STRATEGY

SMALL BUSINESS BRIEF

STRATEGIC PLANNING IN SMALI. FIRMS:
ACTIVITY AND PROCESS REALITIES

Carolyn B. Mueller
Douglas W. Naffziger
Ball State Umversity

ABSTRACT

Research on small firm planning has established that small firms plan and has generally
indicated that planning has value. Strategic plan content research often focuses on developing
a wriaen plan. Little research has focused on who engages in planning and who does not. This
study investigated the relationship between individual and firm differences and ihe extent to
which planning takes place in the firm. Owner demographics such as education, age, and years
in business, had liule relationship with planning activity levels whileftrm sales and number of
employees were related to several planning activity measures.

INTRODUCTION

Prior to Robinson and Pearce's (1984) extensive literature review, research concerning strategic
planning in small firms found planning levels to be "anemic" (Sexton tk van Auken, 1982). In
response, Robinson and Pearce (1984) suggested four research thrusts for future investigation on
the subject: (1)to empirically confirm the presence or absence of strategic planning practices; (2)
to provide empirical evidence of the value of strategic planning; (3) to examine the
appropriateness of specific features of the planning process; and (4) to empirically examine the
content of the strategies of small firms. Several studies have been published which have
attempted to follow one or more of those prescriptions. However, researchers have generally not
investigated the last two thrusts - specific features of the planning process, and the content of
small firm strategies. A more recent review of fourteen studies (Shwenck tk Shrader; 1993)
concludes that strategic planning is positively related to performance, though there may be other
variables which moderate that relationship.

LITERATURE REVIEW

Research strongly supports the notion that many small firm owners do plan and set goals (Lyles,
Baird, Orris, tk Kuratko, 1993;Naffziger tk Kuratko, 1991). Further, studies generally confirm
that the planning process has value (Gaskill, van Auken, bk Manning, 1993; Haswell gc Holmes,
1989), that strategic planning is within the domain of managerial responsibilities, and is an
important factor in small business success (Montagno, Kuratko, dt Scarcella, 1986.

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Journal ofSmall Business Strategy Vol. 10, No. I Spring/Summer l999

Numerous authors (e.g., Lyles et al., 1993; Langley, 1988; Orpen, 1985; Robinson & Pearce,
1984) have indicated that simply engaging in a formal planning process seems to be beneficial
as it leads to a better understanding of the business, and that strategic planning leads to the
development of a wider range of strategic alternatives which was hypothesized to lead to better
firm performance (Lyles et al., 1993).

The most recent survey of the literature on small firm planning is Schwenk and Shrader (1993).
Their review of the literature, prior to their own analysis, showed 13 studies that found a positive
relationship between formal strategic planning and financial performance and four which found

a positive relationship between the content of the strategic plan and performance. Additionally,
though, Shwenck and Shrader found ten studies that concluded there is little or no relationship
between strategic planning and financial performance. In the final analysis, however, Schwenk

and Shrader concluded from their meta-analysis of 14 studies that they were "able to provide
straightforward support for the general assertion that strategic planning does have a significant

positive association with performance across studies" (1993:60). They concluded there is a need
for longitudinal studies on the incremental impact of strategic planning and study of any
contingent relationships between contextual factors, such as environmental uncertainty, and the

impact of strategic planning.

Most recent research on the process of strategic planning in small firms seems to deal in
generalities, using some measure of "formality" to define the strategic planning process (Bracker
& Pearson, 1985; Lyles et al., 1993; Olson & Bokor, 1995; Robinson & Pearce, 1983). Several
studies have investigated the impact of other factors on the strategic planning process in small
firms, such as owner receptivity to the use of planning tools (Pelham & Clayson, 1988), models
of strategic choice (Variyam & Kraybill, 1993), and the effect of perceived environmental
uncertainty on planning (Matthews & Scott, 1995; Shrader, Mulford, & Blackburn, 1989).
Naffziger and Kuratko (1991)investigated the actual process of developing plans to determine
how much time managers spent on this function, whether goals were set and in what areas, and

what kind of activities were included in the planning process in small organizations, such as
environmental scanning and level of planning activity.

