The Effects of Long-Range Planning on Small Business Performance: A Further Examination

Despite the widely held view that long-range planning can improve a firm's performance, several studies have found no differences in the performance of planning and nonplanning firms. However, two early--and widely reported--studies found that firms which engaged in formal planning performed better than other firms within the same industries which did not. These mixed results argue for further research to identify the conditions under which formal planning will or will not improve business performance. The present study examines the effects of long-range planning on small business perforamnce over a period of three years in an attempt to discover some of these conditions. A major problem with earlier research into the impact of planning on performance was the arbitrary classification of firms as formal or informal planners. As Hofer and Schendel have shown, these studies employ no consistent definition of "formal planning" and how it differs from "informal planning. Investigators typically ask respondents, via questionnaire, to indicate how often they, or their firms, engage in formal planning and whether or not they feel that planning contributes to the firm's success. This way of distinguishing between planning and nonplanning firms is suspect for at least two reasons. First, since planning is generally thought of as desirable, respondents may exaggerate both the amount of time they spend on planning and its impact on the firm's performance. Second, this method of estimating the extent and nture of planning relies on the manager's capacity to accurately recall time spent on already completed activities. Unfortunately, even the best memory is subject to lapses and distortions. These problems can significantly affect the validity and reliability of research results. For exmaple, two recent studies have compared the percentage of time managers estimate that they spend on various activities versus the percentage of time they actually do, based on daily diary entries and direct observation. In both of these studies, managers' estimates deviated widely from the times recorded in their own diaries and the judgments of those who observed them at work. A final difficulty with most previous studies of the impact of planning is that they have been restricted to large corporations, chiefly in the United States. No study of the effect of planning on performance has been conducted in small businesses other than those in which the impacts of planning have been assessed only by the managers themselves. METHOD The present study compares the performance of small businesses which engage in long-range planning with that of firms which do not. Data for previous studies were obtained using a single questionnaire, whereas data for the present study were collected in two stages. First, the senior managers of the sample firms kept daily diaries over a six-week period which were later examined by three independent judges, each of whom estimated the proportion of time each manager spent on long-range planning. A second data base was collected at the end of the research, when the same managers completed a brief questionnaire. The questionnaire required managers to estimate the amount of time spent on long-range planning. These two measures of planning were each compared to indicators of company perforamnce (sales growth and return on assets) over the next three years. Besides examining differences in the performance of planning versus nonplanning firms, two groups were compared with respect to: (1) the organizational structure of the planning function; (2) the prevailing attitude toward long-range planning on the part of the senior manager in each firm; (3) the content of the plans and the frequency of their revision; and (4) the perceived benefits and problems associated with long-range planning. The Sample The subjects of the study were fifty-eight senior managers, typically the owner-managers, of fifty-eight small businesses of different types. …