How useful is formal business planning in small enterprises?

The importance and value of planning within small to medium enterprises (SMEs) has been debated within the academic literature for decades. For example, Karl Vesper, writing in the Journal of Business Strategy in 1980 suggested that more should be done to understand how to assist newly established ventures so as to reduce their rates of failure.

Research thrusts in SME strategic planning

In 1984 Richard Robinson and John Pearce published a major review of research into strategic planning in the Academy of Management Review. Their paper overviewed the research literature to that period and asked a series of important questions. These related to what they described as four key “research thrusts”.

The first of these was the lack of formal planning in small firms. Related to this was series of questions as to whether this lack of planning was a problem, whether planning differentiated growing firms from “mom and pop” businesses. They also suggested that more research be done into why small firms did or did not plan and how such planning might best be undertaken and supported.

A second “thrust” was to understand what value a small firm might get from formal strategic planning. Related questions here were whether there was any difference between firms by environmental conditions, type of industry, stage of development, structure or ownership. The benefits of longitudinal studies were also discussed as an area for enhanced research.

The third “thrust” was associated with the actual process of planning within the small firm. In particular how formal or informal should such planning be, what is the role of “outsiders” in supporting such planning, and what specific activities should be involved.

Finally, there was a suggestion that research should focus on what strategic options small firms had. In particular whether they needed particular capabilities to pursue given strategies and what impact technology or business model design might have on such strategies.

The role of firm age, size and entrepreneurial leadership

Since its publication in the mid-1980s Robinson and Pearce’s paper has been cited at least 381 times. However, only a few authors had attempted to address the research questions they raised. By 2006 Suzanne Richbell, Doug Watts and Perry Wardle, were writing in the International Small Business Journal about business planning in small firms and the role played by owner-managers. They did not cite Robinson and Pearce, but they did find that more than half (54%) of the firms they studied did not have formal written business plans.

Their research also pointed to the importance of education to whether or not a small business owner engaged in planning. Owners with post-secondary educations were more likely to prepare formal business plans than their less educated counterparts. Also, owner-managers who had held operational roles prior to owning their business, and serial entrepreneurs with past experience, were more likely to engage in formal business planning.

Owner-managers who had worked in medium or large firms prior to launching into their own business venture were also more likely to possess written business plans. This was also the case for owners who were engaged in industry sectors where they had not held previous employment. Finally, small business owners who were from outside the local community in which the business operated were also more likely to engage in formal planning than their counterparts who were embedded in the community.

Examining the literature

In 2009, in the book The Strategy of Small Firms, my co-author Sophie Reboud and I devoted two chapters to reviewing the academic literature relating to planning and strategy in small firms. We reviewed the literature from 1958s to 2007 and included both peer reviewed and other relevant works.

Our findings suggested that with respect to the motivations, process and benefit of planning and strategy in the small firm, the overall “pattern emerging from the literature was inconsistent and lacking in both definition and solid theoretical foundations” (p. 68). Planning by small businesses was generally informal and operational in nature, and heavily dependent on the characteristics and entrepreneurial orientation of the owner-manager.

In terms of the value of planning to small firms, our review found that it was difficult to identify a clear pattern of evidence in support or opposition. As we noted:

“Based on the evidence so far we can conclude that while small firms appear to gain benefits from planning, the value of this planning is contingent on the nature of the interplay between the firm’s task environment, organisational configuration and managerial characteristics” (p. 73).

In other words the context in which the firm’s planning was taking place, specifically the way in which the owner-manager dealt with uncertainty and complexity, plus the balance between operational and strategic issues appeared to influence the value of planning.

Overall we concluded that the small firm will most likely benefit from planning, but the amount or formality of the planning was less important than the owner-manager’s ability to think in a systematic and analytical manner. Formal planning was found to be more important where the business was highly complex (e.g. with multiple divisions), or where it had outsiders who needed to be communicated with.

The characteristics of the owner-manager, in particular their entrepreneurial orientation, past industry experience and level of education, were all identified as important. Outsiders could play a role in assisting small firms with planning, but their value depended on the ability of the owner-managers to understand and absorb their advice.

Different planning responses for different contexts

Our review of the small firms planning literature led us to the conclusions that there is a need to look at small business planning within the context of how the entrepreneur or owner-manager perceives risk in the face of environmental uncertainty and/or organisational complexity. Also important is their sense of whether they believe they have sufficient information to make decisions.

We proposed four types of planning response depending on the conditions. The first of these is “the shopkeeper” where the level of uncertainty and complexity were low. Here only rudimentary business plans of an operational nature were likely to be required. The emphasis was on fine tuning the business.

