Small business performance, planning sophistication and benchmarking: an empirical study.

Author:Chawla, Sudhir K.
Position:Report
 
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  1. INTRODUCTION

    Historically, innovative management techniques are developed for large businesses and oftenimplemented in a particular functional area. However, over time these techniques seep into other functional areas and into medium and small businesses and other organizations. For example, following the success of Total Quality Management (TQM) in the heavyweights of Japanese industry such as Toyota Motor Corporation, TQM was first implemented in Florida Power & Light, Xerox, and Ford Motor Company in the 1980s in production operations. Today TQM is widely used in all functional areas and in very diverse organizations (Gummesson, 2008; Li, Yang, and Wu, 2008; Stevens, 2008). TQM techniques today are widely used not only in industry but also in schools and churches (Boggs, 2004; Jenicke, Kumar and Holmes, 2008; Sahney, Banwet, and Karunes, 2008).

    Similarly, planning, both long-term (strategic) and short-term (budgeting) has long been the domain of large corporate businesses. However, despite a growing body of literature stressing the significance of planning for small business and link between planning and survival, and positive performance factors that might result from effective planning, Stoner (1983) found limited implementation of two key components of planning: (1) development of long-range plans and (2) establishment of short-term objectives.Orpen (1985) found no significant relationship between long-term planning and various performance measures. However, Orpen suggested that more successful small businesses had more structured, formal, and sophisticated planning processes. Olson and Bokor (1995) found some support forperformance of small rapidly growing firms being influenced by the interaction of planning formality and product/service innovation.

    Rue and Ibrahim (1998) investigated the planning process in small businesses and the relationship between planning sophistication and performance. Rue and Ibrahim (1998) found that about 60% of the small businesses had some form of written plan and there was a moderately significant relationship between planning sophistication and self reported performance relative to industry standard; they found no significant relationship between planning sophistication and Return on Investment (ROI); and a significant relationship between planning sophistication and sales growth rate.

    Conventional wisdom suggests that planning and product and service innovation leads to small business success. Failure to adequately plan often leads to small business stagnation and failure. Therefore, small businesses need to invest in planning both long-term and short-term to maintain their competitive edge.

    Small businesses that do not prepare business plans have a greater chance of failure than businesses that do (Lussier and Corman, 1995). However, empirical evidence supporting a significant relationship between small business planning sophistication and performance is limited and mixed (Meers and Robertson, 2007).

    Another management technique that has worked well in large corporations for about two decades now is benchmarking. Monroe (2000) cites a white paper from the American Productivity and Quality Center, that benchmarking is "the process of improving performance by continuously identifying, understanding, and adapting outstanding practices and processes found inside and outside the organization." Dodd and Turner (2000) define benchmarking similarly. They suggest that the practice of benchmarking works for small business and it is not an unnecessary cost to be avoided but rather a tool that when used properly can produce quantum leaps in company performance. When successful, benchmarking can result in a win/win scenario for both customer and supplier, and this should be the ultimate goal (Booth, 1999).

    However, there is a lack of research and empirical evidence about use and impact of benchmarking in the planning process of small businesses. As a result, the value or impact of benchmarking for small business is unclear. Carr and Smeltzer (1999) suggest that the ultimate test of any management tool is its relationship to the firm's performance. Regardless of how much intuitive or face value a tool may possess, its value must ultimately affect the firm's performance.Carr and Smeltzer (1999) found a positive relationship between benchmarking and firms' performance. While the idea of setting performance benchmarks sounds simple, straightforward, and logical, many either skip this step or don't do it well (Avery, 1999).

    In summary, it can be reiterated that there is limited research investigating the extent and sophistication of planning processes at small businesses and the use and impact of benchmarking and the results are mixed. This research study extends the work of Rue and Ibrahim (1998) by investigating the planning process at small businesses with regard to planning sophistication, use of benchmarking and their relationship to performance.

  2. METHODOLOGY

    This study investigates the planning process of small businesses and implementation of benchmarking. It also attempts to identify the relationship between planning sophistication and benchmarking to the performance of small business. Specific questions of concern are: (1) Do small business that develop written business plan and those that incorporate external variables (planning sophistication) outperform small business that do not develop written business plan, and (2) When...

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