An Empirical Study on the Relation between Business Plan [629329]

ALLIED JOURNALS
An Empirical Study on the Relation between Business Plan
and Profitability of US SMEs
–Manuscript Draft–

Manuscript Number: Allied Journals-18-2253
Full Title: An Empirical Study on the Relation between Business Plan
and Profitability of US SMEs
Short Title:
Article Type: Research Paper
Section/Category: Academy of Entrepreneurship Journal
Keywords: business plan, component, entrepreneur type, development stage
Abstract: Although the claim that there is a high correlation between the business plan and
profitability is persuasive in the theoretical aspect, there are not many studies that
demonstrate it empirically. In this study, the components of business plan of US SMEs
were identified and the effect of each component on profitability was examined. In
addition, when considering the type of entrepreneur and the stage of development,
whether the components of the business plan had significant impacts on profitability
was analyzed.
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An Empirical Study on the Relation between Business Plan
and Profitability of US SMEs1

Koh Inkon2
Abstract
Although the claim that there is a high correlation between the business plan and profitability i
s persuasive in the theoretical aspect, there are not many studies that demonstrate it empirical
ly. In this study, the components of business plan of US SMEs w ere identified and the effect of
each component on profitability was examined. In addition, when considering the type of entre
preneur and the stage of development, whether the components of the business plan had signif
icant impacts on profitability was ana lyzed.
The business plan components were classified into marketing, finance, production/operation a
nd strategic management factors based on 20 items selected through literature review and pre
liminary survey. As a result of the analysis, these factors dis tinguished statistically significantl
y between the good and the not -good performance group in terms of profitability. In particular
, marketing and finance factors showed good discriminant power, while production/ operation
and strategic management factors showed not.
Meanwhile, as a result of examining the influences of the components of business plan on prof
itability by the type of entrepreneur of the surveyed firms, all factors except strategic manage
ment factor were less influential in technician/crafts man entrepreneur firms than in general/op
portunist entrepreneur firms. However, unlike the expectation, it did not show statistically sig
nificant difference. As for the detailed items of business plan component factors, only statistic
ally significant diffe rence was found in the distribution item of the marketing factor. As a resul
t of examining the influence of the components of business plan on profitability according to th
e stage of development of the surveyed firms, the influence of finance factor was th e highest a
t all stages of development but did not show any statistically significant difference. However, s
tatistically significant differences were found in four details: employee hiring and development
, product(service) costing and analysis, product(ser vice) production planning, and inventory iss
ues. They belong to production/operation and finance factors. In addition, I tried to increase th
e usefulness of the study through the investigation of the situation of US SMEs ’ business plann
ing.

Key Words: business plan, component, entrepreneur type, development stage

I. Introduction

Companies generally establish management plans. Plan is to determine the direction of action before implementatio
n to achieve the desired outcome of the future. Therefore, the management plan is all decisions that predicts the futur
e of a company and high lights it. If the management plan is wrong, it is difficult to achieve the goal of a company, a
nd sometimes affects the survival of a company. So management planning should be carefully considered. In the m
anagement plan, there are plans for each functio n such as marketing, finance and production etc. A business plan is a
representative example of the integrated plan in which various functional units are included.

1 This study was supported by Kangnam University Grants in 2017.
2 Associate Professor, Kangnam Univ., top1@kangnam.ac.kr Manuscript
Click here to download Manuscript An Empirical Study on the
.docx