The second planning response is “the administrator”. Here the level of organisational complexity was high but the level of environmental uncertainty is low. Planning in this context is more appropriately focused on structured but operational rather than strategic plans.

The third planning response is “the salesman”, where the complexity is low but the level of uncertainty is high. In this context planning is most likely to be of an informal albeit strategic nature that focuses on market development.

The fourth planning response is “the CEO”. Here the level of both uncertainty and complexity is high. Planning is likely to be useful within this context if it is strategic and structured. However, what the most appropriate planning response might be and what the firm’s owner-manager or entrepreneur might actually do are dependent on their characteristics and perceptions.

Planning or storming the castle

In 2010 Jan Brinckmann, Dietmar Grichnik and Diana Kapsa published a paper in the Journal of Business Venturing that asked the questions whether entrepreneurs should plan or just storm the castle. Their study was a meta-analysis of 46 empirical papers that dealt with planning in small firms. They also found that the academic literature in this area was “fragmented and contradictory”.

This meta-analysis found a positive relationship between formal business planning and firm performance, particularly for established firms. There was a clear divide between firms that were new or engaged in start-up, and those that had become established and were now stable. For the established firms, formal planning was found to be of more value. Both the plan itself and the process of developing the plan were found to be important in enhancing firm performance.

For the younger firms the lack of reliable market or operational information, plus the higher levels of environmental uncertainty, meant that the value of planning was diminished. In these circumstances the entrepreneur or owner-manager should avoid adopting a “process mindset” that places planning ahead of implementation. Instead a more flexible approach is required with adaptive learning forming the foundation of how planning should be undertaken.

Effectuation or formality in planning

The publication of Saras Sarasvathy’s paper on “Causation and Effectuation” in the Academy of Management Review in 2001 has substantially reshaped how academics think about the process of new venture creation. This theory suggests that planning is less useful due to the inability of the entrepreneur to know what to plan for.

The traditional causation model of formal planning is one in which there is a “logic of prediction”. However, this is less relevant to understanding the entrepreneurial process than the effectuation model that is driven by “logic of control”. Causation models work well in relatively stable environments where there is good data on likely outcomes for given activities. In other words, if the future can be predicted it can be controlled.

However, in highly uncertain and complex environments the ability to predict and control the future is impossible. Only the things over which the entrepreneur has control are relevant. What they can afford to lose and the risks that they feel are therefore acceptable matter. Also who they know and their knowledge of how they might exploit opportunities are important. In these conditions planning becomes less important than adaptive learning.

Whether formal planning is or is not of value to small firms continues to be debated. The emergence of effectuation theory has assisted in helping to explain why formal planning may be of less value to start-up ventures, or guiding the entrepreneurial process. However, it does not refute the need for planning.

The findings from past research into small business planning and its benefits remains fragmented and unsatisfying because there is a need to better understand the context in which any planning takes place. This was the point made by Richbell, Watts and Wardle (2006), by Mazzarol and Reboud (2009) and by Brinckmann, Grichnik and Kapsa (2010). No single model of planning applies and firms that are in their formative stages are likely to behave very differently to those that have become established.

Nevertheless, we can see a pattern of support for formal business planning for established firms, or where there is a need to systematically address task environments in which high uncertainty or complexity are compounded by the need to engage with stakeholders. In summary, planning remains important to a small firm, but its value is contingent on the situation that confronts its owners and their ability to engage in the process of developing and implementing plans.

References

Brinckmann, J., Grichnik, D., and Kapsa, D. (2010). "Should Entrepreneurs Plan or Just Storm the Castle? A Meta-analysis on contextual factors impacting the business planning-performance relationship in small firms." Journal of Business Venturing 25(1): 24-40.

Mazzarol, T., and Reboud, S. (2009). The Strategy of Small Firms: Strategic Management and Innovation in the Small Firm. Cheltenham, UK; Northampton, MA; , Edward Elgar.

Richbell, S. M., Watts, H. D., & Wardle, P. (2006). "Owner-managers and Business Planning in the Small Firm." International Small Business Journal 24(10): 495-514.

Robinson, R. B., and Pearce, J.A. (1984). "Research Thrusts in Small Firm, Strategic Planning." Academy of Management Review 9(1): 128-137.

Sarasvathy, S. D. (2001). "Causation and Effectuation: Toward a Theoretical Shift from Economic Inevitability to Entrepreneurial Contingency." Academy of Management Review 26(2): 243-263.

Vesper, K. (1980). "New venture planning." Journal of Business Strategy 1(2): 73-75.