This study explores the link between financial performance and the formal strategic planning process, planning flexibility, and innovativeness of 448 firms in a multi-industry sample. The results suggest that firms' formal strategic planning processes and planning flexibility are positively associated, and each is positively related to innovativeness. In addition, innovativeness fully mediates the relationships between firm performance and the formal strategic planning process and planning flexibility.
Contemporary business leaders face remarkable challenges. Success is increasingly a function of a firm's ability to develop and to deploy unique and costly to imitate resources in an innovative way. Scholarly inquiry in strategy focuses on how firms can deliberately and proactively leverage their idiosyncratic combination of resources to create competitive advantages (Barney, 1991 and Penrose, 1959). Scholars also question how formal strategic planning and planning flexibility may contribute to a firms' ability to innovate and profit (e.g., Titus et al., 2011 and Wiltbank et al., 2006). Positioned at the nexus of these research streams, the current study examines the relationships among financial performance and formal strategic planning processes (i.e., the process of identifying and implementing the firm's strategic initiatives (Jarzabkowski & Balogun, 2009)), planning flexibility (i.e., the ability of a firm to deviate from its formal strategic plan in response to emerging opportunities or threats (Barringer & Bluedorn, 1999)), and innovativeness i.e., a firm's emphasis on innovation (e.g., Dibrell, Craig, & Hansen, 2011b).
We develop and test a set of hypotheses in which firm innovativeness fully mediates the path from formal strategic planning processes and planning flexibility to firm financial performance. Three research questions drive this study: (1) If firm success is predicated on its ability to build and to leverage valuable, idiosyncratic resources and capabilities, then what role may formal strategic planning processes and planning flexibility play in that effort?, (2) Can firms simultaneously develop formal strategic plans, yet integrate adaptive responses based on a changing environment and still successfully innovate?, and (3) How does the combination of the formal strategic planning process, planning flexibility, and innovativeness influence a firm's performance? Many studies examine the relationships between formal strategic planning and innovation (e.g., Miller and Cardinal, 1994 and Salomo et al., 2008), between planning flexibility and formal strategic planning (e.g., Brews and Hunt, 1999, Grant, 2003 and Rudd et al., 2008), and between planning flexibility and innovation (e.g., Barringer and Bluedorn, 1999 and Zhou and Wu, 2010). Other studies, however, note the need for a greater understanding of the possible mediators of the relationship between the formal strategic planning process and firm performance (Rudd et al., 2008).
This research offers multiple contributions. First, it informs the strategic planning literature by examining how (1) the formal strategic planning process functions in the presence of firm innovativeness, (2) planning flexibility relates to firm innovativeness, and (3) firms employ formal strategic planning processes and flexible planning systems concurrently. Consistent with Barringer and Bluedorn (1999), we use planning flexibility and flexible planning systems synonymously. These aforementioned extensions are significant because, though a formal strategic planning process has merits, an overly structured formal planning process can impede a firm's ability to respond to external conditions (Grant, 2003 and Kukalis, 1989). Second, this study explores how innovativeness facilitates the generation of positive financial returns. Specifically, innovativeness should play a critical role in the relationships among formal strategic planning processes, planning flexibility, and firm financial performance. Third, our study contributes to resource based view (RBV) theory by examining how a non-novel process (i.e., formal strategic planning) can produce economic value and be a firm-level source of competitive advantage (Powell, 1992). Finally, the results contribute to recent conversations in the consideration of adaptive approaches in strategy formulation (Read et al., 2009, Titus et al., 2011 and Wiltbank et al., 2006).
