STRATEGIC PLANNING EMPHASIS AND PLANNING SATISFACTION IN SMALL FIRMS: AN EMPRIRCAL INVESTIGATION Javad Kargar John A. Parnell North Carolina Central University Durham, NC Abstract Most empirical studies examining strategic planning effectiveness have fo- cused on its impact on financial performance. However, solid empirically-based conclusions concerning the usefulness of strategic planning have not yet emerged. The present study takes an alternative perspective, examining two dimensions of executive satisfaction with strategic planning. Results support a link between seven strategic planning characteristics and planning satisfaction among small firms. Introduction According to a recent Business Week (1992:60) special edition, "change can [no longer] be an occasional episode in the life of a corporation. Compa- nies with rigid structures will be swept away. Corporate cultures that can adapt will survive and thrive... " Flexibility-as well as the related constructs of speed, adaptability, and change-has been touted as a key tenet of the "para- digm for the postmodern manager" (Byrne, 1992:62). To yield positive results, change and flexibility necessitate prior effective strategic planning. However, researchers have not yet conclusively determined why some planning efforts are more successful than others in meeting this challenge. The present study examines the relationship between various facets of strategic planning and performance in small community banks. Drawing on the planning literature, this article suggests that planning-performance research on small firms can produce meaningful results. Strategic Planning and Performance Over the past decade, researchers have investigated the effects of formal strategic planning on financial performance in small firms. Many have con- cluded that there is no consistent association between the strategic planning process and performance (Cappel, 1990; Greenley, 1986; Leontiades & Tezel, 1980; Orpen, 1985; Robinson & Pearce, 1983). In response to studies high- lighting the impact of strategic planning on firm performance (Karger & Malik, 1975; Rhyne, 1986; Sapp & Seiler, 1981; Welch, 1984), recent research has 2 Journal of Business Strategies Vol. 13, No. 1 seen a greater emphasis on the strategic process rather than only on the strat- egy content that Hofer (1975) proposed in his early study. Steiner (1979) provided a thorough conceptualization of strategic planning. According to Steiner, planning is an attitude and a process concerned with the future consequences of current decisions. Formal strategic planning links short, intermediate, and long-range plans. Strategic planning does not attempt to make future decisions or even forecast future events. It need not replace managerial intuition and judgment with massive, detailed sets of plans. Steiner argued for the importance of strategic planning, providing keen insight into overcoming the barriers and biases associated with planning fail- ures. However, research by Steiner and others is founded in the critical as- sumption that planning is important. But the debate rages on in the literature. The key question remains: Is there really a link between planning and perfor- mance? The literature is inundated with the apparent advantages of planning, most notably its ability to improve the fit between the organization and its external environment (Godiwalla, Meinhart, & Warde, 1981). Others have argued that planning aids in the identification of future marketing threats and opportuni- ties, elicits an objective view of managerial problems, creates a {ramework for internal communication, promotes forward thinking, and encourages a favor- able attitude to change (Hausler, 1968; Loasby, 1967; Stern, 1966; Wilson, 1979). Further, there are intrinsic benefits that accrue as a result of the plan- ning process, including the positive effects of planning on local employment and the economy (Greenley, 1986). Langley (1988) also provided support for the benefits of planning, identi- fying four roles of formal strategic planning. In the public relations role, for- mal strategic planning is intended to impress or influence outsiders. The in- formation role provides input for management decisions. The group therapy role is intended to increase organizational commitment through the involve- ment of people at all levels of the organization in strategic planning. Finally, the direction and control role is fulfilled when plans serve to guide future de- cisions and activities toward some consistent ends. According to Roach and Allen (1983), the strategic planning process is the product of the best minds inside and outside the corporation. The process considers future implications of current decisions, adjusts plans to the emerg- ing business environment, manages the business analytically, and links, directs, and controls complex enterprises through a practical, working management sys- tem. This process plays a vital role in firm performance (Roach & Allen, 1983). Cartwright (1987) suggested that effective planning is not as rational and analytical as it has been portrayed in the literature. He argues for the lost art (rather than science) of planning. He contends that planning is both (1) a ge- neric activity whose success determinants are partially independent of the area in which it is applied, and (2) an area where judgment, intuition, and creativ- ity are still important. Spring 1996 Kargar & Parnell: Strategic Planning in Small Firms 3 Robinson and Pearce (1984) argued that fonnal strategic planning is a conceptual activity suited solely to larger finns and therefore has no effect on the financial perfonnance of small finns. Wortman (1986) reviewed a set of small business planning-perfonnance studies in the context of a broad survey of the methodologies employed in the small business literature. Wortman de- veloped typologies but did not focus on the particular issue of the effect of fonnal strategic planning on small finn perfonnance. However, he clearly ad- dressed the need for continued refinement in planning-perfonnance relation- ships and recommended the use of sophisticated statistical techniques for ad- dressing such substantive research