The Impact of Formal Strategic Planning - Literature review Example

The Impact of Formal Strategic Planning on the Business Performance of Hospitality SME's Strategic planning is widely publicized as an effective management tool to improve performance of businesses. A recent study shows that majority of large organization are adopting the system and benefiting from it's long-term planning approach. The purpose of this paper is to analyze the impact of formal strategic planning to smaller firm particularly those Small and Medium-sized Enterprises in the Hospitality industry. Study the business performances of Hospitality SME's and identify the barriers hampering its growth. SP it this paper means Strategic Planning. THL means Tourism, Hospitality and Leisure as a group in the services sector. SME's or SME refers to Small and Medium-Sized Enterprises and SB short for Small Business. UK is an abbreviation for United Kingdom, Words in quote are exact words used by author. For a common man, the word "strategy" simply means being systematic. A tactic he will use to ensure his success or to his belief is the right way to prevail. If we are to really critically analyze the impact of formal SP to the business performance of Hospitality SME's and arrive into a realistic conclusion, we must clearly identify every aspect of SP and business operations of SME's. Strategic Planning definitions or implementation varies in the environment and business type. A more general and maybe the most practical interpretation of the term is concern with "long-term direction of the organization" (O'Regan et. al., 2002). It is where an organization defines the business they should to take on and match their business activities to the current situation while taking great consideration to the resources on hand .This method by and large helps to reduce the threats and take full advantage of opportunities. However, SP although a "long-term" plan may constantly change in order to survive and maintain equilibrium to the ever changing business environment. It should forestall and act in response to its varying dynamic operational environment (O'Regan et. al, 2002). It is then a competent and effective management tool to augment the company's ability or strength in relation to its business adversary. Strategic planning maybe categorized into two types, informal and formal. The informal type of SP, referring to Robinson and Pearce, 1983, along with several authors, is likely occurring in smaller firms than larger ones (Hannon et. al, 1997 p.105). They stress that it is the size of the business and the stage of development of that business influenced the nature of planning. In addition, smaller businesses tends to aim more and concentrate on the "process of planning" (Hannon et. al., 1997, p. 105) which is opposite to larger firms approach of identifying their goals and objectives. The author also added that informal planners in small firms undergoes some kind of "strategic decision-making" activity which is also similar to the strategies being perform by formal planners. They also believed that the activity or the process itself has more advantage to small firms than the production of written or formal outputs (Hannon et al., 1997, p.105). Formal planning according to Armstrong, (1992), as stated by Hannon et. al., (1997), is the setting up of clear goal and processes to realize a particular task. It is therefore worth considering that the statements provided points to informal planning as the type where smaller firms are focusing largely on the business operation process rather than "output" or goal of the process. Formal "strategic planning" according to Cox B., (2005) though, is a "top-down, vision-driven process" to develop an organization's future value. Although literatures do not mention a universal definition to separate or set a clear distinction between formal and informal SP, we may define informal planning as a less documented and unofficial but similarly effective and efficient type of SP. According to Needle D., (2000) referring to Hickson et. al. (1969), size is an important determinant of structure. In the business world, small firms, particularly in 19th century's UK economic growth, played a very important role in the development of the business enterprise. SME according to Bahlman B. (n.d.) are those with employess not more than 250 people with a turn over not over 50 million euro. He also added that SME's are considered the have the "highest rate of entrepreneurship and creates more jobs". In the turn of the 20th century, mass production, mass market, and joint stock companies overtook the role of small firms and later dominated the market. In 1971, the Committee of Inquiry presented the Bolton Report. The report concluded that the small firm's sector decline in terms of numbers and contribution to Britain's economy. It further notes the substantial importance of small firms in the UK economy and to the vitality of society. The report triggered public awareness and was then followed by a series of public policies aiming to promote the small firm's sector. In addition, the policies for small firms soon expand to include SME's setting the maximum number of employees to 250 (Needle D., 2000, p.173). In the end of 1990, according to Needle D., (2000) p. 174, the estimated number of small firms has reached 95% throughout the EU. In 2001 postal survey, SME's in the Tourism, Hospitality and Leisure (THL) or the service sector was reported to be about 82% (Storehouse, Pemberton. 