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Weekly UpdatesABSTRACT
This study investigates the relationship between strategic planning and firm performance in a non-western, emergent market context. Based on a sample of 28 Jordanian manufacturing organizations, and employing both financial and behavioral indicators of firm performance, this study found strong support for the conventional wisdom regarding the merits of strategic planning. It was found that firms engaging in strategic planning have better financial and behavioral performance than firms that are not implementing this important practice.
INTRODUCTION
The inconsistent nature of empirical research findings investigating the relationship between strategic planning and firm performance is the primary motive for conducting this study. The question of whether strategic planning pays off has been the subject of numerous empirical investigations over the past three decades. A substantial body of empirical research has accumulated, which attempts to clarify the links between strategic planning and firm performance. Surprisingly, there is at yet no consensus as to whether strategic planning has an impact on firm performance. Rather, the results of this line of inquiry are still fragmented and inconsistent. A number of studies examining this relationship indicate that strategic planning pays off, and that organizations using formal strategic planning significantly outperform those that do not (Ansoff et. al., 1970; Braker, Keats and Pearson, 1988; Braker and Pearson, 1986; Burt, 1978; Herold, 1972; Karger and Malik, 1975; Miller and Cardinal, 1994; Orpen, 1985; Pearce, Robbins and Robinson, 1987; Rhyne, 1986; Robinson, Pearce, Vozikis, and Messon, 1984; Sapp and Seiler, 1981; Schwenk and Shrader, 1993; Thune and House, 1970; Welch, 1984; Wood and LaForg, 1979). On the other hand, a number of studies cast doubts on the value of strategic planning (Fulmer and Rue, 1974; Grinyer and Norbum, 1975; Klein, 1981; Kudla, 1980; Leontiades and Tezel, 1980; Lindsay and Rue, 1980; Robinson and Pearce, 1983; and Unni, 1981).
A review of literature indicates that the majority of research has shown strong and consistent bias toward western context organizations, mainly in the U.S. and Western Europe. Little research is available that investigates the relationship between strategic planning and firm performance in other contexts in developing and emergent markets. Therefore, bringing new data sets from these markets will provide valuable information to answer the question of whether a similar pattern of this relationship prevails across various contexts. The primary purpose of this study is to bring new evidence from Jordan, an emerging market context. The study is conducted to examine the relationship between strategic planning and firm performance in Jordanian Manufacturing Organizations (JMOs). Another contribution of this paper is related to the measurement of firm performance. Most of the previous research has exclusively focused on financial indicators of firm performance. This narrow conceptualization of the construct of firm performance limits our ability to investigate the impact of strategic planning on other aspects of performance such as behavioral indicators. Therefore, a broader perspective is required to enrich our understanding of this construct. In this study, we examine the impact of strategic planning on both financial and behavioral measures of firm performance. Four indicators are selected to assess the behavioral performance of organizations. This includes adaptability, job satisfaction, attractiveness, and retention ability of the firm.
To satisfy the primary purpose of this paper, it is divided into four sections. In the first section, we review the relevant literature, which provides a theoretical and conceptual foundation for developing the hypotheses. The second section describes the data collection, operationalization of variables and statistical issues. Empirical results are presented in the third section. Finally, research findings are discussed and summarized and implications are suggested for both future research and practice.
LITERATURE REVIEW AND HYPOTHESES
Empirical research on the impact of strategic planning on organizational performance was initiated by pioneering studies such as Najjar (1966), Ansoff et al. (1970), Thune and House, (1970), and Herold (1972). Their findings confirmed the prevailing wisdom about the usefulness of strategic planning. Following them were numerous research efforts conducting similar analyses. Unfortunately results were inconsistent. Some reinforce the positive impact of strategic planning (Karger & Malik, 1975; Burt, 1978); others cast doubt about its usefulness (Fulmer & Rue, 1974; Grinyer & Norburn, 1975); while the others (Guynes, 1969; Leontiades & Tezel, 1980) failed to establish a significant link between perceived importance of planning and organizational performance.