questions. Greenley (1986) agreed with Robinson and Pearce and others to follow (Cartwright, 1987; Langley, 1988; Ramanujam & Venkatraman, 1987), but pro- vided an alternative perspective, suggesting that there may not even be a posi- tive relationship between planning and perfonnance. Specifically, Greenley noted the face validity of the planning-perfonnance linkage, but reports that existing empirical data has not yet substantiated the relationship. Ramanujam and Venkatraman (1987) provided limited support for Greenley's contention. However, their empirical analysis of high and low per- fonning finns elicited significant differences between the groups that relate to the planning process. Specifically, their research examined the quality of the planning. For example, high perfonning finns tend to commit resources to planning and promote line-staff cooperation substantially more than low per- fonning finns. Low perfonners may plan; they just may not plan effectively. Pearce, Freeman, and Robinson (1987) examined the perceived substan- tive contributions of each of eighteen existing studies, concluding that empiri- cal support for the nonnative suggestions that all small finns should engage in fonnal strategic planning has been inconsistent and often contradictory. In a similar vein, Schwenk and Shrader (1993) recently meta-analyzed fourteen studies on fonnal strategic planning and perfonnance in small finns. While they did not find that planning necessarily improves perfonnance, they argued against the assertion that strategic planning is only appropriate for large finns. As such, they concluded that strategic planning promotes long-range thinking, reduces the focus on operational details, and provides a structured means for identifying and evaluating strategic alternatives. Since this was the first review that clearly demonstrated the planning-perfonnance link across studies, it strengthened the case for recommending the use of strategic planning in all finns, regardless of size. Sinha (1990) appears to have empirically established some kind of a plan- ning-perfonnance linkage. Sinha examined 1087 decisions made by 129 For- tune 500 finns between 1982 and 1986. He concluded that characteristics of the decisions accounted for 15 percent of the variance in data and therefore should be regarded as important detenninants of the contribution planning makes to decision making. However, Sinha concedes that the quality of plan- ning is critical to the relationship. 4 Journal of Business Strategies Planning and Strategic Change Vol. 13, No.1 There are three frequently cited reasons why top managers pursue changes in strategy (Parnell, 1994). First, a change in strategy may appear attractive because desired performance levels are not being attained by the organization. In many cases, top managers may believe that a change in strategy will im- prove the ability of the business to generate revenues or profits, increase mar- ket share, and/or improve return on assets or investment. Many studies have concluded that declining profitability is the most common catalyst for strate- gic change (Boeker, 1989; Webb & Dawson, 1991). Second, an environmental shift may necessitate strategic change to main- tain alignment. Such shifts may result from changes in either the macroenvironment (e.g., new regulations, social forces, demographic changes, etc.) or the industry environment (e.g., new competitors, changes in competi- tor strategies, etc.). Changes in competition and technology necessitate a change in the knowledge base within the organization if it is to survive (Whipp, Rosenfeld, & Pettigrew, 1989). According to the population ecology perspective (Hannan & Freeman, 1977~ Ulrich, 1987), the environment deter- mines which organizations will survive and which ones will not. New firms better suited to the changing environment constantly replace existing ones. Competitors constantly struggle for existence by seeking to procure additional resources. As such, strategic change can be seen as a means to access addi- tional resources and survive in a turbulent environment (Aldrich, McKelvey, & Ulrich, 1984). Third, strategic change can enhance effective resource utilization (Barney, 1991; Lado, Boyd, & Wright, 1992). Proponents of the resource-based perspec- tive have noted that competitive advantage often occurs from such organiza- tional attributes as informational asymmetries (Barney, 1986b), culture (Barney, 1986a; Fiol, 1991), resource accumulation (Dierickx & Cool, 1989), and the minimization of transaction costs (Camerer & Vepsalainen, 1988). Hence, as organizational human and capital resources evolve, changes in strategy become necessary to fully utilize the resources available to the organization. Resource shifts necessitating strategic change are more prevalent in some organizations than in others. Researchers have found that organizational per- formance, age, and length of tenure of the founding entrepreneur influence the degree to which a founding strategy endures and thus, the prospects for stra- tegic change (Boeker, 1989). In fact, new CEOs are often recruited to attempt strategic changes upon entering the organization (Greiner & Bhambri, 1989). Benefits and Costs of Strategic Change There are three potential benefits of strategic change that are commonly cited in the literature. First, strategic change can enhance the strategy-environ- ment fit. For example, Calingo (1989) found that the low cost leadership strat- egy was most successful in price sensitive markets, whereas the differentia- Spring 1996 Kargar & Parnell: Strategic Planning in Small Finns 5 tion strategy was most successful when consumers perceived great differences among product offerings. Second, strategic change can open new dimensions of competitive advantage previously untapped by competitors. These first mover advantages result from the willingness of an organization to enter a new market or develop a new product or service prior to the competition (Gannon, Smith & Grimm, 1992; Lieberman & Montgomery, 1988; Mascarenhas, 1992; Wemerfelt & Kamani, 1989). Finally, strategic change can improve an organization's ability to adapt by forcing healthy