Business Psychology - Latest Findings

Article No. 221
Business Practice Findings, by James Larsen, Ph.D.

Business Planning and Performance

Researcher explores business planning and finds relationships with success.

Business planning. "Do it," say the experts, but business owners resist. "What a waste of time. I've got work to do. I've got products to get made. I've got deadlines to meet. I've got customers to find."

If you're a business owner, and business planning provokes similar thoughts in you, you've got a lot of company.

In a recent study conducted by Leslie Rue of Georgia State University, 40% of those who answered his survey admitted they had no written business plans at all, while many others failed to even respond to his survey. That left 152 companies (or 60%) that answered his survey and described some kind of written business plans.

Past research that explored business planning has tended to focus on large companies and to concentrate on the content of their plans. Most often, this research described the strategic choices they made to position their products relative to their competitors. But this research has always had a serious drawback: although the choices made by these companies can clearly be seen to lead to good results for them, the same choices made by other companies in other industries, at different times, could easily lead to disaster. The lessons we could learn from this research were few.

Rue attempted to correct this problem by focusing on the process of business planning, rather than on the content of the plans. He measured the thoroughness of the planing process, and he questioned firms about their business practices. He wanted to learn if their ongoing practices followed their business plans.

For example, do firms state their business objectives in business terms that can be measured, such as sales, return on investment, market share, and sales/earnings ratio?

Do firms budget for hiring and training, expansions, new product development, advertising, acquisitions, and opening new markets if these are part of their business plans?

Do firms measure and track trends that are relevant for their business plans such as economic factors, technological breakthroughs, and population trends?

Do firms carry out ongoing measurements that will detect differences between their business plan and actual performance of their firms?

And finally, do firms formulate contingency plans to correct problems if their measurements indicate important discrepancies between hoped for and actual conditions?

Rue categorized firms into one of three groups: 1) no written plans, 2) moderately thorough plans, and 3) thorough plans, and then he compared this thoroughness to measures of business success.

Return on investment revealed no differences between companies that planned and those that did not. There was no measurable difference in profit. Perceptions of performance revealed slight differences. Executives of firms that followed business plans believed they were slightly more successful than executives of firms that did not follow plans. Finally, measures of sales growth showed clear and increasing differences between firms that failed to plan, those that followed moderately thorough written plans, and those that followed thorough written plans. Sales grew faster for firms with increasingly thorough planning processes.

Rue was perplexed, and he found himself fishing for explanations of how clearly higher sales growth could fail to be reflected in increased profit. But the important point for us is that he did find evidence that thorough planning helps performance, so the conclusion is obvious: Check your business plans. Ask the same questions he posed, and adjust your plans and your practices accordingly. You have only higher sales to look forward to.

Reference: Rue, Leslie W., and Nabil A. Ibrahim (1998) The Relationship between Planning Sophistication and Performance in Small Businesses. Journal of Small Business Management, October, 24-33.

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