RESEARCH ON SMALL BUSINESS STRATEGIC PLANNING PRODUCES DIFFERENT RESULTS

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1 ABSTRACT RESEARCH ON SMALL BUSINESS STRATEGIC PLANNING PRODUCES DIFFERENT RESULTS Walter E. Greene, Pan American University Many articles cajole the small business entrepreneurs to make strategic plans so that they will not fail. Yet when the small business entrepreneurs read several articles on strategic planning for small businesses, and attend seminars organized for their benefit, they are bombarded with conflicting data. Why does so much of published research arrive at different, i.e., contradictory conclusions? To understand why the "experts" in small business and strategic planning offer such conflicting data is the purpose of this article. The conclusion reached is that data collection is not at fault, rather that many small business researchers do not fully disclose nor explain their methodology, thus making comparisons difficult if not impossible. CONFLICTING INFORMATION Many articles cajole the small business entrepreneurs to make strategic plans so that they will not fail. Yet when the small business entrepreneurs read several articles on strategic planning for small businesses, and attend seminars organized for their benefit, they are bombarded with conflicting data. To understand why the "experts" in small business and strategic planning offer such conflicting data is the purpose of this article. A sample of conflicting information is listed as follows: " (My) most important finding is that the extent of long-range planning was unrelated to company performance, whether assessed by sales growth or return on assets." (Orpen 1985) "(P)lanning firms are more successful. They should serve as models for non-planning firms desiring improved results." (Jones 1982) "... the performance of small banks engaging in formal planning is not significantly better than non-formal small bank planners." (Robinson & Pearce 1983) "(S)trategic planning can help firms to survive and prosper." (Sexton & Van Auken 1985) To answer the question, "Why different and conflicting recommendations?" one must delve beyond the declaratory statements and into the research which prompted these conclusions. Small business owners know that time is valuable, and strategic planning, if not beneficial, is an unnecessary waste of time. The results of research, if not consistent, prove of little or no value to the small, independent business owner. But, the fault may not lie with the results as much as with the definitions on which the research was based. Three questions which should be answered by all researchers. All research performed to determine whether strategic planning is beneficial for small businesses should be based on three questions which the researcher must answer before he even begins to consider the methodology which will be used in the study. They are: 1. What is small business? 2. What is strategic management?; and 3. What measure of performance indicates whether strategic planning was beneficial or not? The questions require definitions, and these definitions are, or should be, evaluated and decided upon before any collection of data or performance of tests is begun. This is important since comparisons cannot be made if definitions are changed in order to conform to the data or to statistical tests which the research wishes to perform. In order for results to be consistent between studies, the definitions must be consistent, particularly when the subject is small business. "(S)mall businesses are not smaller versions of big businesses." (Shuman & Seegar 1986) Small businesses are not as homogeneous as big businesses; they may be operated by one person or many, they may have

2 access to large amounts of funds or access to little, or they may have one product or several. Most are entrepreneurial in nature, most are new; witness the large number of small business failures each year.. If operated by one person, they often close if that person dies or becomes unable or unwilling to continue the business. Given the differences in small businesses and the differences between small and large businesses, the three questions and their definitions take on added significance. REVIEW OF THE LITERATURE A review of the literature revealed the following definitions and populations that were used in describing "small businesses". 1. Under 500 employees. (Henz 1986) 2. Annual sales of less than $5 million. (Bracker & Pearson 1986) 3. Up to 280 employees in mature industries. (Davig 1986) 4. Independent (either privately held, proprietorship, or partnership), sales of at least $100,000 but less than $25 million. (Shuman & Seegar 1986) 5. Independently owned and operated businesses in the central Texas region, around Waco. (Sexton & Van Auken 1985) 6. Federal and state chartered commercial banks in South Carolina considered small by industry standards. (Robinson & Pearce 1983) 7. Owners attended a small business conference (no further data listed). (Orpen 1985) 8. Dun and Bradstreet's Million Dollar Survey for Virginia. (Jones 1982) There may have been additional criteria used by the researchers mentioned above however, none was stated in their articles. Also notice that many of the definitions used only the number of employees as their major criteria, or only the dollar amount of sales, and one even rejected small business sales of less than $100,000. Also notice that none of the researchers used the Small Business Administration's definitions which varies according to industry, such as: - Under 500 employees for manufacturing firms, or - less than $7 million average sales per year over a three-year period for retailing firms. ADDITIONAL FACTORS WHICH SHOULD BE CONSIDERED Several other factors, not always considered in these definitions, might be included in the definition of small business: 1. The firms position on their business life cycle. The positioning of the business on its life cycle would help determine the length of time the business has been in operation and its growth relative to other firms. It would also help to indicate the amount of strategic planning needed and what direction it should take. Since several of the studies used the amount of time spent on strategic planning by owners and top managers, the positioning of the firm on its business life cycle would help the research determine whether or not the stage of development was a factor in the results (see Figure 1 for the typical business life cycle). FIGURE 1 TYPICAL BUSINESS LIFE CYCLE 2. The years in business. Since the majority of small businesses fail within the first two years of operation, in any one year a substantial number of small businesses are new. The owner of a small business in its first years of operation may be more worried about immediate cash flow problems or may simply be adjusting to the environment, and may have little or no time for strategic planning. Sales for the first year are highly unpredictable and strategic planning is difficult to perform if there is no historical information. Therefore, to compare a firm which has been in business for thirty years with one in its first year could produce misleading information. 3. Private or publicly held. Whether a firm is privately or publicly held determines, in a large measure, its financial resources. Publicly held firms have the option to sell stock if additional capital is needed and credit institutions are more likely to lend if the company falls under the regulations imposed by the S E C on all publicly held companies. A survey by this author of local small business reveals over 90% of small businesses are private, i.e., family owned and operated. A firm's strategic options are limited if it is limited in its ability to borrow funds, or must rely upon the owner (s) for additional contributions and earnings for continued operations. Therefore, the alternatives to be considered are fewer and the time spent in strategic planning is less.