2002, p.855). Hospitality accounts for 135,000 jobs in Central London, about 11% of private sector employment (UPO, n.d.). Majority of SME's are independent firms or owned by individuals or a family business. Hotels, travel agencies, restaurants, catering services are commonly sole proprietorship or just partly owned subsidiaries of a larger organization thus the mainstream of businesses in THL sector particularly Hospitality are SME's. Strategic planning is said to offer competitive edge and empower a company to determine accomplishment against expectations. In the academic circle, SP are well understood and documented but their application to the real world is not well accounted. In a survey conducted in 2001 to determine the practical realities of SP to SB firms, Storehouse, Pemberton (2002), said the survey was focusing specifically to SME's with questionnaire covering the general philosophy of a company regarding SP, the scope and duration of the actual planning and importance attached to it, the issues involve and the frequency of use of different strategic analysis tools and techniques. The analysis yields that majority of businesses or around 92% employ a highly structured approach to planning. In a further analysis comparing the Hospitality services to the manufacturing sector, it appears that Hospitality had adopted a more structured plan. To determine if the implementation of SP in Hospitality is short or long term, the time horizon provides some indication that majority of the companies involve only have planning horizons of three years or less (Storehouse, Pemberton (2002), p. 855). The value contradicts SP as a long term approach and raises the possibility that SME's is just using an "emergency approach to strategy" (Storehouse et. al., 2002). In the table provided by Storehouse and Pemberton (2002) p. 856, the service sector in particular, uses SP only to satisfy and fulfil their business level objectives along with their vision and mission statements. The statistical figures show that THL sector including Hospitality services, gives more emphasis on their mission statements and business level objectives than production, volume, output, profit and sales targets. In the following statistical table aimed to determine if the size of the company is a factor to lean towards SP, smaller firm seems to favour a more general policy and further confirms that longer planning are mostly associated with large companies. In summary, the survey yields a high 92% of companies carry out SP, both structured and general. The planning horizon yields that majority of the organization only plan for short period, one to three years. They mostly concentrate on short-tem sales, cost, profit, and targets making use of "policies rather than plans" (Storehouse, Pemberton 2002, p. 858). It is evident that majority of SME's in the Hospitality area prepare to adopt a more general, practical, short term policies than a more structured, long-term, and formal strategic plans. Although majority of them regard SP as exceedingly essential, there is no sufficient evidence of long-term planning. Their approach is seems emergent rather planning oriented. This contradiction maybe explained by the difference of perception between SME owners and the academic or the lack of awareness to the need for long-term strategies. The short-term orientation strongly indicates SME's hesitation and lack of strategic intent. The result of the survey further suggests that the concept and structure of SP still remains with the academics and SME's managers are still uncertain of its practical benefits (Storehouse, Pemberton 2002, p. 858). The survey conducted and the result merely tells us the extent of use and implementation of SP in SME's, and it is now clear that most of them still rely on informal and less structured planning. What is the problem What are the barriers that prevent them from adopting a long-term strategic plan In the conclusion of the Storehouse, Pemberton (2002), report, it is possible that the cause of high failure rates among SME's in the United Kingdom is the inability to implement a long-term plan. A more general barrier or hindrance is the lack of awareness of SME managers of its practical benefits. O'Regan et.al (2002) through exploratory interviews with manufacturing firm, presented eight (8) possible internal barriers similar to those identified by Wessel in 1993 and Beer and Eisenstat in 2000. These are 1) inadequate communication 2) unanticipated longer implementation 3) inadequate employee capabilities 4) goals not well understood by staff 5) insufficient coordination 6) crisis distracted attention from implementation 7) unanticipated problems 8) external factors. Although these findings came from a small manufacturing firm, it may be also the case in a SME within the Hospitality business. For this reason, let us identify the barrier that is also applicable to Hospitality. The nature of hospitality organizations according to David and Nisbet et. al. (1996) is labour intensive and spatially disaggregated and disjointed, operating in multifaceted and dynamic environments, and mainly comprise of small autonomous enterprises. SME's is a "lucrative but complex sector" (Macinnes, 2003). It is a "one tough one" with "50% of restaurants fail every year" (BDC, n.d.). "Involve complex process, multiple encounters, and longer involvement" (Nickson et. Al, n.d.) If we are going to take the first barrier of inadequate communication against the labour intensiveness and disjointed nature of a hospitality organization, we can say