Strategic Planning, Do Strategic Planning Implementation in Small Businesses Affect the Level of Performance

The fourth article in the series deals with the assumption, that strategic planning implementation in small businesses raises the level of performance. A presentation of empirical studies from the past five decades will be used to clarify that issue.

Mayer and Goldstein (1961) studied the survival rate at the first two years of operation of eighty-one firms from service and retail industries. Underlie firms’ failure were lack of planning and coherent decision-making. Chigha and Julien (1979) conducted a longitudinal study on ninety industrial firms throughout the years 1968-1978 in which they examined the correlation between strategic planning and performance. Firms that implemented strategic planning at the highest level available showed significant increase in number of employees, sales and assets. Robinson (1979) examined the effect of strategic planning implementation on business performance in forty-two small businesses from the service industry. Results showed that strategic planning enhanced decision-making that led to significant increase in sales and profits, and significant decrease in debt to capital ratio. Robinson (1982) studied two groups of small firms; a first group that includes small businesses that implemented strategic planning using outside assistance (counselors, lowers, accountants, bankers) and a second benchmark group of small businesses that did not implemented strategic planning. The first group showed a significantly higher level of profitability, sales, return on sales (ROS) and number of full-time employees.




With the development of the research in that field, the classification of firms changed from dichotomous criterion to layers, when a layer of strategic planning was defined through the time length and sophistication in which the planning is conducted. Bracker and Pearson (1986) examined planning and financial performance of small firms, they sampled 188 small dry cleaning businesses, and defined four levels of strategic planning: 1. Unstructured plans – no measurable structured planning in the firm. 2. Intuitive plans – these informal plans are developed and implemented based on the experience and intuition of the owner of the firm. These plans are not written and are stored in the memory of the firm’s owner. They are of a short-term duration (no longer then one year) and based on the owner’s objectives and the firm’s present environment. 3. Structured operational plans – written short-range operation budgets and plans of action for current fiscal period. 4. Structured strategic plans – formalized, written, long-range (three to fifteen years) plans covering the process of determining major outside interests focused on the organization; expectations of dominant inside interests; information about past, current, and future performance; environmental analysis; and determination of strength and weaknesses of the firm feedback. Findings suggest for significant increase in revenue growth and in entrepreneurial compensation growth for firms that conducted structured strategic plans compare to the others. No significant differences found for the measure – labor expense/revenue growth. Rue and Ibrahim (1998) examined strategic planning and performance in 253 small businesses. Three levels of strategic planning were defined: 1. No written planning. 2. Basic written planning – consideration of external factors, quantitative objectives, budget. 3. Sophisticated written planning – in addition to paragraph 2, procedures for inspecting planning versus execution. Results suggested for significant difference between small businesses that implemented basic and sophisticate written planning compared to the others for the rate of increase in sales. No significant difference found for return on investment (ROI). Perry (2001) studied the effect of planning on firms’ failure using a sample of 152 pairs of small businesses, which resembled in age, size, location and industry. The distinction between the pairs of businesses was that one of each pair file for bankruptcy while the other was still in operation. Level of planning sophistication measured using five questions in ordinal scale; each question represents a single planning unit. Findings supported a significant difference at the level of planning between small businesses that file for bankruptcy and these that didn’t. Wijewardena et al. (2004) defined three levels of strategic planning – No written planning. Basic planning. Sophisticated planning. They found that the level of planning correlate positively with the level of sales growth. Yusuf and Saffu (2005) defined three levels of strategic planning – Low. Marginal. High. Unexpectedly, sales growth correlates to low level of strategic planning. No correlation was found between strategic planning and market share growth and growth in profitability.

The empirical studies’ review indicates for inconclusive findings regarding the correlation between strategic planning and small business performance. Moreover, including studies from several decades that examining different industries and using different measures both for strategic planning as well as performance; reinforce the conclusion that strategic planning implementation in small businesses does not guarantee higher level of performance. It’s not obvious that the more sophisticated and for long-term the strategic planning is the higher the level of performance is.

Strategic Planning, Analyzing the Differences between Small and Large Businesses

Through a discussion about why and how strategic planning in small businesses is different then in large businesses, this third article in the series is been used as a passage from an overall discussion regarding strategic planning to a targeted analysis focusing at strategic planning in small business.
Till the mid seventies a small business was considered as a large business regarding the managerial skills needed for its success. From the mid seventies we can note that scholars make the distinction between small and large businesses in terms of the level of sophistication and the scope of strategic planning.

Hofer (1975); Lindsy and Rue (1980) argue that the size of the firm is a significant indicator needed to take into consideration for designing an affective strategic planning. Furthermore, strategic planning as implemented in large firms doesn’t guarantee a similar results for small businesses and it may be inadequate for them. Welsh and White (1981) claimed that despite the common assumption among managers that small business can be regard as large business – except for smaller sales, assets, employees – here is that small businesses need a specific guidance for operating its managerial skills. Thurston (1983) wrote that managers in small businesses could adopt several approaches, starting from non-formal planning without written plans and ending with a fully formal planning that includes written plans.