If we accept the general pmposition that planning has become more widespread throughout small
firms (shown in several studies) and if we acknowledge that ditferences between individuals
exist, then we should also accept the proposition that not all small business owners will plan in

a similar fashion or to the same extent. Individuals will allocate their time differently according

to their strengths, personal preferences, and time constraints, among other factors. What

activities and methods lead to effective planning and what may not? As planning has been shown

to have a positive benefit, it is important to understand what factors might encourage or inhibit

owners from engaging in more effective strategic planning activities. This research is a

preliminary step in the process of determining what individual and firm differences are related
to various levels of planning activities and behaviors.

METHODOLOGY

An initial list of 60 small firms was compiled from various Midwestern Chambers'f Commerce
membership rosters. Small firms were defined as having 500 or fewer employees. Potential
respondents were contacted via telephone and requested to participate in an ongoing university

effort to study small businesses, their owners, and the planning processes used in their companies.

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Journal ofSmall Business Strategy Vo/. 10, No. 1 Spring/Summer 1999

Owners were informed that participation was voluntary and all responses would be kept
confidentiaL The final sample consisted of 46 (77%) small firm owners and top managers. Firms
included in the study were from a cross-section of industries: banking, automobile parts
manufacturing, commercial sales, consumer sales, construction, miscellaneous manufacturing
(e.g., plastics fabrication, metal fabrication), and miscellaneous services (e.g., insurance,
education, advertising.) The final sample was distributed among 33 (71.7%) service and 13
(28.3%) manufacturing firms. Graduate research assistants, trained in survey techniques,
personally delivered and administered the surveys to participants to ensure receipt and
completion. The above format has been utilized in similar studies of small lirms (e.g., Homsby
tk Kuratko, 1990; McEvoy, 1984).

Data were gathered using a 44-item questionnaire. Thirty-four items related to the strategic
planning process in small firms, and focused on both the process and the content of the strategic
plans. These items were developed based on the literature review of Robinson and Pearce (1984)
and Orpen (1985). Respondents indicated whether an item pertained to their respective firm's
planning process, such as whether or not goals were established as part of strategic planning
using a "yes/no" format, or the extent to which certain activities were included in their planning.
Questions of the latter nature used a seven-point Likert-type scale that ranged from (1) the item
"not at all," to (4) "some but not a lot," to (7) "a great deal." Ten items investigated the
demographic characteristics of the respondents and their firms. For owner age and company
annual sales, a range of five response categories was provided.

Frequency analysis was used to examine the demographic characteristics to determine if the
sample was representative of small businesses in general to determine whether the demographic
data was distributed over a broad range of possible responses (e.g., age, college versus non-
college graduate.) T-tests were used to determine the extent to which differences in planning
activity and process levels were related to firm and owner characteristics.

RESULTS

The demographic profile of the sample is presented in Table I. Forty-two respondents (91.3%)
were male, a finding somewhat higher than normal. Subjects ranged in age from under 21 to 56
or more years; a little more than half (n=27, 58.7%) were over 45 years old. Twenty-seven
(63.0%)possessed college degrees. Firms had been in business between 2 and 126 years, with
a mean of 29.9years. Only one (2.0%)firm had annual sales under $500,000, 14 (30%)between
$ 1-5 million, 11 (24%) between $5-10 million, and 18 (39%) had sales of $ 10 million or more,
with the median between $5-$ 10 million. The number of employees ranged from a low of six
to a maximum of 500 (one firm), with an average of 96.5 employees; 25 (54.3%)firms employed
fewer than 50 people. Thirty-six (78.3%)respondents were members of trade associations.

