The Relationship between Planning Sophistication and Performance in Small Businesses

Article excerpt

Interest in the relationship between planning and organizational performance began in the late 1960s. Although a large body of this research has concentrated on large firms, numerous articles in academic publications as well as practitioner-oriented journals have recognized the importance of planning for small businesses. The articles can be classified in two main streams: the first contends that planning improves profitability (Aram and Cowen 1990), and the second stream recognizes that good planning is a key to success (Branch 1991; Brokaw 1992; Hillidge 1990; Knight 1993).

The literature strongly supports the argument that, in small business, planning is a key issue. Planning not only increases the success rate (Jones 1982), but it also affects the level of performance (Schwenk and Shrader 1993). This idea was also supported by Bracker and Pearson (1986), who identified different levels of performance associated with different levels of planning. In parallel with those findings, the results of a meta-analysis conducted by Schwenk and Shrader (1993) identified the presence of moderating variables on the effect of strategic planning on performance in small firms.

Over the past 35 years, much of the research on the relationship between planning and organizational performance has been examined by two separate streams of research. One stream investigated the relationship between performance and the content of plans, and another examined the relationship between the planning process and performance. Both have led to equivocal results (Schwenk and Shrader 1993).

Analysis of the content of strategic plans began with case studies, mostly of large firms (Hofer 1976), followed by studies of single industries (see, for example, Hatten 1983). Subsequently, large firms across industries were examined to develop typologies of generic business strategies, applicable in all industries (Abell and Hammond 1979; Hofer and Schendel 1978; Miles and Snow 1978; Porter 1980). Generic typologies provide a common set of business strategies from which firms can select the most appropriate strategy, depending on their respective strengths and weaknesses relative to competitors (White and Hamermesh 1981). Some relationships between content and performance have been shown; however, the generalizability of the findings has been challenged (Abernathy and Wayne 1974; Harrigan 1983; Hofer 1975).

Although the content-performance relationship continues to be a popular research topic, interest in the process-performance linkage has waned in recent years (Robinson and Pearce 1988). A review of the leading management and strategy journals, from 1985 through 1990, found only thirteen articles concerning the process-performance relationship, while many focused on content and strategic typologies (Robinson and Pearce 1988). The lack of published studies may signify premature abandonment of this stream of research, before there is an understanding of the contingency relationships between planning processes and performance.

The earliest studies investigating the link between planning and performance categorized firms according to the formality of the planning process. Thune and House (1970) and Herold (1972) compared the performance of firms according to the thoroughness of the planning process. Rue (1973) examined the planning practices of 386 manufacturing and service firms using the term "planning sophistication," referring to the completeness of the planning process used by the organization. Firms were classified as either "impoverished," "programmed," or "progressive." Subsequent research attempted to further develop classification schemes using from two to five categories (Kudla 1980; Robinson and Pearce 1983; Rhyne 1986; Bracker and Pearson 1986). These studies used a variety of criteria for classification, but the most common indicators of a formal planning process were the presence of a written long-range plan covering at least three years, the formulation of goals and strategies, and some method for evaluating progress toward the plan. …