that it is really possible and probably happening. Furthermore, logically, an organization operating in an ever changing environment tends to fail in coordination and often experience unexpected problems. The labour intensiveness of multifaceted operations tends to consume most of the management and employees times resulting to misunderstanding and neglect and probably the reason why they prefer a more simple and short-term solutions than SP. In this kind of environment, the barriers are likely to be more active in hospitality organizations than the barriers found in a small manufacturing firm. As Slattery P. (2002) p. 23 had said, the hospitality industry characterized in all countries in the world is "diverse and complex". Gunggeburt et. al (2004) p. 14, "traditional and stable" (Tiessen et. al, 2001), states the facts that majority of hospitality industry in Europe are SME's and this reality make things "if not worse more difficult and different". The basis of their statement is the fact that SB owners tend to develop "close relationship" with their staff thus "less bureaucracy" or formalities than larger business. SB owners value their employees and provide same support and incentives like larger companies, but are "often not able to do so in as formal a manner as larger firms" (Pohlmann, 1999). In addition, according to Heaney (2006), SB owners are often "jack of all trades" or "wearing different hats" which slows down the delivery of services. Finally, according to Lee and Mathews (n.d.), they are more "likely to engage in informal planning" than to engage in sophisticated one. The solution to these barriers perhaps will take us to the very top of the organization. The lack of proper business plan and management is actually the responsibility of the owner and managers. SB owners, aside for being "hardworkers" (Pohlmann, 1999), are the person who can effectively direct the whole system because they are aware where the business is lead to and how to get there. Owners and managers should put away outdated and autocratic management practices and conduct a more extensive planning (Steven et. al, 2004). "Every business regardless of size, needs an effective, comprehensive business plan"(Herter, 1995) as presented by Steven et. al. (2004). The lack of strategic business plan in small businesses leads to outdated management practices (Clayton 1996) as quoted by Steven et. al. (2004). With the evidence provided by surveys and research conducted by various authors and organization, it's apparent that majority of companies within the SME bracket failed to implement a formal SP. In addition, study shows that these companies who are accustomed to short-term plans often fail and suggests the correlation between planning and performance. In most situation, formal SP, creating of a plan and other written output is an evidence that a complete SP process is being followed by a business. In Baker et al. (1993) report shows that 93% of companies who used a plan say that it helped in guiding the company's operation and 72% says it helps to catch the attention of more customers (Hannon and Atherton, 1997). In addition, "A higher proportion of growing enterprises had business plans"(Gibb and Davies, 1990, p.15-21) The analysis of Schwenk and Shrader in 1993 in relation to planning and performance shows no clear relationship between them. Another study carried out by Lyles et. al in the same year also shows no considerable disparity between firms with or without formal planning procedures. In 1997's PC Week report for IT sector, another evidence shows that strategic plan has little impact on performance (Hannon and Atherton, 1997). The negative results of these studies on the benefit of formal SP may be explained by the possibility that a small organization manage by single person or small group are not fit to benefit so much from a formal long range planning system and sometimes may create major disadvantage. However there is some possibility that a carefully planned business strategy may assist an organization in decision making. (Camillut, 1975 and Hannon and Atherton, 1997). Finally, it appears that there is no clear consensus on the beneficial impact of SP specifically as formal organizational activity. In SME's within the THL sector, if we are going to refer to the report of Storehouse and Pemberton (2002), are adopting a more general approach rather than structured plans. SME's continue to make "limited us of formal practices" (Edwards et.al. , 2006). Since there is no clear indication on the beneficial impact of formal planning to SME's, informal planning or the current approach contributes to the success but definitely cannot be blame for failures within the Hospitality SME's. Formal SP deployments in SME's within the Hospitality industry are still in the process of adjustment because there is still no clear indication that it has contributed to the success of SME's in and out of the Hospitality business. According to the study, majority of SME's are not willing to adopt the long-term planning system and thus no real deployment was made. Strategic planning, formal or informal undeniably helps an organization in their decision-making. Formal SP although regarded as a tool to improve performance is still far from practical and remains in the academic domains. 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(1993), "The Strategic Human Resource Management Process in Practice", Planning Review (a publication of the Planning Forum), September-October, Vol. 21 No. 5, pp. 37-8. Read More