For the purpose of performing t-test analyses, firm and owner demographic variables were split
as close to 50/50 as possible when appropriate. "Years in business" was split at 20 or fewer
(n=25, 54 3%) and 21 or more (21, 45.7%). "Number of employees" was split at 50 or fewer(25,
54.3%) and more than ftAy (21, 45.7%). Categorical responses for "annual sales" were split at
$ 10,000,000 or less (29, 63.3%)and more than $ 10,000,000 (17, 36.6%). Categorical responses
for owner age were split at 45 and under (19,41.3%)and 46 and over (27, 58.7%). "Education"
was split along the division of college graduate (27, 61.3%) or not (17, 38.7%), and "trade
association membership" was simply member (36, 78.3%)or not (10, 21.7%). Due to the small
percentage of female respondents, gender was not included as one of the independent variables.

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Table 2- Sample Demographics

ITEM Mean Med. SLDev n
Gcadcrr 46 100

Male 42 91.3
Female 4 87

Ager 46 100
l. 35 end under 6 13.0
2. 36-4S 13 28.3
3.46-55 17 37.0
4. 56+ 10 21.7

Concge Graduate: 46 100
Ycc 27 619
No lr sg7

Years in Buciaecct 29.9 20.0 29.1 46 100
5 or fewer 6 13.0
6 to 10 7 153
I I to 20 12 26.0
21+ 21 45.7

Aaaual Select 46 100
1.Inst than $500,000 I 2.4
2. $500.001 to $ 1,000,000 0 0.0
3. $ 1,000,001 to $5,000,000 '16 34.1
4. $5,000,001 to $ 10,000,000 12 26.8
5. $ 10,000,000 + 17 36.6

Number of Employers: 965 478 115.0 46 100
few«r dum 20 2 4.3
20to50 23 50.0
5 I to 100 7 15.3
101 + 14 30.4

Trade Aceocietioa: 46 100
Yct 36 783
No 10 21.7

Planning Activity Variables

Eight items measured various planning activities, owners might engage in as part of the strategic
planning process. T-tests were used to determine whether subjects included these activities
differently according to personal or business demographic characteristics.

The items included in this category were termed "planning activity measures" because they
focused on "things that are done" during the strategic planning process such as hours per month

spent on planning, number of methods used to gather strategic information, and the presence of
a written mission statement. Eleven out of 48 combinations of planning activity and
demographic variables were identified as statistically significant (p & .l0). The two size
variables, number of employees and annual sales, contained eight of those eleven, all of which
were significant at the p

= .05 level or lower. Owner age and trade association membership
possessed no significant relationships with any of the planning activity measures.

Planning Process Variables

Eight items also measured various aspects of the proces subjects used during strategic planning.
This group of variables focused more on "how things were done" and included items such as the
number of top managers involved, the number of information types used, and the use of reward

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systems during planning. T-tests were again used to determine whether subjects approached the
process of strategic planning differently according to personal or business characteristics. Table
3 presents the results of that investigation. Only eight statistically significant relationships (p &
.I 0) were identified out of a possible 48. As with the planning activity measures, the number of
employees in a finn had the most significant relationships with the planning process variables.

Table 2 - Means for Planning Activity Measures

VARIABLE

ITEM I 2 3 4 5 6 7 8
Yrs. in Business v

0-20 yrs. 9.3 4.9 3.5 3.8 1.5 4.9 2.7 1.3
20+ yrs. IS.1 4.9 3.6 4.8 1.6 5.0 3.2 1.6

¹ Employees ~ ~ v ~ v v ~ v vv
0-50 9.8 49 3.0 3.8 1.8 4.0 2.8 1.6
50+ 14.1 5.5 4.1 4.7 IB 5.9 3.0 1.2

Annual Sales vv ~ v ~

&5 I OMM 13.7 4.4 3.2 4.0 1.7 4.5 2.9 1.4
&8 IOMM 10.7 6.0 4.1 4.7 Id 5.4 2.9 1.4

vvv &.001 ' &.01 v &.05

Variables
I Hours/Month Spent Planning 2 4 of Methods Used to Gaiher Strategic info.
3 = ¹ of Types Strategic l%. Gathered 4 Extent of Formalization Using Meetings
5 Presence ofA Written Mission Statement 6 = ¹ of Goals Set
7 4 of Outcome Measures Used 8 = ¹ ofStrategic Management Concepts Used