The business plan is an integration of the action plans of various functional sectors, and an important guideline in d
oing business(Koh 2005; Lee and Koh 2018; Longenecker et al. 2003). In addition, the business plan motivates the
members of the organization and helps them to create and accumulate knowledge related to each sector by internal a
nd external communication. From the manager's view, It can be used as a basis for establishing the direction of busi
ness management. Besides, it will ultimately affect management performance because it is the basis for the measure
ment of departmental/individ ual performance.
Several studies have shown that the establishment of business plan is a very important management activity, especia
lly in SMEs(Arkebauer 1995; Minzberg 1994; Rue and Ibrahim 1998). Therefore, managers of SMEs should be inte
rested in how t o organize and refine the contents of business plan for the desired performance achievement, but unfo
rtunately, it is not easy to find related researches. In other words, everyone knows that business planning is importan
t, but there is no consensus on how to plan. In addition to this, SMEs do not establish business plans for a variety of
reasons. Koh et al.(2007) investigated the business plan establishment behaviors of SMEs in Korea, and found that
market uncertainty was the biggest obstacle to the establi shment of business plan.
On the other hand, management varies according to the type of entrepreneur. Since SMEs are relatively heavily dep
endent on CEOs compared to large corporations, the CEO ’s personal factor is considered as the success factor of S
MEs(Steiner and Solem 1988). In order to reflect this factor in this study, the entrepreneur type is used. According t
o entrepreneur type, the business plan components emphasized may be different. So how to distinguish entrepreneur
type and what type of entr epreneur are the important issues in business planning.
The development stage of a company is also an important consideration in business planning. Similar to the concept
of product life cycle(PLC) in marketing, the stage of development of a company can be classified from the biologica
l point of view(Hanks and Chandler 1994; Miller and Friesen 1984; Santisteban and Mauricio 2017). Generally, the
stage of development of a company can be divided into four phases: establishment period, growth period, expans ion
period, and stabilization period. Because it is possible to find the typical phenomena at each stage of development, c
ompanies belonging to the same stage will have the similar management issues. Therefore, it is necessary to conside
r the development s tage in business planning so that the company's goals can be achieved effectively.
The purposes of this study are as follows. First, the components of business plan in US SMEs will be identified and
the impact of each component on profitability will be examined. Second, the entrepreneur types of US SMEs will be
investigated and whether the influence of the component of business plan is different by each type will be analyzed.
Third, the development stages of US SMEs will be investigated and whether the i nfluence of the component of busin
ess plan differs at each stage will be analyzed.
In addition, the situation of business planning of US SMEs will be examined in order to increase the usefulness of t
his study.

Ⅱ. Theoretical Background

1. Business P lan

Planning is the first step in the management process and as a preliminary step in execution, affects the direction of f
uture actions. Therefore, the plan means all decisions that predict and highlight the future of a company.
Meanwhile, the busines s plan is a report that integrates the plans of all departments related to the business of compa
ny such as organization management, production, marketing, and finance etc. Allen(2003) defined a business plan as
a comprehensive analysis designed to realisti cally implement business concepts of a company. In other words, unlik
e other management plans, all functional sections are included in business plan, and as a result, the business plan bec
omes the basis for actually promoting the planned business(Longeneck er et al. 2003; Lee and Koh 2018). The busine
ss plan allows the manager to define the business and recognize as closely as possible how to respond in current mar
ket(Hormozi et al. 2002). Strategic planning, which frequently mentioned recently, and business planning are two si
des of a coin. Baker et al.(1993) argued that a documented strategic planning is a business plan. Therefore, they are
not distinguished in this study.
A well -established business plan has positive impact on corporate management (Arkeba uer 1995; Rue and Ibrahim
1998) and reduces failure rates(Crawford – Lucas 1992), however a business plan that is not well established will ine
vitably have negative impact on corporate management(Minzberg 1994). As a result, many studies have shown that
business plan is highly correlated with firm performance(Aram and Cowen 1990; Baker et al. 1993; Parks et al. 199
1; Shrader et al. 1989; Schwenk and Shrader 1993). Especially in SMEs, business planning can give many advantag
es by making great contributions to business growth(Astrachan and Kolenco 1994; Orser et al. 2000; Ward 1997).
Noting that about 99% of US firms are small businesses with fewer than 500 employees, Perry(2001) investigated t

