A Longitudinal Study of Small Business Strategic Planning

Article excerpt

A small but growing body of research is addressing the important issue of small business strategic planning. Planning in large corporations has been studied extensively, but only recently has the process been studied in smaller firms, which numerically dominate the American business scene. This article reports on a longitudinal study of strategic planning among a sizable sample of small firms in Texas.

REVIEW OF THE LITERATURE

Small business planning behavior has been characterized as unstructured, irregular, and comprehensive, and as incremental, sporadic, and reactive. The small business manager's goals have been described as "vague or inadequately defined, and . . . generally pragmatic and short-range."

In one of the first empirical studies of small business planning, Mayer and Goldstein concluded that lack of systematic planning was a major reason for small business failure. In a more recent study, Potts examined twenty-one successful and twenty-one unsuccessful small manufacturers over a five-year period. He discovered that the successful firms made much more extensive use of outside accounting and financial services.

Robinson also assessed the importance of outsiders to small business success, finding that small firms which engaged in "outsider-based" strategic planning achieved significant performance improvement in profit, sales growth, employment, and productivity. In a more recent study, however, Robinson and Pearce investigated the relationship between planning and performance in fifty small South Carolina banks. They found no significant differences in financial performance between the banks that engaged in strategic planning and those which did not.

In a 1981 study of 357 small companies in Texas, it was found that only a small minority of firms carried on true strategic planning, defined as: anticipating sales levels, estimating local industry sales levels and the firm's net profits, and planning to accommodate anticipated changes in sales and profits. A sizeable percentage of the sample, however, did engage in less rigorous types of planning. The results reported in this article are derived from a follow-up longitudinal study of that 1981 sample of Texas firms.

METHODS

In 1981, the authors classified 357 Texas small businesses according to the degree of strategic planning they exhibited. Interviews were conducted with the owners or chief executives of each firm. The firms were classified according to five levels of planning:

Strategy level 0 (SL0): no knowledge (predictive ability) of next year's sales, profitability, or profit implementation plans.

Strategy level (SL1): knowledge only of next year's sales, but no knowledge of coming industry sales, company profit, or profit implementation plans.

Strategy level 2 (SL2): knowledge of next year's company and industry sales, but no knowledge of company profit or profit implementation plans.

Strategy level 3 (SL3): knowledge of company and industry sales and anticipated profit, but no profit implementation plans.

Strategy level 4 (SL4): knowledge of next year's company and industry sales, anticipated company profits, and profit implementation plans.

Only those firms designated SL4 were true strategic planners; i.e., they not only planned ahead for changing levels of sales and profit, but also made specific plans for attaining the anticipated sales and profit levels. Strategic planning was thus defined as managerial planning designed to adapt a small firm to its external environment in a manner perceived to achieve sales and profit goals.

Table 1 summarizes the 1981 strategy level classifications arranged by standard industrial code (SIC). Only 18 percent of the sample's small firms attained the SL4 level of strategic planning.

Two years later, in 1983, interviews were again held with the same sample to determine each firm's level of strategic planning. …