Table 3 - Means for Planning Process Measures

VARIABLE
ITEM I I 3 4 5 6 7 8

Yrs.in Business
0-20yrs. 3.2 3.3 0.7 0.6 0.4 1.0 4.2 3.1
20+yrs. 3.3 4.2 0.7 0.8 0.6 0.8 5.1 3.2

¹ Employees kv
0-50 2.7 3.7 0.6 0.5 0.5 0.9 4.3 2.8
SO+ 3'.7 0.8 0.9 0.5 1.0 4.9 3.6

Annual Sales ~ *
&$ 10MM 2.4 3.8 0.6 0.6 0.4 0.8 4.3 2.9
&$ 10MM 4.1 3.6 0.7 0.8 0.5 1.3 S.I 3.6

v ~ v &.001 vv &.01 v &.05

Variables
I S of Top Managenwnt People Involved in Process 2 Lover Level Employees Actively Involved
3 Plan Communicated Down to Mtd-inset Managers 4 Plan Communicaud Down To Supervisors
S Plan Communtcamd Down to Hourly Persomwl 6 4 of limes rrmt information Is Gathered
7 Reward System Used to gestae Employee Commlnnent 8 4 of Types Of Rewards Used To Motivate

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Though not formally hypothesized, it was recognized that owner satisfaction with both the

process and the results of strategic planning is an important concern. However, an examination
of those items across the demographics revealed that the only statistically significant relationships
regarding those variables were between years in business and satisfaction with the planning
process (p = .025), and trade association membership and satisfaction with the results of the
planning (p = .035). In other words, it appears that the longer a firm has been in business, the
more satisfied its managers are with the planning process, and managers who are members of
trade associations are more satisfied with the results of their planning than managers who are not.

DISCUSSION AND CONCLUSIONS

This research continued to verify that small firm owners spend a great deal of time and effort on
strategic planning. While arguments can be made that certain demographic characteristics should
be related more strongly to planning activities and process management, the findings here, in
general, do not support that contention. Results of the analyses suggest that these variables are
somewhat evenly distributed through this population. Primarily, the only firm or owner
characteristics which were related to differences in planning dealt with fum size. The number
of employees, a measure of size, was the only independent variable with a notable number of
significant relationships. Another measure of size, annual sales, was the second most prolific,
with four significant relationships. Though these results may substantiate the hypothesis that a
relationship exists, care must be taken regarding causality. For example, questions remain
whether larger firms plan more simply because they are larger and more complex. Do they plan
more because there are more dollars at risk? Did they plan less when they were smaller?
Conversely, are those firms larger because they planned more?

Owners of firms with more employees, and to a lesser extent higher sales levels, reported
performing more planning activities than did owners of smaller firms.

The relatively small number of significantly strong relationships could lead to the conclusion that
perhaps there are few important relationships between personal and/or business characteristics

and strategic planning. However, it could be that all relevant individual and finn characteristics

were not included. For example, no measures of individual time management or organizational
skills were measured. Significant differences in strategic planning among small firms may be due

to other factors, such as an individual's tendency to be better organized or have a more
participatory philosophy about managing a business. It is also possible that the measures
included in this study are not an accurate picture of the process of strategic firm management.
Finally, a larger sample, allowing for a breakdown between industries, such as service, retail, and
manufacturing, is recommended.

Additional research needs to be done before the relationship between owner and business
characteristics and strategic planning can be fully understood. For example, intuitively it is

attractive to think that college educated owners will place more value on planning, yet if their
degrees were in non-business areas, their education would likely not have included a course on

strategic planning. Similarly, when considering owner age, one could argue two ways: younger
owners may approach their firms more professionallybecause of their more recent education and
focus on planning or exposure to media on managing entrepreneurially. On the other hand, an

argument could be made that older owners have had the time to realize the value of planning and
their businesses have grown to a size where it permits them the time and other resources to plan.
Additionally, one would like to think that owners who have taken time to join trade associations

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would approach management in a more "professional" manner. It is, therefore, argued that the

strategic planning process in small firms continues to merit study.

