This article extends the debate regarding the relationship between strategic planning and performance. It addresses criticism of previous empirical studies that have largely investigated direct and bi-variate relationships, producing equivocal results. The current study investigates the mediating effects of four types of flexibility on the strategic planning and performance relationship. Flexibility is defined as the extent to which new and alternative decisions are generated and considered in strategic planning, allowing for positive organizational change and adaptation to environmental turbulence. Through investigating simultaneous equations in a structural equation model, we find that two types of flexibility mediate the relationship between strategic planning and financial performance, while the other two types mediate the relationship between strategic planning and non-financial performance. The results are new empirical insights that have not been previously reported.
While there is empirical support for a positive association between strategic planning and performance (Rhyne, 1986, Miller and Cardinal, 1994, Brews and Hunt, 1999, Andersen, 2000 and Delmar and Shane, 2003), there is also evidence suggesting that no such relationship exists (Shrader et al., 1984 and Pearce et al., 1987). This dichotomy has hindered the development of this important research domain (Boyd, 1991, Greenley, 1994 and Hahn and Powers, 1999). The empirical studies investigating a direct relationship between strategic planning and performance have attracted criticisms, including the use of a bi-variate methodology. While this relationship is of importance to organizations practicing strategic planning, the critics suggest that other factors will impact on the relationship between strategic planning and performance (Schwenk and Shrader, 1993 and Meilich and Marcus, 2006).
Theory predicts that successful organizations will anticipate and address environmental turbulence through strategic planning (Miller and Cardinal, 1994 and Rogers et al., 1999). It also predicts that they will demonstrate flexibility in strategically planning decision options about how they will adapt when the environment changes, in a preparatory or “ex-ante” state (Evans, 1991; p 77). Through flexibility organizations are better prepared to cope with environmental turbulence, enhancing the influence of their strategic planning on performance. Although strategic planning, the notion of the flexibility and performance have received much attention in the strategic management literature, to date there have been no empirical investigations of their simultaneous relationships; somewhat compounded by a lack of conceptual clarity surrounding the notion of flexibility (Dreyer and Gronhaug, 2004, Worren et al., 2002 and Ebben and Johnson, 2005). This is at odds with their importance in the literature (Rapert et al., 2002 and Dreyer and Gronhaug, 2004), and is a major gap in understanding.
In this article we contribute to understanding the strategic planning and performance relationship, by addressing the criticisms of the previous bi-variate empirical studies. We empirically investigate the mediating effects of flexibility on the strategic planning and performance relationship, through analyzing simultaneous relationships in a structural equation model, which is novel research in this domain. Also, this study renews investigative attention of the relationship between strategic planning and performance, which is central to the strategic management paradigm.
This article has extended the debate about strategic planning and performance, and has renewed empirical investigation in this domain. This was done by addressing the criticisms of the previous empirical studies that had investigated a direct relationship between strategic planning and performance. Through the investigation of simultaneous equations in a structural equation model, we find that flexibility mediates the relationship between strategic planning and performance. Both operational and financial flexibility mediate the influence of strategic planning on financial performance, while structural and technological flexibility mediate its influence on non-financial performance. These are new insights that have not been empirically investigated in the literature.
In previous studies of strategic planning and performance, where generally a bi-variate method for addressing the strategic planning and performance relationship has been used, the results have been equivocal and inconclusive. These mediation effects from the four types of flexibility are an explanation for these equivocal results, suggesting that a bi-variate method is not appropriate. Mediation in the current model means that the impact of strategic planning on performance happens through flexibility, in that flexibility is an influence that facilitates the impact of strategic planning on performance. Hence, without flexibility as a mediating variable in the model, the actual relationship between strategic planning and performance is unlikely to be demonstrated.
There are several implications of these results for both theory and managers. Although strategic planning is a process for anticipating environmental turbulence, the logical sequential process often prescribed in the literature, is not enough to influence performance. Flexibility in decisions is needed to change operational issues, such as products and services or their production, and to change financial issues, such as capital and gearing, in order to impact on financial performance. Similarly, flexibility in decisions is needed to change structural issues, such as managerial style and expertise, and to change technological issues, such as production technology and software, in order to impact on non-financial performance. The results suggest that the influence of strategic planning is more effective when such changes are made. While financial performance is improved through operational and financial flexibility, and non-financial performance is improved through structural and technological flexibility, the results found no relationship between non-financial performance and financial performance. Hence managers focusing on structural and technological flexibility will see improvements in employee morale and retention, but not in financial returns. Managers seeking purely financial returns should focus on operational and financial flexibility and not structural and technological.
Appropriate flexibility will, however, be necessary for effective mediation. Implications here are that managers will firstly be able to anticipate environmental turbulence over the period of the strategic plan, and will also be able to monitor change over this period. Second, flexibility requires managerial ability to generate appropriate alternative decision options with respect to operations, finance, structure and technology, in advance of when environmental turbulence is likely to arise over the period of the strategic plan. Flexibility requires managers to be in a preparatory or ex-ante state. Third, to be flexible managers must be willing to consider these decision options, some of which may entail unfamiliar decisions and risk, as and when there is environmental turbulence and opportunities and threats arise. Fourth, managers must be willing to take appropriate decisions about changing their operations, finance, structure or technology, in order to pursue the necessary flexibility to impact on their performance. Fifth, managers must have capabilities to exploit planned flexibility, by ensuring that operational, financial, structural and technological changes are effective in allowing the company to adapt to new opportunities and threats. Finally, managers must implement necessary and important change effectively and efficiently, in order to realize the anticipated benefits of planned change (Naveh et al., 2006) The consequences of such adaptations could, of course, be far reaching, having major impact on product/service offerings in the market place, major changes to financial gearing, major changes to the management of the company, and consequences for competitive advantage and the next round of strategic planning.
The above implications suggest several directions for future research. Clearly most of the above implications could be investigated to pursue further understanding of how the process of flexibility works together with strategic planning to impact on performance. Some of these issues could be incorporated into the model for further latent path analysis, but some may be antecedents to strategic planning, which in turn may influence the effectiveness of strategic planning.
