Strategic Plan Quality, Implementation Capability, and Firm Performance

ABSTRACT This paper extends research on strategic plan quality, implementation capability, and firm performance. Specifically, banks pursue cost leadership, differentiation, and focus strategies consistent with Porter's typology and cost leaders realize significantly higher performance than those that do not pursue a generic strategy. When strategic groups are divided by intensity of the strategic plan quality and implementation capability effort, banks that follow one of the Porter generic strategy types and report both high plan quality and high implementation capability achieve significantly higher levels of performance than their low plan quality and low implementation capability counterparts. INTRODUCTION While implementation of strategy is critical to firm success, most strategic management models inadequately emphasize the relationship between strategy formulation, quality, and implementation (Day and Wensley, 1983; White, 2008). This lack of emphasis is significant as the capability of an implementation effort is important to the achievement of superior performance (Crittenden and Crittenden, 2008; Noble, 1999; Singer, 2008). Despite this relationship between implementation and performance, often strategic planning becomes a formality as opposed to a vital and implemented process (O'Regan and Ghobadian, 2007). While a sizeable body of literature exists in the area of strategy formulation (Borch, Huse, and Senneseth,1999; Campbell-Hunt, 2000; Dess and Davis, 1984;Porter, 1980, 1985; Miles and Snow, 1978;Mintzberg, 1988; Robinson and Pearce, 1988), limited research attention has been given to implementation's role in strategic planning success (Chebot, 1 999; El-Ansary, 2006; Khalil, Kim, and Shin, 2006; Noble, 1 999; Tsai, Fan, Leu, Chou, and Yang, 2007). This paper examines how the interaction of strategic plan quality and implementation capability impacts performance at financial service firms. In an early study, Burt (1978) identified a link between strategic plan quality and firm performance, but regrettably, subsequent research was not conducted in this area. The present research builds upon Burt's study and advances the strategic management research stream by first identifying firms that follow a common strategic direction (cost leadership, differentiation, or focus), and then by assessing how firm performance is impacted within identifiable strategic groups as a result of differences in strategic plan quality and implementation capability. The results indicate that banks convert competitive methods in a way that conforms to a cost leadership, differentiation, or focus generic strategy type. The cost leadership group's performance is significantly different compared to the stuck-in-the-middle strategy group, whereas other strategy group comparisons were found to be not significant. This study is an important first effort to investigate the interaction of strategic plan quality and implementation capability on firm performance. The results indicate that there is a significant performance advantage associated with strategic plan quality and implementation capability. Banks that report both high strategic plan quality and high implementation capability generate statistically superior ROAs when compared to those that report low strategic plan quality and low implementation capability. STRATEGIC MANAGEMENT LITERATURE Managers of profit seeking organizations strive to maximize firm performance (Rappaport, 1981). Strategic planning enhances firm performance (Bowman and Helfat, 2001) and its implementation is necessary for value creation (El-Ansary, 2006). It can also serve as a tool to engage various members of the organization in the achievement of its goals (Vilda and Canales, 2008). It must be kept in mind, however, that managers often tend to underestimate the difficulties associated with strategy implementation (Speculand, 2006). Strategic initiatives are a key aspect of profitable performance in the financial services industry (Young 1999; Devlin 2000) making this industry appropriate to study. …