CHAPTER ONE

INTRODUCTION

Background of the Study

Armmd 1999, empirical researchers began to examine the performance and consequences of formal strategic planning (Thune and House, 1999; Ansoff et al., 2000; Herold, 2001) and over 40 planningperformance studies have appeared since that time. However, in recent years this line of research has slowed to a trickle and with good reason: Previous studies lacked theoretical grounding, produced a bewildering array of contradictory findings, drew heavy criticism for inadequate methodologies and had little or no discemable net impact on strategic management research or practice (Shrader et al., 1984; Pearce et al., 1987a, b). Nonetheless, it seems evident that the planning-performance relationship bears significantly on strategic management research and practice and that scholars should not abandon this line of enquiry altogether. This study re-evaluates the planning-performance research; the critical assessment of strategic planning and its impact on organizational performance which has effect on its survival. Strategic planning can be defined as the process of using systematic criteria and rigorous investigation to formulate, implement and control strategy and formally document organizational expectations (Higgins and Vincze, 1993; Mintzberg, 1994; Pearce and Robinson, 1994). Strategic Planning is a process by which we can envision the future and develop the necessary procedures and operations to influence and achieve that future. As in many other fields, strategic planning professionals often cloak their work in pseudo-scientific jargon designed to glorify their work andcreate client dependence. In reality, strategic planning processes are neither scientific nor complex. With modest, front-end assistance and the occasional services of an outside facilitator, organizations can develop and manage an on-going and effective planning program. Strategic planning consists of a set of underlying processes that are intended to create or manipulate a situation to create a more favourable outcome for a company. This is quite different from tradition tactical planning that is more defensive based and depends on the move of competition to drive the company's move. In business, strategic planning provides overall direction for specific units such as financial focuses, projects, human resources and marketing. Strategic planning may be conducive to productivity improvement when there is consensus about mission and when most work procedures depend on technical or technological considerations. This study goes beyond the observation of some research that questioned the existence of direct casual relationships between the use of strategic planning and improved performance. This study draws from some of the many publications on the use of strategic planning in the private sector and from the growing number of those that deal with its uses and potential for the public sector. One of the major purposes of strategic planning is to promote the process of adaptive thinking or thinking about how to attain and maintain firm environment alignment (Ansoff, 1991). Finns, however, appear to gain more because they can derive considerable benefits not only from adaptive thinking, but also from integration and control. Small firms can derive considerable benefits from adaptive thinking but probably gain less than large firms from the integration and control aspects of strategic planning. Evered (2000), suggested that the different uses of the term strategic planning vary from broad ones (which include the purposes of defining purpose, objectives and goals) to very narrow ones (namely, those that deal with the means for achieving given objectives). Given Evered's differentiation between broader and narrower definitions of strategy, Bozeman's definition is a narrow one; one that assumes an ultimate mission of the organization. Bozeman's definition assumes that the strategic planning/management process is triggered by changes in policies and priorities (Bozeman, 2003). Hence, according to (Eadie, 2004), strategic planning may be defined broadly or narrowly. However, this formulation still does not help managers in the public sector, for now they need to decide not only whether they want to develop strategic plans but also whether they should approach such plans with a global perspective or with a narrower one. Thus, what seems to be a problem of semantics masks a fundamental question about the inclusion or exclusion of goal definition from the strategic planning process. According to Berry (1997) Strategic planning is a tool for finding the best future for your organization and the best path to reach that destination. Quite often, an organization's strategic planners already know much of what will go into a strategic plan. However, development of the strategic plan greatly helps to clarify the organization's plans and ensure that key leaders are all on the same script but far more important than the strategic plan document is the strategic planning process itself. The strategic planning process begins with an assessment of the current economic situation. First, examining factors outside of the company that can affect the company's performance,in most cases, it makes sense to focus on the national, local or regional and industry economic forecasts. This part of the analysis should begin early, at least a quarter or so before the formal planning process begins. Hence, it's been concluded that, strategic planning positively affects organizations' performance, or more specifically, the amount of strategic planning an organization conducts positively affects its financial performance. Since the case study used for this research study is a bank, there is a need to understand strategic planning and financial performance relationships in banks. The result from past researches suggested that the intensity with which banks engage in the strategic planning process has a direct positive effect on banks' financial performance and mediates theeffect of managerial and organizational factors on bank's performance. Results also indicated a reciprocal relationship between strategic planning intensity and performance. That is, strategic planning intensity causes better performance and in turn, better performance causes greater strategic planning intensity (Hopkins and Hopkins, 1997). There is a constant need for organizations, especially financial institutions like banks to think strategically about what is going on (Sclnneumer, 1995). This appears to be precisely what banks, in particular have begun to do in recent years. In response to increasing complexity and change in the financial services industry, banks have turned to strategic planning. The relatively new trend towards strategic planning in banks is viewed as a move designed not only to help them negotiate their environment more effectively, but to improve their financial performance as well (Bettinger, 1996; Bird, 1991; Prasad, 1999). In consistent results of bank-related research, however, have not fully resolved the issue of whether strategic planning leads to improvements in banks financial performance. The intensity with which managers engage in strategic planning depends on Managerial (e.g., strategic planning expertise and beliefs about planning-performance relationships), Environmental (e.g., complexity and change) and Organizational (e.g., size and structural complexity) factors. The effects of these factors on strategic planning intensity have been suggested by several studies (Kallman and Shapiro, 1990; Unni, 1990; Robinson and Pearce, 1998; Robinsonet al., 1998; Watts and Ormsby, 1990b). Studies that have analyzed the relationship between strategic planning and financial performance proved that the intensity with which banks engage in the strategic planning process intervene-that is cause an indirectness and lack of one-to-one correspondence-between factors such as strategic planning expertise and beliefs about planning performance relationships (managerial factors), environmental complexity and change (environmental factors), bank size and structural complexity (organizational factors) and bank's financial performance. As suggested by the inconsistent research findings, past studies have mis-specified the relationship between strategic planning and financial performance in banks. Misspecification of this relationship might be attributed to past studies' lack of attention to the relationship among these managerial, environmental, organizational factors and their potential impact on planning intensity and performance (Hopkins and Hopkins, 1997). Subsequently, the consideration of such factors in the present study is viewed as a significant issue that holds implications for future research as well as for planning practices.