he impact of planning on the bankruptcy of american small busines ses. He found that most small firms did not plan f
ormally and failed firms relatively less planed than non -failed firms.
In family businesses, business planning is a decisive success factor(Knight 1993; Jones 1982; Ward 1988). Family f
irms have the charac teristics such as family ownership and control, family influence in decision making, and willing
ness to succeed in the next generation(Sharma et al. 1997), and relatively more resist to plan than other firms(Upton
and Petty 2000; Ward 1997), and as a resul t, documented business plan is rare in general(Minzberg 1994). Besides, t
here is a tendency to avoid borrowing(Berembeim 1990). Especially, these phenomena are more prominent when the
re was a successful experience in the past(Ward 1997). However, family fi rms pursuing rapid growth are positive for
risk taking and innovative/aggressive management(Blake and Saleh 1995; Zahra and Covin 1995), so they are tend t
o be strategic approach to business planning(Barringer et al. 1998; Eggers 1999; Siegel et al. 1993), focus on R&D a
ctivities(McKann 1991; McGee and Dowling 1994), emphasize the quality of products and services (Barringer et al.
1998). In this regard, Upton et al.(2001) pointed out that the growth -oriented family firm has the characteristics such
as a lon g-term planning, participation in the board of directors in planning process, linking with business plan and pe
rformance, continuous communication with all employees, quality/ prestige strategy(differentiate strategy), and the f
irst(or early) entry.
Mean while, Rhyne(1986) reviewed existing studies and argued that the relationship between firm's business plannin
g and financial performance did not show a consistent direction. However, this is not a result that the two factors are
not related to each other, but rather the problem of insufficient consideration of the independence/dependent variable
s and control variables used in each study.
It is effective to establish a business plan through formal communication among the members rather than informally
and arbitrarily by executives of the top management or related departments(Baker et al., 1993; Rue and Ibrahim 199
8). Meanwhile, lack of time & skill is a main reason that small enterprises can not plan, and resistance to planning a
nd resources have a decisive influence on the effectiveness of strategic planning(Ramanujam and Venkatraman 1987
; Sexton and Van Auken 1985). In addition, Robinson et al.(1984) suggested the stage of company development as t
he factor affecting the strength of strategic planning.
Many studies suggest the necessity of business plan, but there is no answer to how to do it concretely(Rue and Ibrah
im 1998). Perry(2001) investigated the relationship between management failures by measuring whether they had wr
itten plans for sales, personn el, fund demand/spending, identification of strategies and measurable goals, but showed
the limitations of the constitutional items in business plan.
Table 1 shows the common components of business plan(Arkebauer 1995; Hormozi et al. 2002; Koh 2005; Long inc
ker et al. 2003; O'Hara 1995). Among components, relatively more researches have been done for financial items.
Bhide(1992) investigated the nature of funding at the beginning of business and found that most managers raised mo
ney through personal meth ods(savings or borrowing), Winborg and Landstrom(2000) categorized financing schemes
into six specific categories. There was also research on funding from the outside, Mason and Harrison(1996) argued
that individual investors are making relatively rapid in vestment decisions and consider both financial and non -financ
ial aspects.

<Table 1> The Common Components of Business Plan
COMPONENTS CONTENTS
company status company name, establishment date, location, capital stock, CEO, history
, management/technique team, corporate purpose(mission, vision, etc.)
product/service patent rights, differences from existing products, features
business overview target market, business environment, supply of raw materials, legal requir
ements, insurance, promotion schedule, expected location
marketing items STP strategy, competitor analysis and competitive advantage, price struc
ture, location selection, distribution channel, promotion plan, future sales
plan
production items technology, equipment, personnel, production capacity, production plan,
cost per product unit, quality control, production process diagram
financial items funding and spending plans, projected fund balance sheet, estimated fin
ancial statements, profitability
other important
points borrowing state and repayment plan, guarantee/warranty state, important
contract contents, ongoing litigation etc.

Assumptions
in business
planning raw material increase rate, wage increase rate, market growth rate, inflati
on rate, sales price increase rate etc.

2. Entrepreneur Types

Compared to large corporations, SMEs differ in their ownership of management, capital procurement, target market
, and organization size etc. As a result, it is effective to use different strategies from large corporations(Koh 2009). T
he biggest difference between SMEs and large corporations with well -established management systems is that SMEs
depend on CEOs relatively more. It is not surprising, therefore, that many scholars have taken CEO ’s personal fact
or as the one of the success factors of SMEs(Steine r and Solem 1988; Yusuf 1995). They argued that CEOs ’person
al experiences, their skills, management abilities and even their personality and behavior, have great impact on corp
orate management.
Entrepreneur type is being used as a concept to reflect these individual factors into research. Though there are vario
us ways of classifying entrepreneur types, the dichotomy method that distinguishes the entrepreneur whose technical
side is stronger as the craftsman and the entrepreneur whose management side is str onger as the opportunist is domi
nant. Lee and Osteryoung(2001) classified SMEs in Korea and US into technician/craftsman entrepreneurs and gene
ral/ opportunist entrepreneurs, and examined whether the success factors of SMEs were identical between entrepren e
ur types. Longenecker et al.(2003) classified entrepreneur types as artisan and opportunist. In general, technician typ
e is a skilled entrepreneur who is trained technologically, and has the tendency of emotional management for compa
ny by his/her own view . However, the opportunity catcher type is a generally educated entrepreneur who is not relat
ed to technology, and has the tendency of professional management for company.

