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.