3 4. Type of business. Whether a firm is a retail, service, or manufacturing firm is more important for a small business than for big business. Since a small concern is more likely to rely upon one or few products or services for its success, the business itself is more likely to revolve around these. A large retailing corporation, Macy's for instance, and a large manufacturing corporation such as IBM are similar in many ways, from their functional/divisional separations to their use of corporate planners. But, a small retail operation with only one outlet-and a hand-work leather manufacturing firm (both of which are operated by the owner) may differ in many respects: personnel and management resources, functional department (usually none), financial resources, or dependency upon suppliers or customers for credit. To compare firms whose entire structure is centered around one operation and this operation varies between firms, is difficult and often better left not done. 5. Number of top management personnel. Although the exact number may vary, "large" businesses have a lot of top management personnel, many highly educated or trained, and specialized. A small business may have one person running the organization or a small number of "top" management personnel. Most likely it will be a "family affair." If one person runs the firm, he may or may not be college educated, sophisticated in strategic planning techniques, and able to delegate duties to subordinates (is any). He may or may not be a risk taker. Comparing firms with one-person management to a firm with several managers is difficult. Needless to say, there are probably many other factors in small businesses which should be considered before a researcher establishes the definition which he will use in his study. Many of these factors may be considered insignificant if a study on strategic planning in large businesses is planned. The studies examined used between one (1) and three (3) of the possible seven (7) factors presented here in their determination of a definition of small businesses (see figure 2 for seven (7) significant distinguishing factors in small businesses). Consistency with regard to the definition of a small businesses would help to make the results of the studies more consistent and much more comparable. WHAT IS STRATEGIC MANAGEMENT? Strategic management is generally defined as the process (planning) used to develop, refine, and implement actions (decision-making) in order to achieve the desired outcomes. A good generic definition of strategic planning might be: The forming of strategic plans which outline the actions necessary to achieve (long-term) goals (see figure 3 for the elements of strategic management). FIGURE 2 SIGNIFICANT DISTINGUISHING FACTORS IN SMALL BUSINESSES A SMALL BUSINESS - PRIVATELY OF PUBLICLY HELD - YEARS IN BUSINESS - NUMBER OF EMPLOYEES - YEARLY SALES - POSITION ON BUSINESS LIFE CYCLE - TYPE OF BUSINESS - NUMBER OF TOP MANAGEMENT The studies examined displayed little consistency in their definitions of strategic management or strategic planning. A sampling of some of the definitions of strategic plans, (or the planners themselves), follows: 1. Formal planners versus informal planners. (Bracker & Pearson 1986) These planners were divided into subcategories according to four types of plans: Structured written strategic long-range plans (SSP) Structured written operational short-range plans (SOP) Intuitive unwritten plans (Experience) (IP) Unstructured plans (No plans) (UP) 2. Competitive strategic plans. (Davig 1986) These plans include four types of competitive strategies: Defender (niche) strategy Prospector (first) strategy Analyzer (stability) strategy Reactor (respond only) strategy FIGURE 3 ELEMENTS OF STRATEGIC MANAGEMENT STRATEGIC PLANNERS OPERATIONS PLANS STRATEGIC LONG-RANGE PLANS GOALS INVESTMENT PLANS COMPETITIVE STRATEGIES 3. Working plans versus investment plans. (Fry & Stoner 1985) The working plan provides information and guidance