changes within the business. The initial pain associated with change may be offset by the emergence of a lean, rejuvenated organization with a fresh focus on its goals and objectives. On the contrary, organizations that maintain strategic consistency over time may become stagnant, limiting the creativity and potential contributions of its members (Grimm & Smith, 1991; Wiersema & Bantel, 1992). Regardless of the potential benefits, four potential costs that may be in- curred as a result of strategic change have received considerable attention in the literature. First, strategic change increases perceived risks; a change in any key strategic, environmental, or organizational factor requires that the business develop a new "formula" for success suited to the change (Gaertner, 1989; Yoshihara, 1990). Second, change can disrupt the strategy-culture alignment (Green, 1988; Scholz, 1987; Schwartz & Davis, 1981). Although the organi- zational culture may be changed (Saffold, 1988; Schein, 1990) to reflect and support the change in strategy, the period of time required to do so is likely to take several years (Lorenz, 1988; Saffold, 1988; Schein, 1985; Scholes, 1991). Third, measures required to implement a change in strategy may ne- cessitate the outlays of capital (Miles & Snow, 1978). Finally, strategic change may result in consumer confusion as they begin to alter their perceptions of the organization's products and services. Even when strategic change results in a successful new product or ser- vice, there is no assurance that this success can be maintained. Indeed, com- petitors may distort consumer perceptions and reap the benefits of the initial strategic change. For example, many consumer goods companies implement an "imitation strategy" (Foxman, Muehling & Berger, 1990). As a result, many consumers purchase the imitation product thinking it is the original. If the con- sumer dislikes the product, this dissatisfaction can be transferred to the origi- na1. If the consumer likes the product, the consumer may realize that the prod- uct is an imitator and transfer the positive associations with the original prod- uct to that of the imitator. Either scenario can prove costly to the originator (Loken, Ross & Hinkle, 1986). Constructs and Propositions Empirical studies in small firms have generally employed a single dimen- sion measure such as the presence or absence of planning or its degree of 6 Journal of Business Strategies Vol. 13, No. I formality to explain variations in organizational performance. Such conceptualizations are inconsistent with the multidimensional view of planning systems that are being viewed as more important in the recent literature (e.g. Dyson & Foster, 1982; King, 1983; Kukalis, 1991; Lorange, 1979, 1980; Rhyne, 1987; Veliyath & Shortell, 1993). Although many strategic planning system characteristics have been sug- gested in the literature, no consensus has yet emerged. For example, Ramanujam and Venkatraman (1987) proposed six dimensions of planning systems: use of techniques, attention to internal facets, attention to external facets, functional coverage, resources provided for planning, and resistance to planning. In another attempt to categorize strategic planning, Veliyath and Shortell (1993) identified five dimensions for strategic planning systems: plan- ning implementation, market research competence, key personnel involvement, staff planning assistance, and innovativeness of strategies. Further, these stud- ies focused on large firms. Thus, an expanded conceptualization of the notion of small-firm strategic planning is germane. Following recent work (Ramanujam & Venkatraman, 1987~ Veliyath & Shortell, 1993), the strategic planning system characteristics in the present study includes: (l) the degree of internal orientation of the system, (2) the degree of external orientation of the system, (3) the level of integration achieved within functional departments, (4) the extent of key personnel in- volvement in the planning process, and (5) the extent of use of analytical tech- niques in addressing strategic issues. These planning system attributes, in ad- dition to being well-grounded in the existing literature (see Table 1), also ap- pear to be problem areas in strategic planning within the banking industry. 1\vo Dimensions of Planning Satisfaction Most researchers who have investigated small-firm strategic planning have used financial and marketing measures as indicators of performance. These per- formance measures are based on how a business has performed in the past, implicitly assuming that such success can be extrapolated into the future. How- ever, financial superiority is only one element of organization performance. Perhaps more attention should be attached to an organization's ability to adapt to changes that are occurring and will occur in its environment. A realistic model of organization performance must reflect a highly complex paradigm and requires more than a single criterion (Brown & Laverick, 1994). As such, the present study adopts a broader perspective, examining satisfaction with planning. Specifically, two dimensions are examined: satisfaction with the concrete and financial outcomes believed to be associated with the planning process, and satisfaction with the contribution of strategic planning efforts to overall organizational effectiveness. The first dimension follows the tradition of ear- lier studies that sought to examine the impact of planning on financial perfor- mance. Although perfonnance objectives were included in the goal attainment Spring 1996 Kargar & Parnell: Strategic Planning in Small Finns 7 dimension, there is a clear distinction between achieving perfonnance goals and being a high-perfonnance organization. The second dimension reflects a goal-centered approach to assessing organizational effectiveness (Cameron & Whetten, 1983; Ramanujam, Venkatraman & Camillus, 1986). The goal attain- ment measure is primarily concerned with the specific end results nonnally anticipated from a planning system. This view reflects King's (1983) suggested approach to the evaluation of planning and Steiner's (1979) notion of mea- surement against purpose. Table 1 