Additional questions to gain more insight into the "whys" and "wherefores" of small firm
strategic planning need to be asked. Future studies should investigate such issues as the value

that owners realize by allocating time to strategic planning. An important direction for such

questioning would look at how planning has helped. For example:
~ What differences do owners see in their firms or their own managerial capabilities as a result

of planning?
~ Has planning helped managers to more clearly see future trends?
~ Which aspects of the process seem most helpful?
~ Are managers in firms that plan better organized or caught off guard less often?
~ Have they been able to be more proactive in their business?
~ Do they see differences in their employees as a result of being involved in planning?
~ Can they better identify business strengths and weaknesses or external opportunities and

threats as a result of planning?
~ Has planning helped to clarify goals and strategies better for employees?
~ Have employees been more motivated as they become more involved in strategic planning

or as they are rewarded for achieving strategically relevant targets?

With those questions in mind it is recommended that further research be undertaken and this

study be considered exploratory. Perhaps at some point in time, a model can be developed which

accurately delineates the entire strategic management process in small firms. While prescriptive

in nature, such a model could undoubtedly be an asset in the strategic management process of
small firms.

REFERENCES

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Curtis, D. A. (1983). Strate ic lannin for smaller businesses, Lexington, MA: Lexington
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Haswell, S. Ec Holmes, S. (1989). Estimating the small business failure rate: A reappraisaL
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Hornsby, J. S. dt Kuratko, D. F. (1990). Human resource management in small businesses:
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Kotey, B. tk Meredith, G. G. (1997). Relationships among owner/managers personal values,
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Langley, A. (1988). The roles of formal strategic planning. Lon Ran e Plannin 21 3 40.
Lyles, M. A., Baird, I. S., Orris, J. B. tk Kuratko, D. F. (1993). Formalized planning in small

business: Increasing strategic choices. Journal of Small Business Mana ement 31 2
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Matthews, C. H. 4L Scott, S. G. (1995).Uncertainty and planning in small and entrepreneurial
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McEvoy, G. M. (1984). Small business personnel practices. Journal of Small BusinessM~22 4 2.4.
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Pelham, A. M. bt Clayson, D. E. (1988). Receptivity to strategic planning tools in small
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Peterson, R. A., Kometzky, G., dt Ridgway, N. M. (1983). Perceived causes of small business
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Robinson, R. B. (1982).The importance of 'outsiders'n small firm strategic planning. A~eadem
of Mana ement Journal 25 1 80-93.

Robinson, R. B, bt Pearce, J. A. (1983). Measures for small firm effectiveness for strategic
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Robinson, R. B. kk Pearce, J. A. (1984). Research thrusts in small firm strategic planning.
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Schwenk, C. R. 8t Shrader, C. B. (1993)Effects of formal planning on financial performance in
small firms: A meta-analysis. Entre reneurshi: Theo and Practice 17 3 53-65.

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Carolyn B. Mueller received her Ph.D. in Strategic Management and International Business
Pom the University of South Carolina in 1994. Her research interests include corporate
restructuring, social responsibility, and various aspects ofinternational strategic management.
She taught at Ball State University Pom 1994 to 1999 and will begin teaching at Stetson
University in the fall, 1999.

Douglas JV. Naffzlger received hts D.B.A.Pom the University of Colorado in 1983. He has
taught in the Entrepreneurship Program at Ball State University since 1990. His research
interests include strategic planning in small firms and entreprenewial ethi cs and motivation. He

has papers published in Journal of Small Business Strategy, Entreprenewship: Theory and
Practice, Journal ofSmall Business Management, Journal ofBusiness and Entrepreneurshi p and
other relatedjournals. He has held numerous posts in USASBE and is a past president of the
Great Lakes SBlDA organization.

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