3. Company Development Stages

In the marketing area of business administration, the concept of product life cycle(PLC) is used as the method to un
derstand market dynamics. Similar to the PLC concept, several scholars have analyzed the development stage of a c
ompany from a biological point of view(Hanks and Chandler 1994; Miller and Fr iesen 1984; Santisteban and Mauri
cio 2017).
They generally distinguish the development stages as four stages of establishment, growth, expansion, and stabilizat
ion. Though the basic assumptions of the company life cycle curve are different by researchers , there are common p
henomena in each development stage.
Establishment stage is the period when a new company tries to achieve a visible reality, characterized by the comm
ercialization of ideas. It is also important to clearly define the market, acquire t he necessary skills and develop basic
procedures for work. Dodge and Robbins(1992) demonstrated that firms in establishment stage had a strong needs fo
r consulting support in marketing and production/operation systems in preference to other areas.
Growth stage is the period of solidifying the business through high growth by providing commercialized products to
the market through appropriate marketing activities. Dodge and Robbins(1992) argued that companies in this stage f
elt difficulties in production an d finance/accounting, while Kazanjian(1988) did not find any particularly problemati
c areas.
Expansion stage is the period of slow growth, and major concerns of companies in this period are mass production,
sales and distribution of products. Therefore, most of the issues related to these become important, such as raw mate
rial purchases/productio n planning/inventory and quality control issues in the manufacturing sector, payroll systems/
facility maintenance issues in the management sector, financial planning issue in the finance sector, sales promotion/
channel management issues in the marketing se ctor. Dodge and Robbins(1992) argued that firms in this period had a
greater difficulty in marketing than management or finance, and that CEOs tended to be more difficult in organizatio
nal systems, sales/marketing, and external relationships.
Companies i n stabilization stage have the lowest growth rates. Besides, sales volume stabilizes, innovative aspects d
eteriorate, and organizational structure is more bureaucratic. Kazanjian(1988) and Dodge and Robbins(1992) argued
that companies in this period were i nterested in improving profitability, improving organizational efficiency, and for
malized planning/control issues.
The development stages of venture companies are divided into a number of stages ranging from 2 to 6 stages, depen
ding on researchers. Santis teban and Mauricio(2017) analyzed 1,013 papers and a total of 74 researches through key
word search, and they organized success factors of IT startups in 32 items of organization, individual and external ca

tegory. In particular, they divided the development stages of venture companies into seed, early, growth, expansion s
tage and argued that prior experience of establishment team and government support factors in seed stage and ventur
e capital factor in early stage and clustering, technology/business compete ncy and venture capital factors in growth s
tage, and clustering factor in expansion stage were the main success factors.
Table 2 summarizes the above.

<Table 2> The Characteristics and Main Issues in Company Development Stage
STAGES CHARACTERISTIC S MAIN ISSUES
Establishment Period that a new com
pany tries to achieve a
visible reality ⋅Commercialization of ideas: It is important to clear
ly define the market, to acquire necessary skills, an
d to develop basic procedures of work
⋅The needs for consulting support in marketing and
production/operation systems
Growth
(Early
growth*) Period toward high growt
h due to marketing appro
ach to commercial produ
cts ⋅Production and finance/accounting
Expansion
(Late
growth*) Period that is similar to
growth period but grow
th slows down ⋅Mass production and sales of products, distributio
n: Problems in all relevant sectors are the main con
cerns
– Raw material purchases, production planning, inv
entory, quality control issues
– Payroll system, facility maintenance issues
– Financial planning issue
– Sales promotion, channel management issues
Stabilization Period that show slowe
r growth than expansio
n ⋅profitability improvement, organizational effectiven
ess improvement, formalized planning/control issue
s

* Expression in Dodge and Robbins(1992)

Ⅲ. Analysis

1. Research Hypothesis

As the business plan is a comprehensive plan in which each division's strategy for achieving corporate goals is expr
essed, the stock and flow of relevant knowledge are expressed clearly in the plan(Koh 2005). The components of bu
siness plan differ from sc holars, but they are roughly classified into six categories(Arkebauer 1995; Hormozi et al. 2
002; Longenecker et al. 2003; O'Hara 1995). Based on prior studies, I took preliminary study and selected the detail
ed items that would affect the company performan ce. Specifically, as shown in Table 3, the components of business
plan were classified into four areas of strategic management, finance, marketing, production/operation, and then five
detailed items representing each areas were selected.