Characteristics of Strategic Planning Systems Characteristic Description Supporting Literature Hitt, Ireland, & PaBa (1982); Hitt, Ireland. & Stadler (1982); Lorange (1980); Snow & Hrebiniak (1980); Ramanjam et at. (1986); Ramanjam & Venkatraman (1987) Andrews (1971); McDaniel & Kolari (1987); Ramanjam et a1. (1986); Snow & Hrebiniak (l980); Veliyath & Shortell (1993) Cartwright (1987); Greenley (1986); Ramanjam et al. (1986); Roach & Allen (1983); Shank, Niblock & Sandal (1973) Andrews (1971); Camillius (1975); King & Cleland (1978); Langley (1988) Govindrajan (1986); Mowday et at. (1982); Ramanjam & Venkatraman (1987); Steers (1977); Veliyath & Shortell (1993) Fredrickson (1984); Grant & King (1982); Hax & Majluf (1984); Ramanjam & Venkatraman (1987) The degree of emphasis placed on planning as a means of organizational controL The extent of attention Camillus & Venkatraman (l984); devoted to an organization's Grant & King (1982); King & recent history and current Cleland (1978); Lorange & situation, past performance, Vancil (1977); Steiner (1979); and analysis of strengths Stevenson (1976) and weaknesses Ability to obtain reliable and timely research information in order to learn about external environmental opportunities and threats. The extent of coverage given to different functional areas with a view to integrating different functional requirements into a general management perspective. The degree of involvement of top management, board members, line and staff managers in planning process. The extent of reliance on appropriate planning techniques in order to solve ill-structured strategic problems. The degree to which planning efforts emphasize new modes of thinking. Focus on Control Key Personnel Involvement Creativity in Planning Functional Integration Internal Orientation External Orientation Use of Analytical Techniques 8 Journal of Business Strategies Vol. 13, No. 1 Propositions Almost all previous small-firm research has examined relationships be- tween strategic planning and organization performance with unidimensional treatments. However, the issue becomes more complicated when both sets of variables are conceptualized in multidimensional terms, as some authors have recently argued (e.g. Ramanujam et al., 1986; Ramanujam & Venkatraman, 1987). Hence, a positive relationship between strategic planning and perfor- mance dimensions among small firms is expected. Specifically, the present study posits two propositions: 1. Increased emphasis placed on each of the seven planning character- istics will be positively associated with each of the two dimensions of plan- ning satisfaction. 2. Top executives of firms that place the greatest emphasis on all seven planning characteristics will report the greatest satisfaction with planning along the two dimensions. Likewise, top executives of firms that place the least em- phasis on all seven planning characteristics will report the lowest satisfaction with planning along the two dimensions. Methodology, Analysis, and Findings Sample Sixty-nine U.S. commercial banks in the state of North Carolina were ex- amined, representing the entire population with fewer than $500 million in total deposits. All 69 banks are considered small banks by banking industry stan- dards (Robinson and Pearce, 1983). Surveys were sent to the senior executives (presidents and/or CEOs) of all the 69 banks. To improve the response rate, the North Carolina Commis- sioner of Banks asked that each bank president and/or CEO cooperate by com- pleting a questionnaire that would be sent to them. Forty-seven of the 69 banks completed and returned the research questionnaire for a response rate of 68 percent. Forty-one of these banks were chosen for further analysis to elimi- nate banks less than five years old as well as those that did not provide com- plete information. These criteria ensured that sample would not be biased to- ward banks with inadequately developed strategic planning systems, reducing the effective response rate to 59 percent. North Carolina's small community banks provide an excellent opportunity to apply evaluation processes that are normally employed to study strategic planning in small businesses because they historically have had broad powers to engage in various businesses traditionally not associated with commercial lending (North Carolina Banking Commission, 1991). Challenges requiring strategic management by small community banks go beyond establishing new branches and typically include introducing new products/services, offering com- petitive personalized services, meeting the needs of small businesses, and al- tering racial lending patterns. The relative stability of the North Carolina com- Spring 1996 Kargar & Parnell: Strategic Planning in Small Firms 9 mercial banks in an industry under turmoil also provided for a strong popula- tion from which to draw the sample. Further, there was only one bank failure each in 1991 and in 1993 in North Carolina. Strategic Planning Characteristics The specific strategic planning system characteristics are summarized in Table 2 and based on five-point Likert scales ranging from no emphasis (1) to great emphasis (5). Internal orientation was measured through the perceived degree of attention devoted to customer services, efficiency of operations pro- cess, attracting and retaining high-quality employees, and analysis of financial strengths and weaknesses. External orientation was measured by four items re- lating to the analysis of investment and deposit opportunities, competition and market analysis. Functional coverage was measured by Ramanujam and Venkatraman's (1987) four-item scale relating to the perceived degree of em- phasis accorded to functional involvement, coordination, and integration in planning activity. Key personnel involvement was measured by the degree of CEO, board member, and line manager involvement in the strategic planning process. Creativity in planning is assessed by Ramanujam and others nine-item scale addressing the firm's ability to anticipate surprises and crises, to adapt to unanticipated changes, and so forth. The control aspect was measured by Ramanujam and others (1986) ten-item scale which addressed