Strategic and Operational Planning, Uncertainty, and Performance in Small Firms

(Tables and illustrations not shown) INTRODUCTION The relationship between strategic planning and organizational performance has been a subject of growing interest in the field of strategic management. Recent reviews have underscored the importance of the issue and have pointed to gaps in our knowledge of planning/performance relationships. ' A basic comclusion of these reviews has been that few studies have adequately addressed the issue because of measurement and conceptual problems. Of particular importance has been the manner in which the independent planning variables have been operationalized. Few studies have measured strategic and operational planning in ways that can be replicated. Furthermore, the dependent variable, performance, has been measured many ways and has seldom been examined over relevant time periods. Additionally, the literature has clearly highlighted the importance of organization context and uncertainty in determining planning/performance relations. Indeed, strategic planning has been considered more or less salient due to organization type, relevant industry, and environmental uncertainty. The purpose of the present study is to partially address these concerns. The study examines strategic planning/ performance relationships for a stratified random sample of small firms in three major industry sectors over a three-year time period. It also is an investigation of the degree to which environmental uncertainty affects both strategic and operational planning. Specific issues addressed in the study include: (1) the relationships of strategic planning, and operational or functional area planning with performance over time for small businesses using a planning scale which measures degree of planning effort and degree of formality, as well as scales measuring functional area planning efforts; (2) and the differences in strategic planning/performance relationships and in environmental uncertainty in manufacturing, retail, and service sectors. Strategic Planning and Performance We conceive of a strategic plan as: a written long-range plan, which includes both a corporate mission statement and a statement of organizational objectives. A strategic plan includes strategies indicating how objectives will be accomplished. Strategic planning is also considered to provide the substance from which overall company performance can be controlled and measured. Operational planning, on the other hand, is defined as the setting of short-term objectives for specific functional areas such as finance, marketing, and personnel. Strategic plans are more general and have longer time horizons than do operational plans. Strategic plans normally cover a one-to-five-year time period, whereas operational plans cover periods of less than a year. Operational plans are expressed in more day-to-day terms. Operational plans might include written inventory and sales forecasts; and financial, human resource, and advertising budgets; for monthly or quarterly time periods. A number of early studies have suggested a simple positive relationship between formal strategic planning and organizational performance, and have generally concluded that planners outperformed nonplanners, the premise being that formal plans are superior to informal plans because the process of writing the plan forces ideas and objectives to be thought out. Indeed, a recent study by Robinson and Pearce suggests that the more sophisticated the planning process, the better the organizational performance. 7 Other studies suggesting a positive relationship between strategic planning and performance have been numerous. However, not all research has yielded positive results. Several recent studies have found either non-significant or negative relations. As an explanation of inconsistent findings, several reviews have concluded that variety in the measurement of strategic planning has precluded meaningful comparison of findings across studies. …