This inconsistent nature of results motivated some researchers to investigate these studies to obtain possible explanations for this divergence in findings. Kudla (1980) criticized previous studies as lacking "control of extraneous, independent variables that could have influenced performance" (p. 7). Surprisingly, he ignored controlling for industry effects, despite its preeminent position as a contingency variable (Beard & Dess, 1979, 1981; Dess, Ireland, & Hitt, 1990), justifying his position that "industry effects account for a relatively small part of the rate of return variance" (p. 7). His study failed to establish a relationship between strategic planning and organizational performance. Robinson and Pearce (1983) noticed that past research has shown a strong bias toward large organizations, and that there was only very limited empirical research which examined the strategic planning-performance relationship in small organizations. In response, several studies were conducted (Robinson and Pearce, 1983; Robinson et al., 1984; Orpen, 1985; Pearce, Robbins, and Robinson, 1987; Ackelsberg and Arlow, 1985; Shrader et al, 1989; Robinson et al., 1986; Unni, 1981). Results again failed to establish a clear, strong relationship between strategic planning and organizational performance. While Klein (1981), Robinson and Pearce (1983) and Unni (1981) found no relationship, Ackelsberg and Arlow (1985), Orpen, (1985), Pearce et al, (1987), Robinson et al., (1984), Robinson et al. (1986), Sapp and Seiler (1981), Shrader et al. (1989), and Wood and LaForge (1979) supported a positive relationship.
Further studies were conducted later on (Bracker and Pearson, 1986; Ramanujam et al., 1986; Bracker, Keats, and Pearson, 1988; Rhyne, 1986). Ramanujam et al. (1986) investigated the impact of five dimensions of the strategic planning system on organizational performance. Bracker and Pearson (1986) and Bracker, Keats, and Pearson (1988) results reinforced the overall positive impact of strategic planning on organizational performance when they controlled for the potential effects of both size and environment.
Despite the large volume of studies that has accumulated over the past three decades to clarify the form, strength and direction of the relationship between strategic planning and organizational performance, very little can be said with certainty about this relationship. This inconsistent and vexing nature of empirical research findings presented insofar encourages researchers to examine this relationship in different contexts.
Most of the empirical research conducted within the boundaries of this paper shows a strong bias toward examining the link between strategic planning and firm performance in U.S. and U.K companies. To the best of the authors' knowledge, no study exists that is primarily and explicitly concerned with empirically examining this relationship in emergent markets such as Jordan. Therefore, the first concern of this paper is to examine the relationship between strategic planning and financial performance of the firm in JMOs. Following the conventional wisdom that advocates the positive impact of strategic planning on firm performance, the following two hypotheses are developed:
H1: Organizations engaging in formal strategic planning have a significantly higher return on asset (ROA) than organizations that do not.
H2: Organizations engaging informal strategic planning have a significantly higher growth rate in revenue than organizations that do not.
The exclusive focus on financial indicators of firm performance has limited our ability to examine the impact of strategic planning on other important aspects of performance. This over reliance on economic indices to assess performance is in fact a partial conceptualization of this construct, especially within strategic context. Much criticism has been directed at the financial indicators due to their inability to encompass the multidimensionality of organizational performance (Chakravarthy, 1986; & Dess & Robinson, 1984). Alternatively, instead of relying on strict and narrow economic figures, subjective assessments of performance was suggested as an appropriate means to capture the multidimensionality of this construct (Dess & Robinson, 1984). Drawing on this suggestion, the current study utilizes no financial indicators of organizational performance in addition to economic performance. Four behavioral indicators have been found to be common in literature (AI-Shammari & Al-Shaikh, 1993; Cameron, 1981; Lewin & Minton, 1986). They are: (1) Adaptability, which refers to the ability of the organization to cope with changes that occur in the environment in which the organization exists, (2) Job satisfaction, which reflects the degree to which members of the organization are satisfied with their work, (3) Attractiveness, which measures the ability of the organization to attract and hire quality labor force, and (4) Retention, which assesses the ability of the firm to retain quality people within the firm. Based on these four measures of behavioral performance and consistent with the conventional wisdom, the following hypotheses are developed:
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