Strategic Planning and Financial Performance

STRATEGIC PLANNING AND FINANCIAL PERFORMANCE:A LITERATURE REVIEW

This literature review is a part of a study of the relationship between the degree of formality in the strategic planning process and organizational financial performance. An assumption was made for this study that strategic planning incorporates the process of budgeting. Organizational financial performance in this study was measured in terms of sales, stock price, earnings, return on equity, return on investment, return on total assets, and return on sales.

The Strategic Planning Concept, and the Formality of the Process

Formal strategic planning (FSP) is defined as "the process of determining the mission, major objectives, strategies, and policies that govern the acquisition and allocation of resources to achieve organizational aims" (Pearce, Freeman, and Robinson, 1987, p. 658). Strategic planning is a process which generates specific actions which are required to carry out a particular strategy.

By definition, thus, the strategic planning process begins subsequent to the adoption of a strategy. The entire strategic process within an organization, however, is a set of highly interrelated components, which function within a dynamic environment. Thus, in the socalled real world, strategic planning will often precede strategy development, because of the cyclical character of the strategic process.

There are five generally recognized elements of the strategic cycle. These eleme

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anning had the greatest financial impact in the area of operating income, as opposed to net income. These studies, however, did not address the issue of the formality of the planning process. Among those studies that considered financial performance in a narrow context and based an assessment of the effects on financial performance on the formality of the strategic planning process, where such formality was defined as the formal adoption of strategic planning as an organizational function, it also was found that the greatest effect of strategic planning on financial performance was in the area of operating income (Merchant, 1989, pp. 291307; Smith, 1990, pp. 118134; Varaiya, 1987, pp. 487497; Weitzel, 1987, pp. 919). Among those studies that considered financial performance in a narrow context and based an assessment of the effects on financial performance on the formality of the strategic planning process, where such formality was defined as existence of a formal internal structure for the process with specificity of planning steps and personnel participation, it was found generally that the formality of the planning process had no significant impact on the strategic planningfinancial performance relationship (Habib and V

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