the degree of emphasis given to managerial motivation, upward and downward communica- tion in the hierarchy, integration of operational areas, and the like. Finally, the use of planning techniques was measured by the degree of emphasis devoted to the application of financial models, portfolio analysis, and forecasting analy- sis techniques. Strategic Planning Satisfaction Planning satisfaction was measured via the two aforementioned dimen- sions, hereafter abbreviated as financial performance (FINANCE) and organi- zational effectiveness (ORGEFF). These dimensions were measured by an eight-item, two-factor scale (see Table 3) based on prior'work by Ramanujam and Venkatraman (1987), including items addressing areas such as the predic- tion of future trends, improving short-term performance, improving long-term performance, evaluating alternatives, and enhancing management development. Respondents were asked to indicate their yiews via a 5-point scale, ranging from much deterioration (1) to much improvement (5), on eight criteria as a primary goal. Factor loadings (see Tables 2 and 3) indicate that all the factors tapped characteristics measuring states of planning system and organization perfor- mance. Factor loadings in each scale were above 0.50 and eigenvalues for each factor were well above 1.0. Internal consistency of each scale was also as- sessed and judged strong using Cronbach's alpha (Cronbach, 1951; Van de Yen & Ferry, 1980). These assessments provide adequate support for the reliability 10 Journal of Business Strategies Vol. 13, No. 1 of the measures employed. Factor scores were computed for each planning system characteristic and planning satisfaction dimension to serve as compos- ite measures for hypothesis testing. Table 2 Planning System Characteristics and their Factor Loadings* Factor Loadine Internal Orientation (INTNLX 1: alpha =0.79) - Customer Services 0.57 - Efficiency of operating process 0.91 - Attracting and retaining high-quality employees 0.86 - Analysis of financial strengths and weakness 0.80 External orientation (EXTNLX1; alpha = 0.66) - Analysis of investment opportunities 0.75 - Analysis of deposits opportunities 0.87 - Analysis of competition 0.73 - Performing market research 0.71 Functional coverage (FUNTNX1; alpha =0.75) - Marketing function 0.77 - Finance function 0.86 - Personnel function 0.77 - Operations function 0.72 Involvement of key personnel (RESRSX1; alpha = 0.51) - Time spent by the CEO in strategic planning 0.93 - Involvement of line managers in strategic planning 0.54 - Involvement of board members in strategic planning 0.77 Use of planning techniques (TECHKX1; alpha =0.63) - Financial models 0.90 - Forecasting and trend analysis 0.86 - Portfolio analysis techniques 0.71 Creativity in Planning (CREATX1; alpha = 0.85) - Ability to anticipate surprises, threats and crises 0.74 - Flexibility to adapt to unanticipated changes 0.70 - Value of a mechanism for identifying new business opportunities 0.53 - Role of identifying key problems 0.78 - Value as a basis for enhancing innovation 0.69 - Capacity to generate new ideas 0.68 - Formulating goals to be achieved in the bank's competitive environment 0.50 - Capacity to generate and evaluate a number of strategic alternatives 0.72 - Anticipating, avoiding, and removing barriers to strategy implementation 0.73 Focus on Control (CONTRX1; alpha =0.94) - Value as a tool for management control 0.66 - Ability to communicate top management's expectations down the line 0.81 - Value as a tool for managerial motivation 0.79 - Capacity to foster organizational learning 0.78 - Ability to communicate line management's concern to top management 0.84 - Value as a mechanism for integrating diverse functions and operations 0.60 Spring 1996 Kargar & Parnell: Strategic Planning in Small Firms 11 Table 2 Planning System Characteristics and their Factor Loadings cont'd* Factor Loadina: - Monitoring & controlling the implementation of the bank's strategy 0.90 - Using multiple financial & non-financial control measures 0.83 - Using control techniques for monitoring performance 0.89 - Having control systems to revise current plans 0.83 *All scales were (1-5) Likert scales: no emphasis (1) to great emphasis (5) Table 3 Satisfaction with Planning and their Factor Loadings Dependent Variables Factor Loadina:s FINANCE ORGEFF .73 .59 .82 .84 .83 Financial Performance Items: Predictions of future trends Enhancing management development Improving short-term performance Improving long-term performance Direct impact on financial performance Organizational Effectiveness Items: Improving ability to evaluate alternatives .15 Improving ability to avoid mistakes .27 Improvement of budget process .38 *All scales were (1-5) Likert scales: no emphasis, to great emphasis. .41 .37 .18 .15 .36 .85 .79 .68 Table 4 presents correlations among the dimensions. Each planning sys- tem characteristic positively and significantly correlates with only FINANCE and ORGEFF (at the .05 percent level). These results are consistent with the conceptual literature from which dimensions were distilled. The presence of the expected bivariate relationships between the planning system characteris- tics and these two satisfaction dimensions is encouraging, but the main focus of this study is on the multivariate relationship between the planning charac- teristics and planning satisfaction. Having established the existence of appro- priate measurement scales, proposition testing can be pursued. The first proposition was strongly supported. Emphasis on each of the seven planning characteristics was positively associated with both satisfaction dimensions. Further, firm size (EMPLOYES) was not significantly associated with any of the seven characteristics. The second proposition was partially supported. To examine which fac- tors contributed to the greatest satisfaction in planning along both dimensions, the forty-one businesses were clustered on the seven planning emphases into three distinct groups (see Table 5). The purpose of the cluster analysis was to identify several groups of organizations, each of which would contain busi- nesses with similar emphases on the seven planning