Untangling the Relationship Between Strategic Planning and Performance: The Role of Contingency Factors

Strategy researchers have devoted considerable attention to the relationship between strategic planning and performance, with over 30 empirical studies appearing since the publication of Thune and House's study in 1970. This literature has been reviewed extensively by Armstrong (1982), Pearce, Freeman, and Robinson (1987), and Shrader, Taylor, and Dalton (1984). The reviewers agree that findings in this research stream are nearly impossible to reconcile. For example, Shrader et al. (1984, p. 154) concluded that "there is no clear systematic relationship between long-range planning and organizational performance," and Pearce et al. (1987, p. 671) concluded that "empirical support for the normative suggestions by strategic planning advocates that all firms should engage in formal strategic planning has been inconsistent and often contradictory." Although the problems vary from study to study, the reviewers have focused on two methodological shortcomings, namely, poor measurement of strategic planning processes and the neglect of important contingency variables such as firm size, industry, and generic strategy. This study attempts to untangle the planning-performance relationship by introducing valid, reliable measures for key strategy-making constructs, and by investigating the role of contingency variables in moderating the planning- performance relationship. The following section provides a brief review of the planning-performance literature, and subsequently introduces the contingency variables and hypotheses. The empirical findings are then presented and discussed, along with their implications or researchers and practitioners. STRATEGIC PLANNING AND FINANCIAL PERFORMANCE Planning adherents have widely asserted that formal strategic planning provides important benefits to firms (Steiner, 1979; Thompson & Strickland, 1987). It generates information, ensures a thorough consideration of all feasible options, forces the firm to evaluate its environment, stimulates new ideas, increases motivation and commitment, enhances internal communications and interaction, and has symbolic value, reassuring stakeholders (such as creditors, potential customers, and the investment community) that the firm has set a confident, proactive course for the future. Since a firm would presumably be more profitable with these characteristics than without them, strategic planning is said to have financial performance consequences for the firm. However, even planning adherents such as Steiner (1979) concede that formal planning is not a costless activity, and that these costs must be weighed against the benefits just mentioned. For example, a strategic planning program that entails a staff person or department devoted exclusively to formal planning incurs significant, direct human resources expenses. If planning is done by line managers, the expense is less direct, but may be greater overall, since it removes managers from operations to gather information, attend committee meetings, and produce reports. This expense becomes far greater as senior managers become involved in the planning process. Of course, consultants can be hired to produce strategic plans, but this also is expensive, and researchers and practitioners are unanimous in their contempt for strategic plans prepared without the involvement, and consent, of top management and relevant line managers (Andrews, 1980; Quinn, 1980). Organizational scholars have also argued that formal strategic planning deludes managers into a false sense of control and security, and obscures outworn assumptions, producing the strategic "blind-spots" and complacency that inevitably lead to crises (Miller, 1990; Starbuck, Greve, & Hedberg, 1978). Moreover, Brunsson (1982) has argued that formal planning threatens organizational well-being by delineating environmental uncertainties, producing internal conflicts, creating a confusing array of alternatives that cannot be rationally compared (in part because their consequences are unknowable), and focusing explicitly on negative data (e. …