4 for making operational decisions while the investment plan focuses on financial issues only. 4. Small-scale planners versus large-scale planners. (Moyer 1982) A small-scale planner uses operating plans to improve present operations. A large-scale planner rejects self-imposed limitations and pursues new options. 5. Five levels of strategic planning. (Sexton & Van Auken 1985) They include five (5) strategic planning levels: SLO No knowledge of next year SLl Knowledge of next year's sales, company only SL2 Knowledge of next year's sales, company and industry SL3 Knowledge of SL2 and anticipated company profits SL4 All of the above plus profit implementation plans 6. One study produced no definite conclusions regarding the amount of time spent in strategic planning, but gave specific characteristics of the planners. (Jones 1982) Planners: Generally view environment as more restrictive View the environment as less threatening Are more likely to engage in group discussions Are older and more educated Use more techniques to search for opportunities Aside from the obvious, that strategic planning is "planning", the researchers did not agree on a definition for strategic planning. Consistency with regard to what is being measured is a definite requirement for producing consistent results between studies. PERFORMANCE MEASURES Measurement should be on what is in the strategic plan. The strategic plan itself should be the criterion for measurement. Most of the studies reviewed used a different performance measure to determine if their definition of strategic planning was beneficial to the financial performance of their uniquely defined "small business". Notice that some of the studies used one year as their strategic planning horizon while others used a longer period of time. It should be noted here that approximately 50% of small businesses fail within their first year of operation and nearly 90% fail during their second year. Some studies differentiated between types of strategic plans or used a specific area of strategic planning. A common feature in many of the studies was a question regarding whether the plans were formal (written) or informal (unwritten). Among the different performance measures were: 1. Revenue growth. (Orpen 1985) 2. Annual sales. (Sexton & Van Auken 1982) 3. Sales per employee and return on fixed assets. (Henz 1986) (see figure 4 for matrix used) 4. Companies going out of business. (Sexton & Van Auken 1985) 5. Loan growth. (Robinson & Pearce 1983) 6. Return on equity. (Robinson & Pearce 1983) 7. Profit margin. (Robinson & Pearce 1983) 8. Entrepreneurial compensation growth. (Bracker & Pearson 1986) 9. Labor expense/revenue ratio growth. (Bracker & Pearson 1986) Although there is enormous flexibility in performance measures which may be used, a certain consistency between studies should be encouraged. The use of different measures allows the evaluation of many areas of performance, but the use on only one or two performance measures which have not been used in another study may hide important information. If a consistent correlation is to be found between strategic planning and financial performance, at least some of the same measures of performance must be used. FIGURE 4 SIMPLE FORM, LEAN STAFF PERFORMANCE MATRIX 100 SALES PER EMPLOYEE LESS THAN GOOD (THOUSANDS) STANDARD 60 LESS THAN POOR STANDARD SOURCE: "IN SEARCH OF EXCELLENCE--THE LESSON FOR SMALL BUSINESSES", SAM ADVANCED MANAGEMENT JOURNAL. (4, 33) ADDITIONAL FACTORS Besides the three (3) basic definitions stated in the introduction above, there are other factors that should be mentioned which affect the results of the various studies. Granted, these factors affect the results of all types of research regardless

5 of topic. But, they are not insignificant enough to ignore. 1. Methods of data collection. Examples of different methods used included: Questionnaires. (Bracker & Pearson 1986) Self reporting. (Davig 1986). Estimates of time spent on strategic management performed by independent judges. (Orpen 1985) Interviews. (Sexton & Van Auken 1985) Self ranking. (Jones 1982) 2. Accuracy of performance measures. If the company is publicly held, measures of performance are available through published sources. But, as in most cases, if the company is privately held, the reliability of this data supplied by the owner may be questioned due to the natural inclination of people to distort data so that it (they) appears more favorable. It is not the different data collection methodologies that makes the studies incomparable, rather it is the absence of identical operational definitions for the critical concepts of "small businesses" and "strategic planning." Another pivotal point to consider is that many small business researchers do not fully disclose or explain their methodologies, thus making comparisons difficult if not possible. The point to be made is that the reader should always approach a study with a healthy degree of skepticism. CONCLUSIONS AND RECOMMENDATIONS Evidence does not tell us if the strategic plan was or was not useful for the small business, only that the evidence so far is contrary and thus inconclusive. Research, if it is to be useful by small business owners, should be consistent. This means that researchers must approach the subject in a manner which a small business owner would understand, rather than in a manner which awards the researcher critical acclaim for his originality or his unique approach. If research is actually performed to benefit the small business owner in planning, then researchers should follow at least three general guidelines: 1. Define "small businesses" consistently. Due to the uniqueness of small businesses, number of employees and upper limits on sales should be constrained to a much smaller range. Where possible, the research should attempt to use the standard definition supplied by the Small Business Administration. Additionally, care should be exercised that the firms chosen for study are also comparable in the following areas: a. years in business; b. privately or publicly held; c. type of business; and d. number of top management personnel (specify whether top management personnel are predominately family members who own the majority of the company). 2. Define strategic planning consistently. A consistent definition of strategic planning should be used both within studies and between studies of small businesses. This is an area where, in order to make research more usable, the researcher must wake an attempt to conform to previous studies rather than to set out his own parameters. 3. Use at least some performance measures which have been used before. This is not to say that all performance measures should be consistent from study to study, but that certain measures are more "revealing", i.e., comparable, than other measures might be. One method of ensuring comparable, hopefully consistent, results is for one researcher to use the same definitions as a previous researcher; and for all researchers to include more details as to their methodology and definitions in their research, thereby permitting other researchers to repeat and verify previous research. Without a measure of consistency and comparability in the results of studies, they are useless to small business owners. The theory looks nice but there is no proof that strategic planning actually improves the financial performance of a small business. Intuitively, it sounds as if it should; but without adequate research to support the claim, the theory remains a theory. Since one set of definitions or sets of attributes do not conveniently fit all small businesses, further research should be constrained within one of the two sets of assumptions: Assumption Set I