characteristics. Although Table 4: Descriptive Statistics and Correlations ....... N EXTNLXl FUNTNXI RESRSXI TECHKXI CREATXl CONTRXI FINANCE ORGEFFCorrelations: EMPLOYES INTNLX I EMPLOYES OOסס.1 P--. INTNLXI .0041 1.0000 P=A90 P--. EXTNLXI -.1873 .6147 P=.120 P=.OUO FUNTNXI -.1630 A739 P=.154 P=.ool RESRSXl .0914 A594 P=.285 P=.ool TECHKXI .1252 .3292 P=.218 P=.018 CREATXI -.2428 .5637 P=.063 P=.OOO CONTRXI -.1430 .6026 P=.186 P=.OOO FINANCE -.2057 .3478 P=.099 P=.0l3 ORGEFF -.0716 .3056 P=.328 P=.026 1.000 P--. .7994 1.0000 P=.OOO P--. .3731 .4411 1.0000 P=.008 P=.002 P--. .2641 .3041 .2812 1.0000 P=.048 P=.027 P=.037 P--. .5416 A861 A654 .5391 1.0000 P= .000 P=.ool P=.OOI P=.OOO P-- . .5054 A061 .6053 .5296 .8590 1.0000 P= .000 P=.004 P=.OOO P=.ooO P=.OOO P=. A393 .4872 .3529 .3952 .5863 .5768 1.0000 P=.002 P=.ool P=.0l2 P= .005 P=.OOO P=.OOO P--. .3125 .2700 .3360 .2702 .5901 .6272 .0000 P=.023 P=.044 P=.016 P=.044 P=.OOO P=.OOO P=.5oo 1.0000 P=. ~ $;;: :.i l::l- ~ ~ $;;: ""S· !lI """" ~ ~ ~ ~' "" ~ ...... w Z 9 ...... Spring 1996 Kargar & Parnell: Strategic Planning in Small Firms 13 a variety of clustering methods could be applied, Ward's algorithm was se- lected because of its tendency to cluster cases into groups of similar sizes, an aspect critical for small populations (Barney & Hoskisson, 1990; Hair, Ander- son & Tatham, 1987). The optimum solution contained three clusters of eight, eleven, and twenty-two businesses. Table 5 Planning System Satisfaction Means for each Cluster Cluster Analysis Variable Employees INTNLXl EXTNLXI FUNTNXI RESRSXl TECHKXl CREATXl CONTRXI FINANCE ORGEFF Cluster I Cluster 2 (N=8, 19%) (N=ll, 27%) 235.38 592.64 0.37 ·0.32 0.72 1.28 0.87 -0.53 0.43 -0.20 0.38 -0.12 0.88 ·0.47 0.75 -0.46 0.73 -1.23 1.09 0.39 Cluster 3 (N=22, 54%) 118.68 0.02 0.80 -0.05 -0.06 -0.08 -0.09 -0.04 0.35 -0.59 Sig. Level .178 .335 .035 .006 .375 .500 .009 .028 .000 .000 Firms in the first cluster placed the greatest emphasis on six of the seven planning characteristics and also reported the greatest satisfaction with plan- ning along both dimensions. Firms in the second cluster placed the least em- phasis on six of the seven characteristics, also reporting the least satisfaction with planning dimensions. Significant differences among the clusters were found in four of the seven emphases and both planning satisfaction dimensions. External emphasis did not associate with the other six planning characteris- tics, suggesting that heavy external emphasis may be more associated with planning that does not lead to satisfaction with the process. Conclusions and Future Directions Taken together, it seems evident 'that the relationship between planning and performance in small firms bears significantly on strategic management re- search and practice, and that strategy scholars should not abandon this line of inquiry altogether. The planning literature appears to suggest two key themes: First, planning should be an integral part of the strategic management process. The benefits of planning can outweigh the costs. And most critically, one's competitors will likely enjoy the benefits of planning. Therefore, to ignore planning is to relegate a source of competitive advantage to disadvantage. The second theme is perhaps most critical. Effective planning-not just the process of planning-appears to be positively associated with performance. 14 Journal of Business Strategies Vol. 13, No. 1 In other words, organizations that plan effectively are more likely to achieve higher performance than those that do not. But the key here is effective plan- ning; Ineffective planning appears to have no predictable or consistent asso- ciation with performance. Going through the motions of planning provides no great insights or benefits; it may actually result in a depletion of resources and lower quality decisions. Thus, a strong emphasis placed on planning is only justified when it is also focused on effective planning. Future research may address five areas appropriate to this study. First, a longitudinal research design may improve the reliability of strategy measures and examine the long-term (Le., beyond five years) effects of strategic plan- ning. Golden (1992) found that 58 percent of organizations he surveyed did not agree with the previously validated accounts of their organization's past strategies! Hence, retrospective accounts of strategy and planning emphases may not always be valid. A longitudinal design would eliminate the reliance on CEOs' perceptions of past strategy-a limitation of this exploratory study. Second, future inquiries should expand the planning assessment process beyond the chief executive officer. Although a high response may be more dif- ficult when complete anonymity is not assured, a more accurate depiction of planning activity may be gleaned from surveying several managers within each organization in addition to the CEO. Further, the validation of self-reported fi- nancial results with archival data would improve the validity of the study. Third, additional industries may be examined. This study addressed only the banking industry. Additional investigations should include those industries experiencing major macroenvironmental changes. In such industries, one may actually find a greater value in strategic planning activities. Fourth, the identification of important planning characteristics should pro- vide an impetus to further efforts at reconceptualizing planning in more real- istic terms than the unidimensional treatments common in the previous small- firm empirical research. Similarly, the results support such a multidimensional treatment, which argues against the use of narrow conceptualizations of plan- ning effectiveness in future studies. In general, these findings suggest the need for future research to explore not only the degree of emphasis and perceived effectiveness of various strategic planning dimensions but also the reasons for these choices. Such research will help to provide a better understanding of why managers of small firms choose various strategic planning system approaches as well as how these approaches give rise to possible changes in organization strategy. Finally, the present study