Churchill, a politician and former Prime Minister of the United Kingdom, during the World War II. The Oxford dictionary generally defines plan as “a detailed proposal for doing or achieving something”. In term of management, planning set out an organisation’s objectives and how those objectives could be achieved. Furthermore, planning can be either formal or informal. In formal planning, the time period is included along with written objectives that are distributed internally, whereas informal planning is concerned with little to no written materials (Robbins et al. 2014). Nevertheless, when the term planning is being used, it is often referred to as formal planning. The purpose of this essay is to discuss the controversial effects of formal planning on the performances of firms that were evidenced in a range of empirical studies, the influence it has on newly established ventures and its applicability at the times of environmental uncertainty.
Camillus (1975) states that “companies that plan formally perform better than those which plan informally”, and he also believes that by formalising plans, the firms’ performances can be improved. An important feature of formal planning is strategic planning, which is known as “the process managers use to form a vision, analyse their external and internal environments, and select the strategies they will use to create value for stake holders” (Robbins et al. 2014). It was argued that formal strategic planning has a relationship to the financial performances of organisations, and that relationship could be positive. This argument was evidenced by a study conducted by Robert Arasa and Peter K’Obonyo (2012).
The study was taken in Kenya, a developing country, paying extra attention to the strategic planning steps, and it concluded that firms that have been engaging in a high-level of strategic planning tend to perform better in both financial and non-financial aspects. This conclusion corresponds to another study conducted in 1994, where the firms were measured in term of mean capital returns for a five year period, and resulted that the firms with strategical planning have a higher chance of survival (Capon, Farley & Hulbert 1994). Nevertheless, the relation-
ship between formal strategic planning and performances of firms is considered controversial due to the fact that despite the studies that have proven the positive link between the two, there are ones that prove the complete opposite (Bhide 2000). Researchers believe that the question regarding the above relationship is “complex and difficult” and their “knowledge respective to it is limited” (Shrader, Taylor and Dalton 1984, p. 167) due to the inconsistency of the studies. The link between planning and organisations’ performances was found to be void, with the effects ranging from null to negative, as commented by Boyd on his meta-analysis review (1991). Additionally, formal planning was also confirmed to produce a small negative effect on financial performance, as it was concluded from an experiment that was conducted by banking organisations (Whitehead and Gup 1985). In spite of having studies as supporting evidences for both of the arguments, the question about whether there is a positive relationship is still remains inconclusive, and the positive effect is considered to be surmised.
The difference that arose from the above studies could be due to the difference in objectives of the firms and/or how they define strategic planning (Whitehead and Gup 1985). Since the positive effect on firms through planning is unconfirmed, it is important to narrow down the target population and to observe the influence of planning only on the new firms. Hence, the next section would focus on analysing the influence of planning on the newly established ventures. As an entrepreneur or prospective business owner would like to establish his/her own business, there are decisions needed to be made about whether he/she should develop the business basing on intuition, or whether it should be carefully considered through planning.
This paragraph would closely scrutinise the influence of planning on new ventures, especially on the development of those ventures, including how planning influence the finance acquisition prior to the development of one firm, chances of new ventures to survive, and excluding financial approach since it is not likely for new firms to generate revenue (Stuart, Hoang & Hybels 1999). According to Delmar and Shane (2003), they focus their findings based on three dimensions of venture development, including “product development”, “venture organising activity” and “disbanding” as they believe those three are the most essential factors that contribute to the establishments of firms. As a result, there is an enhancement of all three factors when firms’ founders utilise planning. Other than the study of Delmar and Shane, Perry (2001) and Liao and Gartner (2006) have also found a positive link between the chance of survival of a new venture and planning. In addition, there are a number of financial providers required owners and/or entrepreneurs to present a business plan, such as Royal Bank of Canada, or the Barclays bank of Britain, as mentioned by Karlsson (2005).
Nevertheless, it was argued that the importance of business plan on the development of new ventures were considered to be “overstated” in literature (Karlsson 2005). Based on the research that was completed by Bhide (2000), firms founders tend to use their personal funds or bank loans to set up their businesses, and therefore, the financial providers pay more attention to the ability to pay debts of the firms owners/entrepreneurs rather than their business plans, as evidenced by a survey that was completed by a number of American venture capital and equity firms (Gumpert and Lange 2004). The difference in policy of the financial providers might due to the difference in context or difference in regulations, as the financial providers are not from one specific context. Furthermore, there are different elements other than planning that could have contributed to the success of firms, regardless of their size, and one of those factors is the degree of environmental uncertainty.
Therefore, the next component would emphasis on the applicability of planning during the times of environmental certainty. Environmental uncertainty refers to the risks that emerged from unpredictability (Cyert and March 1963), and there are disputes surrounding the applicability of planning during the time of environmental uncertainty. Examples of environmental uncertainty could be the entry of new competitors or the technological advancement of the firm’s rival. There are ones that in favour of planning in time of environmental uncertainty, suggesting that planning should be implemented by managers as it shows the possible risks (Matthews and Scott 1995; Zollo and Winter 2002), whereas there are those who suggested that in times of environmental uncertainty, firms need to rely on intuition and creativity (Mintzberg 1994; Allinson, Chell & Hayes 2000; Bhide 1994). It was also found that planning shows managers the possible risks and hence develop solutions (Robbins et al 2014;
Matthews and Scott 1995). However, it should also be noted that due to the lack of resources, it is unrealistic for growing and/or newly established ventures to excessively focus on planning as it would be costly (Matthews and Scott 1995). On top of that, a business plan is accused for creating a rigid schedule (Robbins et al. 2014). Originally, a business plan process would comprise of external and internal analysis, formulation, implementation of strategies, and then evaluation of results (Robbins et al. 2014). Nevertheless, in reality, Mankins and Steele (2006) suggest that managers should be innovative and creative to make continuous strategic decisions responding to environmental uncertainty. They also pointed out from their researches that firms only make 2.5 strategic decisions per year on average due to their dependence on the planning process, which in turn defined shortcomings of formal planning such as insufficient time to deal with unpredictable matters.
In other words, firms should continuously being innovative in making strategic decisions rather than relying on a business plan (Mankins and Steele 2006; McGrath 1995; Carter, Gartner & Reynolds 1996; Mintzberg 1994) as it might result in the lost of opportunities (Bhide 1994). In the final analysis, the significance of planning is evaluated throughout the discussion of its effects on performances of firms of different size, how it influence on the smaller/newly developed firms, and its applicability during times of uncertainty. The relationship between performances and planning is discussed mainly in term of financial performances, while the relationship between smaller/newly established firms and planning is discussed primarily in term of survival and the firms’ development processes.
Lastly, the essay assesses different perspectives of analysts on whether or not planning is utilisable during the time of uncertainty. Since the results are inconclusive for the most part due to the difference in contexts of studies, it is undeniable that planning would be an important element that business owners should look at in order to improve the chance of success. It is recommended that the business owners should be innovative to fix the rigid nature of planning, and to be flexible when it comes to the time of environmental uncertainty. Additionally, if formal
planning is considered to be unaffordable for smaller firms, the firms founders could be engaging in informal planning, or short-term planning rather than depending merely on intuition.
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