6 1. Sales less than $1 million. 2. Less than 50 employees. 3. In business for more than one year. 4. All privately held (or all publicly held). 5. An even mix of retailing, manufacturing, and service firms. (Specialized research may be in any one of the three.) 6. Top management personnel are predominately family members who own the majority of the company (in privately held firms). Assumption Set II 1. Sales less than $7 million (over- $1 million). 2. Less than 500 employees (more than 50 employees). 3. All privately held (or all publicly held). 4. In business for more than one year. 5. An even mix of retailing, manufacturing, and service firms. (Specialized research may be in any one of the three.) 6. Top management personnel are predominately family members who own the majority of the company (in privately held firms). Once sufficient research has been performed within the constraints of the two assumptions sets outlined above (which fall within the definition of small businesses as defined by the Small Business Administration) research can then be compared to the results of previous studies. All studies should use a definition of strategic planning which will not vary between firms or studies. It is recommended that the following definition be used: Strategic plans are those written, formalized implementation plans for activities to be performed by the business which are directly related to goals anticipated to be achieved within the next year. Long-range strategic plans should have the same definition except achievement will take longer than one year. All studies should include as many performance measures as the researcher deems necessary, but must as a minimum include two (2) or more measures from each of the following two categories: 1. Performance measures: revenue growth labor expense/research growth sales growth per employee annual sales 2. Income measures: return on assets return on equity profit margin leverage loan growth As previously stated, after sufficient research has been performed using the same definitions, the use of small business research will be more useful to small businesses. Adoption of the above recommendations will alleviate some of the problems of inconsistent and incomparable results. REFERENCES [1] Bracker, J.S. and Pearson, J.N. "Planning and Financial Performance of Small, Mature Firms". Strategic Management Journal, Volume 7, (1986) pp [2] Davig, W. "Business Strategies in Smaller Manufacturing Firms". Journal of Small Business Management, (1986) pp [3] Fry, F.L. and Stoner, C.R. "Business Plans: Two Major Types". Journal of Small Business Management, (1985) pp [4] Henz, D.J., "In Search of Excellence--The Lesson for Small Businesses". SAM Advanced Management Journal, (1986) pp [5] Jones, D.W., "Characteristics of Planning in Small Firms". Journal of Small Business Management, (1982) pp [6] Moyer, R., "Strategic Planning for the Small Firm". Journal of Small Business Management, (1982) pp [7] Orpen, C., "The Effects of Long-Range Planning on Small Business Performance: A Further Examination". Journal of Small Business Management, (1985) pp [8] Robinson, Jr., R. B. and Pearce II, J.A., "The Impact of Formalized Strategic Planning on Financial Performance in

7 Small Organization". Strategic Management Journal, Volume 4, (1983) pp [9] Sexton, D.L. and Van Auken, P., "A Longitudinal Study of Small Business Strategic Planning". Journal of Small Business Management, (1985) pp [10] Sexon, D.L. and Van Auken, P. "A Longitudinal Study of Small Business Strategic Planning". Journal of Small Business Management, (1982) pp [11] Shuman, J.C. and Seegar, J.A., "The Theory and Practice of Strategic Management in Smaller Rapid Growth Firms". American Journal of Small Business, (1986) pp, [12] U.S. Small Business Administration, Office of Advocacy.