Critically evaluate the impact of formal strategic planning on the business performance of Hospitality SME's

Various studies have been undertaken to investigate the relationship between strategic planning and its impact on the performance of SME’s (i98joaal.island, 2005). Some studies have shown that there are positive relationships, however others have found no relationship at all (Lyles et al. 1993). The essay shall critically evaluate the impact of formal strategic planning on the business performance of SME’s.

Formal strategic planning can be described as a process compromising of variations in strategic analysis, decisions making and strategy implementation, where organisations evaluate their competitive positions and put their plans into action (David and Nisbet 1996). To carry out strategic planning, vast data is required with exceptional analytical skills, and many businesses especially small and medium sized enterprises (SME’s) are weak in terms of skills for these processes (bisness-plan, 2005).

It must be noted that different countries interpret SME’s in different ways and that a definition for SME’s has been a subject of discussion for the last 30 years, however the European Commission (1996) believes that an SME should be classed as a business with less than 250 employees and a turnover of less than 40million Euros per year. The hospitality industry is said to be dominated by SME’s (brtf, 2005) and evidence suggests that 90% of businesses in the European Union are categorised as being SME’s (Department of Heritage, 1998).

An important reason for strategically planning in SME’s according to Curtis (1983) is that besides improving business performance, it improves business decisions and enhances employee commitment. On the other hand Perrault (1998) believes that SME’s should not engage into strategic planning as this decreases management control and the inability to adapt to changes in the environment, therefore the review of literature suggests that there are two schools of thought.

SME’s are more likely to have short term plans and a non formal, non written type of strategy looks to better suit their needs (Stonehouse and Pemberton 2002). However ample research shows that SME’s with well considered written strategic plans, perform better than those without. Matthews and Scott (1995) found that the majority of SME owners regarded strategic planning as extremely important, however there was limited evidence of practical implementation of strategic planning actually taking place. This could be associated to the barriers faced by SME’s, including the availability of external capital and skills in place to achieve these aims.

Limited staff expertise associated to problems in Human resources, e.g. training and recruitment could be linked to the fact that very few SME’s strategically plan (Boer et al, 1997), as they cannot afford to carry out training and recruitment practices and therefore are unable to communicate strategic planning processes to employees within the organisation.  

Peel and Brigade (1998) have highlighted a strong positive correlation between the success of SME’s and the degree of long-term planning undertaken. In some cases it has been proved that a greater use of strategic planning tools has resulted in improved organisational learning, enhanced strategic thinking and reduced failure rates for hospitality SME’s. On the other hand, in a recent survey undertaken by Perry (2001) it was found that there was no evident link between strategic planning and financial performance in SME’s, in which case SME’s may be better off avoiding the process of strategic planning as it may not impact positively on business performance.

When referring to strategic planning, there are two approaches which can be taken, informal and formal. The presence of a written strategic plan in SME’s is used as a substitute measure of formality (Regan and Ghobadian, 2002). A significant amount of planning activity in SME’s is known to be unstructured (Kuratko 1995), however Robinson and Pearce (1984) identified no significant differences in performance between small firms that planned formally and informally. Therefore it can be seen that whether an SME chooses to take on strategic planning informally or formally, results and performance are said to be relatively same. Regan and Ghobadian (2002) do however point out that problems were better prepared for in formal firms than in non-formal planning firms which shows that formal strategic planning in this case does positively impact business performance.

Gibbons and O’Connor (2005) believe that planning and control systems in most SME’s are informal and inadequate. They are convinced that at times the firm lacks control over the business environment and this point can be related to the way in which the firm is managed as shall now be evaluated.

Ownership is believed to be a critical factor in the adoption of strategic planning (Variyam and Kraybill 1993).The majority of SME’s in the Hospitality Industry are owned by owner/managers who usually follow an informal management structure (i98joaal.island, 2005). Entrepreneurs generally value their independence and have dominating attitudes, which result in a managerial style which is often unpredictable and egocentric, hence a corresponding lack of long term planning. In most cases the owner tends to be more interested in measures of profitability rather than growth (McNamee et al, 2000), however in order to make a profit it is believed that an organised structure is needed first (French et al, 2004). Many SME owners have limited knowledge about strategic planning which could also be the reason as to why SME’s rarely plan. If however SME managers had a deeper understanding of thinking, the development of strategic planning in more SME’s could be encouraged (Gibbons and O’Connor, 2001).

It must also be considered that unlike larger organisations owner/managers in SME’s tend to busy performing other tasks which are more important and highly relevant to their short-term survival (Glaister and Falshaw, 1999). Most managers in SME’s tend to have ‘mental maps’ of what they want to achieve (Stonehouse and Pemberton, 2002), which shows that it is possible to have a soundly thought out strategic plan without writing it down as a formal plan.