involved a relatively small number of banks in the study. Future investigations into process and content dimensions unique to small firm strategic planning process could focus on larger industries. Spring 1996 Kargar & Parnell: Strategic Planning in Small Firms 15 References Aldrich, H., B. McKelvey, and D. Ulrich. "Design Strategy from the Population Per- spective." Journal of Management 10 (1984): 67-86. Andrews, K.R. The Concept of CQrporate Strategy. Homewood, IL: Dow Jones-Irwin, 1971. Barney, 1.B. "Firm Resources and Sustained Competitive Advantage." JQurnal of Man- agement 17 (1991): 99-120. Barney, lB. "Organizational Culture: Can it Be a Source of Sustained Competitive Ad- vantage?" Academy of Management Review 11 (1986a): 656-665. Barney, J.B. "Strategic Factor Markets: Expectations, Luck, and Business Strategy." M<.magement Science 32 (1986b): 1231-1241. Barney, J.B., and R.E. Hoskisson. "Strategic Groups: Untested Assertions and Research Proposals." M<.magerial <.md Decision Economic§ 11 (1990): 167-198. Boeker, W. "Strategic Change: The Effects of Founding and History." Academy of Mana~ment JQurnal 32 (1989): 489-515. Brown, D.M., and S. Laverick. "Measuring Corporate Performance." Long Range Plan- ning 27 (1994): 89-98. Business Week. "Managing Change." Business Week 1992 Spe.£ial BOiju§ Issue: R$}in- venting America (1992): 60-74. Byren, J.A. "Paradigms for Postmodern Managers." Busine§§ W$}ek 1992 Special Bo- nus Issue: Reinventing America (1992): 62-63. Calingo, L.M.R. "Environmental Determinants of Generic Competitive Strategies: Pre- liminary Evidence From Structured Content Analysis of Fortune and Business Week Articles (1983-1984)." Human Relation§ 42 (1989): 353-369. Camerer, C., and A. Vepsalainen. "The Economic Efficiency of Corporate Culture." Strategic Management Journal 9 (1988): 115-126. Cameron, K. and D.A. Whetten. Org<.mizational Effectivene§s: A Compari'son Qf Mul- tiple Mod&b. New York: Academic Press, 1983. Camillus, J.C. "Evaluating the Benefits of Formal Planning." L.Qng, Range Planning 8 (1975): 3340. Camillus, J.C., and N. Venkatraman. "Dimensions of Strategic Choice." Planning Re- view 12 (1984): 26-31. 16 Journal of Business Strategies Vol. 13, No. 1 Cappel, S.D. Strategic Profiles and Performance in Service QrganizatioQS: Examinin2 Retail Department. Variety and General Merchandise Stores. Unpublished doctoral dis- sertation, Memphis State University, Memphis, Tennessee, 1990. Cartwright, TJ. "The Lost Art of Planning." Long Range Planning 20 (1987): 92-99. Cronbach, LJ. "Coefficient Alpha and the Internal Structure of Tests." Psychometrica 16 (1951): 297-334. Dierickx, 1., and K. Cool. "Asset Stock Accumulation and Sustainability of Competi- tive Advantage." Management Science 35 (1989): 1504-1511. Dyson, RG., and MJ. Foster. "The Relationship of Participation and Effectiveness in Strategic Planning." Strategic Mam!l~ement Journal 3 (1982): 77-88. Fiol, C.M. "Managing Culture as a Competitive Resource: An Identity-Based View of Sustainable Competitive Advantage." Journal of Management 17 (1991): 191-211. Foxman, E.R, D.D. Muehling, and P.W Berger. "An Investigation of Factors Contrib- uting to Consumer Brand Confusion." Journal of Consumer Affairs 24 (1990): 170- 189. Fredrickson, J. W "The Comprehensiveness of Strategic Decision Process, Extensions, Observations, Future Directions." Academy of Management Journal 27 (1984): 45-466. Gaertner, K.N. "Winning and Losing: Understanding Managers' Reactions to Strategic Change." Human Relations 42 (1989): 527-545. Gannon, MJ., K.G. Smith, and C. Grimm. "An Organizational Information-Processing Profile of First Movers." Journal of Business Research 25 (1992): 231-241. Godiwalla, Y.M., WA. Meinhart, and W.A. Warde. "General Management and Corpo- rate Strategy." Managtfrial Planning 30 (1981): 17-29. Golden, B.R "The Past is the Past-Or is it? The Use of Retrospective Accounts as Indicators of Past Strategy." Academy of Management Journal 35 (1992): 848-860. Govindrajan, V. "Impact of Participation in the Budgetary Process on Managerial Atti- tudes and Performance: Universalistic and Contingency Perspectives." Decision Sci- ences 7 (1986): 96-516. Grant, J.H., and WR King. The Logic of Strategic Planning. Boston: Little, Brown & Company, 1982. Green, S. "Strategy, Organizational Culture, and Symbolism." Long Range Planning 21 (1988): 121-129. Greenley, G. "Does Strategic Planning Improve Company Performance?" Long Ram~e Planning 19 (1986): 101-109. Spring 1996 Kargar & Parnell: Strategic Planning in Small Firms 17 Greiner, L.E., and A Bhambri. "New CEO Intervention and Dynamics of Deliberate Strategic Change." Strategic Mana~ment Journal 10 (1989, Summer): 67-86. Grimm, eM., and K.G. Smith. "Management and Organizational Change: A Note on the Railroad Industry." Strategic Management Journal 12 (1991): 557-562. Hair, J.P., RE. Anderson, and RL. Tatham. Multivariate Data Analysis. New York: MacMillan, 1967. Hannan, M. and J. Freeman. "The Population Ecology of Organizations." Americ;an Journal of SodolQgy 82 (977): 929-964. Hausler, J. "Planning: A Way of Shaping the Future." Management International Re- view 2 (1968): 12-21. Hax, A.C., and N.S. MajIuf. Strategic Management: An Integrative Approach. Englewood Cliffs, NJ: Prentice-Hall, 1984. Hitt, M.A, RA. Ireland, and G.A. Stadter. "Functional Importance and Company Per- formance: Moderating Effects of Grand Strategy and Industry Type." Strategic Man- agement Journal 3 (1982): 315-330. Hofer, C.W. "Toward a Contingency Theory of Business Strategy." AcaQl;IDY of Man- al;!eIDent Journal 18 (1975): 784-809. Karger, D.W, and Z.A. Malik. "Long Range Planning and Organizational Perfor- mance." Long Range Planning 8 (1975): 60-64. King, WR "Evaluating Strategic Planning Systems." Strategic Management Journal 4 (1983): 263-277. King, WR., and DJ. Cleland. Strategic Planning and Policy. New York: Van Nostrand Reinhold, 1978. Kukalis, S. "Determinants of Strategic Planning Systems in Large Organizations: A Contingency Approach." Journal of Management Studil;S 28 (1991): 143-60. Lado, A, N. Boyd, and P. Wright. "A Competency Based Model of Sustained Com- petitive Advantage: Toward a Conceptual Integration." Journal of Management 18 (1992): 77-91. Langley, A. "The Roles of Formal Strategic Planning." Long Range Planning 21 (1988): 40-50. Leontiades, M., and A. Tezel. "Planning Perceptions and Planning Results." Strategic Management Journal I (1980): 65-75. Lieberman, M.R, and D.B. Montgomery. "First-Mover Advantages." Strategic Man- agement Journal 9 (1988): 41-58. 