Research shows a rather consistent, positive relationship between the extent of planning activities and the performance of small businesses (Robinson and Pearce 1984). This relationship is found despite differing definitions of small businesses, ways of assessing formality of planning, and types of performance measures utilized. However, Robinson and Pearce (1984) called for increased study of the relationships among planning formality, strategy content, and firm performance, thereby encouraging a more complex view of strategic management processes and results in small firms.
The primary purpose of this study is to examine the relationship between planning formality and three other elements--the process by which the strategic decisions are made, the content of small firm strategies, and firm performance. It is proposed that small firms which do more formal planning will also have a more comprehensive strategic decision process and adopt a wider variety of alternative strategies than will non-formal planners. This increased attention to the decision process and the consideration of more strategic options may be associated with higher levels of growth and profitability for the formal planners.
MEASURING THE FORMALITY OF PLANNING PROCESSES
In previous research dealing with the formality of planning in large businesses, the typical approach has been to: a) define the planning system elements; b) measure the formality of the elements; c) develop a formality scale; and d) categorize firms based on their scores on the formality scale. Formality has been measured by assessing such things as the degree of planning manual usage, the amount of emphasis on developing written plans, and/or the existence of specific schedules for formulating plans (Wood and LaForge 1981; Grinyer, Al-Bazzaz, and Yasai-Ardekani 1986; Rhyne 1986; Ramanujan and Venkatraman 1987; Fredrickson 1984).
Previous research on small businesses has concentrated more on identifying broad, formalized, planning categories rather than on measuring differences in formality in terms of one- or two-point differences on a planning formality scale. Bracker and Pearson (1986) identified eight planning components: objective setting; environmental analysis; strengths, weaknesses, opportunities, and threats (SWOT) analysis; strategy formulation; financial projections; functional budgets; operating performance measurement; and control procedures. Based on the presence of these components in small firm planning, they developed four levels of planning sophistication including structured strategic planning, structured operational planning, intuitive planning, and unstructured planning. Then they compared financial performance between structured (formal) strategic planners and the other groups. Similarly, Robinson and Pearce (1983) grouped small firms into broad planning categories based on the extent of written documentation and inclusion of various planning steps.
This broader definition of planning formality is important in order to reflect the entrepreneurial thought processes and actions that permeate the small organization. The direct application to smaller firms of planning formality measures developed in large, bureaucratic companies is inappropriate. Therefore, in this study, planning formality is conceptualized and measured in a manner relevant to small businesses so that the formal structuring of their long-term plans as well as the thoroughness of their planning system is captured.
STRATEGIC DECISION PROCESS
Fredrickson (1984, 1986) argues that planning formality does not represent what actually occurs during the strategic decision process. Following his argument, planning formality and the decision process utilized may be two separate constructs. It is possible to have a highly formal planning system that is not associated with comprehensiveness in the decision process. Therefore, while each of these constructs can be studied separately, the relationship between them may also be the focus of study. …