The Impact of Planning and Control Sophistication on Performance of Small and Medium‐Sized Enterprises: Evidence from Sri Lanka

Abstract

Journal of Small Business Management 2004 42(2), pp. 209-217 There has been some academic discussion on the relationship between planning sophistication and performance of small and medium-sized enterprises (SMEs) (Knight 1993; Aram and Cowen 1990; Hillidge 1990). Yet little attention seems to have been given to the control aspect of planning and its possible impact on performance. This points to a major limitation of the prior research on planning and performance. It is common knowledge that effective control often is necessary for achieving the maximum results from a predetermined plan of action in any organization. Even an excellent plan may not produce the results as expected due to numerous unforseen circumstances that are internal or external to the firm. Therefore, measuring actual performance against planned performance from time to time and taking remedial action on factors causing unfavorable deviations from the plan are important for maximizing the results anticipated through planning (Koontz and Weihrich 1988). Accordingly, this process, commonly referred to as control, is likely to have an adverse impact on enterprise performance if it is not utilized effectively. Furthermore, the impact of this process on performance may vary from firm to firm depending on the extent of its use. Moreover, studies have reported that while the majority of very small firms do not use any kind of written plans, the use of planning and its extensiveness tend to increase with firm size (Berman, Gordon, and Sussman 1997; Robinson and Pearce 1984). Therefore, it is important to examine empirically what planning and control processes are used in SMEs and how they impact their performance. Findings of such studies, while contributing to the literature, can be useful to owners and managers of SMEs. However, while the impact of both planning and control on enterprise performance is implicit in academic discussions, much of our understanding of this phenomenon is based on speculation and opinion (Romano and Ratnatunga 1994; Gibb and Scott 1985). In particular, although some studies have examined the relationship between planning sophistication and performance, there has been no empirical investigation into the sophistication of both planning and control processes and their impact upon the performance of SMEs. Moreover, no study seems to have been conducted in a developing country on the relationship between planning sophistication and performance of SMEs. Therefore, based on a questionnaire survey of a sample of SMEs operating in the developing economy of Sri Lanka, the current study attempts to fill this knowledge gap. Prior Research Although a few studies have examined the nature of both planning and control processes in relation to different aspects of enterprise growth, none of them have focused on the sophistication of those processes. For example, an Australian study by Romano and Ratnatunga (1994) examined the relationship between the formal planning and control processes and the different stages of growth in a sample of small manufacturing firms. The results of their study have revealed that while formal planning and control systems are important elements in the management of high-growth firms operating at stages of mature growth, a lack of concern with formal systems typically is found in lower-growth firms within the sustained and steady growth situations. Similarly, Potts (1977) and Robinson (1982) have suggested that small firm growth is constrained by failure to prepare and to implement a sophisticated planning and control system. However, they have not tested its possible effect on enterprise performance empirically. Most of the studies in this area have focused on the differences in performance between planners and nonplanners, and until recently the sophistication of the planning process associated with performance received little attention (Rue and Ibrahim 1998; Rhyne 1986). …