56% of successful businesses have written plans, 44% do not, yet these are still successful (Hussey, 1999).Robinson and Pearce (1984) believe that it is the process of providing written documentation of a strategic plan that determines the level of formality and success. However it must be fully considered that even if plans are written, it is not guaranteed that they will be followed or monitored in any way. The purpose of a written plan is to follow it, and evidence suggests that the majority of SME’s rarely refer plans after they have been prepared (Shrader, 1989), in which case the firm has wasted time and money preparing the plan in the first place.

The benefits of a formal written plan are that it enables a critical objective to be made and closely examines operating strategies and expected results (Robinson and Pearce, 1984). There may be failure to implement a plan if it is not written down as there would be no clarity about what has to be done (Needle, 2000).On the other hand Monroy (1995) argues that the written business plan is an inefficient and ineffective use of time, energy and resources. Monroy (1995) believes that plans are of little value to the owners/manager and that they are written to impress and not to accurately describe. It can therefore be seen that benefits of strategic planning appear to be marginal in some people’s opinions, however other people argue the opposite.

SME’s tend to create barriers that inhibit planning (Curtis, 1983). Noble (1999) suggests that strategic deployment often fails as a result of SME’s inability to identify and overcome potential implementation barriers. An example in this case would be the staff or the resources to commission such research, which prevents them from carrying out such planning procedures. The lack of time constraint due to the owner/managers being preoccupied with the day-to-day activities also means SME’s are restricted to plan (Mintzberg, 1994).This can be correlated to the thinking of Steiner (1979) who believes that due to a lack of time, plans cannot be written in a formal way, and therefore SME’s are held back in carrying out strategic planning.

Strategic planning is less likely in independently owned SME’s and is more likely to be present in subsidiary SME’s. Subsidiary firms are those that can be considered SME’s but are part owned by larger organisations. They tend to have access to the necessary resources, because formality may be a requirement of the franchise agreement and therefore they do not need to waste time exploring resources needed. Subsidiaries also have the advantage of learning from the parent company, where rules to follow may already exist. This means that they are advantaged as they are able to fall back on the expertise of the parent company and have a greater capacity to bear risks, whereas independently owned SME’s usually only have one chance to get it right and therefore for them procedures such as strategic planning, impose huge risks (Variyam and Kraybill, 1993).

Although subsidiaries may find it easier to strategically plan, this may also disadvantage them as it may mean they have less authority to make investment decisions, whereas SME’s are not restricted to following certain rules, but on the negative side, SME’s do not have a parent company to learn from or follow (Variyam and Kraybill, 1993). This shows that whether a firm is an independently owned SME or a subsidiary, the impact of strategic planning on the performance varies in both cases. There are downturns in any case which need to be considered. There isn’t thorough evidence suggesting that a subsidiary is guaranteed more success than an SME (Bracker and Pearson, 1986).

It is said that SME’s tend to see strategic planning as a once-a-decade project. Strategic planning is an on-going, long term involvement and commitment, and this is what SME owner/managers need to take into consideration. They may also find it useful to choose a simple strategic process, that requires minimum data and resources but at the same times gives a clear picture of the strengths and weaknesses of the company (Regan and Ghobadian, 2002).

SME’s need to recognise the benefits of making change through strategic planning. They need to understand that if the plan is interpreted properly the desired results will be achieved, hence impacting business performance. However there are other issues such as internal barriers which restrict SME’s from planning strategically. A common internal barrier is that of communication. SME’s tend to have little downward communication and employees at times are not informed about the plans which means implementation is slowed down. Non formal strategic planning firms indicate a greater emphasis on barriers than formal strategic planning firms (Noble, 1999), which implies that formal planning helps in meeting the problems to a limited extent. Therefore it can be said that formal planning enables firms to meet any potential barriers and problems with greater confidence (Boer et al, 1997).

Very little formal planning is undertaken in SME’s, but when undertaken it seems to increase survival rate and enhance the firm’s growth (i98joaal.island, 2005).
While no definite conclusion can be arrived at the analysis indicates that the impact of formal strategic planning on the business performance of SME’s can to some extent improve performance, but on the other hand it has also been found that strategic planning in some cases has no effect on the planning performance of SME’s.

The bulk of the evidence suggests that there is some a link between strategic planning and performance, however it is apparent that the link is not strong. Perhaps the research can be summarized by the opinion of Lyles et al (1993) who came to the conclusion that it is the process of planning and not the plan itself that is important.

Although it looks as though strategic planning cannot guarantee success, it does dramatically appear to increase the firm’s chances of survival in a hostile business environment (Scarborugh and Zimmerer, 2000). It can therefore be concluded that SME’s are more likely to succeed if they formally plan than if they don’t plan at all.
Formal strategic planning is effective if its followed, if its not followed then in most cases the plan fails.

Evidence suggests that SME’s do care about their strategic performance and consider it to be vital for their success, however their approach to the planning procedure is informal with a very limited framework and hence their performance in most cases is not improved. It can be concluded that both formal planning and informal planning to some extent can impact the business performance of hospitality SME’s. It really depends on the approach taken by the particular SME.