Effects of Formal Strategic Planning on Financial Performance in Small Firms: A Meta-Analysis

Article excerpt

Small businesses are the backbone of the U.S. economy, accounting for more than half of total employment and over eighty percent of employment growth in the past decade (Wheelen & Hunger, 1989). Small firms are also often innovative and challenging to manage strategically (Dollinger, 1985; Bracker & Pearson, 1986; Carter, 1990). Consequently, it is important to assess the value of techniques like strategic planning for improving the performance of these firms.

There is a growing body of literature examining the effects of formal strategic planning on the financial performance of small firms (e.g., Robinson, Pearce, Vozikis, & Mescon, 1984; Bracker, Keats, & Pearson, 1988; Shrader, Mulford, & Blackburn, 1989). There are also numerous field studies examining the effects of various forms of strategic and operational planning activities on a variety of financial performance measures for both large and small firms (Robinson & Pearce, 1984). Researchers who have undertaken these studies, especially those of small firms, have drawn conflicting conclusions: some claim that formal strategic planning provides structure for decision making, helping small business managers take a long-term view, and, in general, benefits small firms; others conclude that formal strategic planning has no potential payoff for small firms because it is a heady, high-level, conceptual activity suited solely to large firms and therefore has no effect on the financial performance of small firms.

This controversy is interesting and there is much to be gained from the subjective debate over these issues. Given the number of studies addressing the subject, however, it may be fruitful to apply quantitative methods to the review of past research. Meta-analysis is a logical next step because it allows for the comparison of findings across studies. The use of meta-analysis makes it possible to draw clearer and more consistent conclusions from the body of literature on the effects of formal strategic planning on small firm performance than have been drawn from previous literature reviews.

In this paper, past reviews on formal planning and research on planning/performance relationships in small firms will be summarized. This summary will be followed by a discussion of the basic tenets of meta-analysis and an application of this technique to the results of past studies. Finally, general conclusions and suggestions for future research will be offered.

PAST RESEARCH ON FORMAL PLANNING AND FIRM PERFORMANCE

In the last fifteen years, there have been at least six reviews of the literature on the effects of formal planning on financial performance. The first was Hofer's broad review of strategic planning research (Hofer, 1976), the purpose of which was to point to gaps in knowledge rather than compare findings across studies. In this vein, Hofer reviewed the literature addressing costs and benefits of formal planning and concluded that formal planning probably had a beneficial impact on the content of plans. Hofer did, however, express concerns over the lack of rigor in this stream of research and suggested that future research should employ methods that would allow cross study comparisons.

Armstrong's 1982 review of twelve strategic planning and performance studies included a detailed examination of the formal planning independent variable. Armstrong compared studies as to whether they considered five component parts of the formal planning process: (1) setting of objectives, (2) generating strategies, (3) evaluating strategies, (4) monitoring the process, and (5) commitment to the process. Armstrong also compared studies on the bases of the situation and results, and then used the ratings of experts to assess the results of formal planning, cautiously concluding that formal planning benefitted firms.

Shrader, Taylor, and Dalton (1984) came to a different conclusion from Armstrong. Their comprehensive review of over sixty studies classified the planning and performance literature into three categories: formal long-range planning and performance, planning typologies and performance, and planning salience and performance. …