Reviewing the way strategic planning is implemented in small businesses strengthen the notion about the need for unique approach toward strategic planning in small businesses. Hestings (1961) studied planning difficulties and implementation in 106 manufacturing firms. He found that in most firms planning was not formal. Moving forward the planning process caused major difficulties, likewise to allocate the necessary time for it. Still (1974) investigate the approach toward strategic planning in ninety-two firms from manufacturing and construction industries. His findings were: 1. Strategic planning was implemented in irregular and incomprehensive way. 2. The planning was not methodical. 3. Few people took part of the planning process. 4. Very occasionally the firm’s goals were taking into account. 5. The search for alternatives was with no inspiration and the tendency was to limit the search for more alternatives as soon as a good alternative was located. Cohn and Lindberg (1972) studied 106 small businesses and ninety-one large businesses in order to locate and define the differences concerning managerial aspects, findings reveled: 1. Planning was the hardest procedure for implementation. 2. Setting goals was the weakest procedure in small business planning. 3. Planning in small business consumed considerable amount of time. Shuman (1975) examine long-range planning in forty-one manufacturing firms, findings were: 1. Planning was informal, inconsistence and unstructured. 2. The planning based on insufficient and inadequate data. Robinson and Pearce (1984) ascribe the lack of strategic planning in small businesses to a limited knowledge in the planning process, lack of time, expertise and trust. Sexton and Van Auken (1985) reported that only a minority of the small businesses engaged in strategic planning, these that did plan showed instability and inconsistency with keeping the planning process over time.

To summarize the above, small businesses have a problem with the implementation of strategic planning due to lack of time, knowledge and expertise. When planning do carried out its output is insufficient and incomplete. Strategic planning in small businesses should take into consideration the strengths and weaknesses, competencies and disabilities of the small business.
The forthcoming articles in this series will enhance the discussion about strategic planning in small businesses in two aspects: 1. Do the implementation of strategic planning in small businesses affect the level of performance. 2. Tailor made step-by-step strategic planning for small businesses, an operative suggestion.

Strategic Planning, Definitions Used at the Empirical research

In continuance with the first article that presented a theoretical overview of strategic planning, the second article in the series has focused on the different definitions used by scholars while implementing the empirical research of strategic planning.

Researches at the early seventies classified firms according to dichotomous criterion – whether the firm implementing strategic planning. Thune and House (1970); Herold (1972) defined strategic planning as the definition of goals and strategies for a period of at least three years and the preparation of operation plan and procedures for achieving the goals. Rue and Fulmer (1973) argue that firm can be regard as strategic planner if it possess written plans that includes goals and long term strategies for a period of at least three years. Karger and Malik (1975) determine that firm can be regards as conducting strategic planning if it implementing a general five years plan and a detailed two years plan for the organization and its subsidiaries.

With the development of the research in that field, the classification of firms changed from dichotomous criterion to layers, when a layer of strategic planning was defined through the time length and sophistication in which the planning is conducted. Kallman and Shapiro (1978) ranked firms according to five categories based on the firm’s level of commitment to long term planning (more then one year), starting with firms that didn’t implemented any form of strategic planning to firms that implemented a detailed and written plans. Wood and LaForge (1979) ranked firms according to three categories based on the scope of long-term planning. Sapp and Seiler (1981) classify firms according to the wholeness of their planning posture. Four levels have been examined: 1. Not planning. 2. Beginner planners. 3. Moderate planners. 4. Sophisticated planners. Robinson and Pearce (1983) classify firms according to three levels: 1. No written plans. 2. Moderate sophisticated written plans for a period of at least three years, includes; goals and objectives, strategies, future resources analysis. 3. Highly sophisticated written plans, includes in addition to “moderate sophisticated”; procedures for reviewing planning versus execution, business environment analysis. Rhyne (1986) characterized five levels of strategic planning: 1. Short term forecast – definition of the short run operation outcomes (less then one year). 2. Budget – financial check-up on the planning outcomes (one year). 3. Yearly planning – identification of threats and opportunities in order to maximize the current year’s outcome (one year). 4. Long range planning - identification of threats and opportunities in order to maximize outcomes from operation for a longer period of time (five to fifteen years). 5. Strategic planning – identify Opportunities within the firm’s existing market or within new markets as well as identify potential threats to the current operation of the firm (five to fifteen years).

Another issue that rises from the literature and needs clarification is why scholars uses the concept “formal strategic planning” and when strategic planning becomes formal? Perry (2001) identified strategic planning using five levels ordinal scale, and an evaluation at each level whether the planning process end with a written outcome. This sort of evaluation is based on the assumption that planning becomes formal when it’s written.