18 Journal of Business Strategies Vol. 13, No. 1 Loasby, BJ. "Long-Range Formal Planning in Perspective." Journal of Management Studies 4 (1967): 12-21. Loken, 8., I. Ross, and RL. Hinkle. "Consumer Confusion of Origin and Brand Simi- larity Perceptions." Journal of PubliC Policy and Marketing 5 (1986): 195-211. Lorange, P. "Formal Planning Systems: Their Role in Strategy Implementation." In Strategic Management: A New View of Business Policy and Planning. Eds. D.E. Schendel and C.W. Hofer. Boston: Little Brown & Company, 1979. Lorange, P. Corporate Planning: An Executive View Point. Englewood Cliffs, NJ: Prentice-Hall, 1980. Lorange, P., and R.F. Vancil. Strategic Planning Systems. Englewood Cliffs, NJ: Prentice-Hall, 1977. Lorenz, C. "Why Strategy has been Put in the Hands of Line Managers." Financial ~ (May 18, 1988): 20. Mascarenhas, B. "First Mover Effects in Multiple Dynamic Markets." Strategic Man- agement Journal 13 (1992): 237-243. McDaniel, S.W., and J.w. Kolari. "Marketing Strategy Implications of the Miles and Snow Strategic Typology." Journal of Marketing 51 (1987): 19-30. Miles, RE., and C.c. Snow. Organizational Strategy, Structure. and Process. New York: West, 1978. Mowday, RT., L.W. Porter, and RM. Steers. Employee-Organization Linkages - The Psychology of Commitment. Absenteeism and Turnover. New York: Academic Press, 1982. North Carolina Banking Commission. State Qf North Carolina Commissioner of Banks 1991 Annual Report. Raleigh, NC: 1991. Orpen, C. "The Effects of Long-Range Planning on Small Business Performance: A Further Examination." Journal of Small Bu&iness Management 1 (1985): 16-23. Parnell, J.A. "Strategic Consistency Versus Flexibility: Does Strategic Change Really Enhance Performance?" American Business Review 12 (1994): 22-30. Pearce, lA., II, E.B. Freeman, and RB. Robinson. 'The Tenuous Link Between For- mal Strategic Planning and Financial Performance." AcademY of Management Review 12 (1987): 658-675. Ramanujam, V., and N. Venkatraman. "Planning and Performance: A New Look at an Old Question." Busi nes& Horizons 30 (1987): 19-25. Spring 1996 Kargar & Parnell: Strategic Planning in Small Finns 19 Ramanujam, v., N. Venkatraman, and J.e. Camillus. "Multi-Objective Assessment of Effectiveness of Strategic Planning: A Discriminant Analysis Approach." Academy of Mana2emept Journal 29 (1986): 347-372. Rhyne, L.C. "Contrasting Planning Systems in High, Medium and Low Performance Companies." Journal of Mana2ement Studies 24 (1987): 363-85. Rhyne, L.C. 'The Relationship of Strategic Planning to Financial Performance." Stra- teiic Mana2ement Journal 7 (1986): 423-436. Roach, J.D.C., and M.G. Allen. "Strengthening the Strategic Management Process." In The Strategic Mana2ement Handbook, 1983. Robinson, R.B., and J.A. Pearce. 'The Impact of Formalized Strategic Planning on Fi- nancial Performance in Small Organizations." Strate2ic Mana2ement Journal 4 (1983): 197-207. Saffold, G.S. III. "Culture, Traits, Strength, and Organizational Performance: Moving Beyond Strong Culture." Academy of Manaiement Review 13 (1988): 546-558. Sapp, R.W., and R.E. Seiler. "The Relationship Between Long-Range Planning and Fi- nancial Performance of U.S. Commercial Banks." Management Planning 29 (1981): 32- 36. Schein, E.H. "Organizational Culture." American Psychologist (Feb. 1990): 109-119. Schein, E.H. Organizational Culture. San Francisco: Jossey-Bass, 1985. Scholes, K. "The Way to Manage Strategic Change." Accountancy 107 (1991): 98-99. Scholz, e. "Corporate Culture and Strategy-The Problem of Strategic Fit." ~ Range Planning 20 (1987): 78-87. Schwartz, H., and S. Davis. "Matching Corporate Culture and Business Strategy." Or- ganizational Dynamics (Summer, 1981): 475-493. Schwenk, e.R., and C.B. Shrader. "Effects of Formal Strategic Planning on Financial Performance in Small Firms: A Meta-Analysis." Entrepreneurship Theory and Practice 17 (1993): 53-64. Shank, J.K., E.J. Niblock, and WT. Sandall. "Balance 'Creativity' and 'Practicality' in Formal Planning." Harvard Business Review 51 (1973): 87-95. Sinha, D.K. "The Contribution of Formal Planning to Decisions." Strategic Manage- ment Journal 11 (1990): 479-492. Snow, C.C., and L. Hrebiniak. "Strategy, Distinctive Competence, and Organizational Performance." Administrative Science Quarterly 25 (1980): 317-35. 20 Journal of Business Strategies Vol. 13, No. 1 Steers, RM. "Antecedents and Outcomes of Organizational Commitment." Adminis- trative Science Quart~rly 22 (1977): 46-56. Steiner, G.A. Strategic Planning: What Every Manager Must Know. New York: Free Press, 1979. Stem, M.E. Marketing Planning: A Systems Approach. New York: McGraw-Hill, 1966. Stevenson, H.H. "Defining Corporate Strengths and Weaknesses." Sloan Management Review 17 (1976): 51-68. Ulrich, D. "The Population Perspective: Review, Critique, and Relevance." Human Re- lations 40 (1987): 137-152. Van de Yen, A., and D. Ferry. Measuring and Assessing Organizations. New York: Wiley, 1980. Veliyath, R., and S.M. Shortell. "Strategic Orientation, Strategic Planning System Char- acteristics and Performance." Journal of Management Studies 30 (1993): 359-381. Webb, J., and P. Dawson. "Measure for Measure: Strategic Change in an Electronic Instruments Corporation." Journal of Management Studies 28 (1991): 191-206. Welch, J.B. "Strategic Planning Could Improve Your Share Price." Long Range Plan- ning 17 (1984): 144-147. Wernerfelt, B., and A. Karnani. "Competitive Strategy under Uncertainty." Strategic Management Journal 8 (1987): 187-194. Whipp, R., R Rosenfeld, and A. Pettigrew. "Managing Strategic Change in a Mature Business." Lom: Range Planning 22 (1989): 92-99. Wiersema, M.E, and K.A. Bantel. "Top Management Team Demography and Corpo- rate Strategic Change." Academy of Management JQurnal 35 (1992): 91-121. Wilson, RM.S. Mana&\