The researcher went personally to each named SMEs to secure the permission of the SMEs owners/officers for the participation of their enterprise in the study. The visit for purpose had started from January 30, 2008 to February 15, 2008. Though their assistance was selflessly given, it took the researcher a minimum of two visits to the different SMEs before the data collection was completed.

Data Processing and Statistical Treatment The raw data retrieved from the questionnaire were collected and tabulated manually and presented using appropriate tables. Data analysis and interpretation was made using the following statistical treatment with the assistance of a statistician. The profile of SMEs, areas of concern of strategy analysis and performance of SMEs and descriptive measures for the level of financial performance were presented using the frequency count and mean. Friedmans Two-Way Analysis of Variance (ANOVA) and T-test were used in testing the hypothesis.

Notes in Chapter III

Norberto F. Fabra, Elementary Statistics for Secondary Schools, (Las Pinas, Metro Manila, Fabra,N.F. Educational Books, 1999, p 64)

DF Polit and Beck CT., Nursing Research, Principles and Methods, 7th cd., (Philadelphia, Lippincott Williams and Wilkins, 2004) 716

C.A Sanchez, Ph.D. Methods and Techniques of Research, 3rd Edition Manila, 1999.

Nancy Burns and Susan K. Groove, Understating Nursing Research. Division of the Hart Court Brace and Company, New York, 1998.