<Table 3> Components of Business Plan
COMPONENTS DETAILED ITEMS
Strategic Management Corporate Vision and Mission
Strategic Management
Management Team
Strategic Management
Employment and development of employees

Strategic Management
Related Industry Analysis
Strategic Management
Competitiveness Analysis
Finance Accounting system
Finance
Tax issues
Finance
Product(Service) Costing and Analysis
Finance
Financing
Finance
Financial analysis
Marketing Overall marketing plan
Marketing
Market research
Marketing
Pricing
Marketing
Advertising
Marketing
Distribution
Production/Operation Product(Service) Production Plan
Production/Operation
Inventory issues
Production/Operation
Quality Management
Production/Operation
Product(Service) Development
Production/Operation
Management Information System(MIS)

As the profitability index of companies in this study, I used the improvement level of return on assets(ROA) for the
last 3 years. This is a representative measure of profitability and has been widely used in many studies. If the impact
s of the business plan components on profitability are different, then corporate managers should establish effective c
riteria for resource allocation and this study can provide useful implications in this regard.
Comparing to companies with not well established business plans, companies with well established business plans f
or each functional sector such as production, marketing, finance and personnel organization can maximize profits by
effectively putting resources into, thereby enhance profitability(De Luca and Atuahene -Gima 2007; Sharkie 2003; V
alle and Avella 2003).
A well -established business plan can be a means of effective communication between organization members a nd/or
stakeholders to resolve conflicts and create bonds and consensus, which can save time and money in business. Shark
ie(2003) argued that active communication increased the speed of work, which reduced the time and cost and conseq
uently, increased the p rofit of the company. De Luca and Atuahene -Gima(2007), Valle and Avella(2003) showed th
at active communication within and outside the organization activated interactions such as information exchange an
d cooperative building, resulted that time and cost red uced for new product development and increased the performa
nce of the organization.
Therefore, the following hypothesis can be set.
H1 The components of the business plan will have positive impacts on profitability

The smaller the size of SMEs, the more influenced by the entrepreneurs ’ individual factors. Entrepreneurs seem to
consciously or unconsciously tend to manage their businesses uniquely in accordance with their own experience, ed
ucational background, personal inclination, and motive for star tup. In other words, according to the type of entrepren
eur, there are many differences in the ways operate firms(Lee and Osteryoung 2001; Longenecker et al. 2003). Cons
idering this, it can be expected that business planning will be different in each of the component(ie, strategic manage
ment, finance, marketing, production/ operation) according to the type of entrepreneur.
So, the following hypothesis can be set.
H2 According to the type of entrepreneur, the impacts of business plan components on profitab ility will vary.

Several scholars have analyzed the development stages of a company from a biological standpoint(Hanks and Chan
dler 1994; Miller and Friesen 1984; Santisteban and Mauricio 2017). They attempted to express the process from cre
ation to ex tinction of a company as a schematic life cycle curve. The basic assumption of the corporate life cycle cur
ve is that common patterns appear in each stage of development. The stage of development of a company can be ge
nerally divided into four phases; est ablishment period, growth period, expansion period, and stabilization period. Ea
ch stage has the characteristics as shown in Table 2 above. Therefore, companies in the same development stage ma
y have similar management issues. Considering this, it can be e xpected that firms will have a similar pattern in terms
of establishing business plans, as varying the proportions of business plan components according to the stage of dev
elopment.
Therefore, the following hypothesis can be set.
H3 The impacts of bu siness plan components on profitability will vary according to the stage of development
of a company.

2. Operational Definitions of Variables

1) The Components of Business plan
To test hypothesis, I measured the degrees of impacts on the performance of the 20 detailed items of business plan i
n four areas selected through literature review and preliminary survey. For increasing the respondents ’concentratio
n, reversed 5 point Likert scale was used(1 -very strong, 5 -very weak). The details are shown in Tabl e 3 above.

2) The Type of Enrepreneur
Using the general classification method for entrepreneur type, I distinguished entrepreneurs between technician/craf
tsman entrepreneurs and general/opportunist entrepreneurs. Technician/craftsman entrep reneur means a CEO who c
atches business opportunity by technology, and general/opportunist entrepreneur means a CEO who catches busines
s opportunity by other than technology. In this study, Lee and Osteryoung(2001) items were used to measure the ent
reprene ur type.

3) The Stages of Development

Considering the purpose of the study, the stages of development of the responding companies were divided into three phases ex cep
t the establishment period on the corporate life cycle curve; the early growth stage, the late growth stage and the maturity stage. The
early growth stage is also called as growth phase, and the stage in which high growth is expected by commercial products and mark
eting approach. The main tasks are product production, organization construction, and initial marketing planning. The late growth s
tage is also called as expansion phase, and the stage in which the growth rate is gradually slowing down. Major concerns incl ude pr
oduction/sales/delivery methods of more products, manufacturing and general management systems. The maturity sta ge is also refe
rred to as stabilization phase, where the firm is stable in sales and the organization is operated like a small bureaucracy. In addition,
cost control and productivity become primary concerns as the focus of management moves from growth to profitability. In this stud
y, the stage of development of a company was measured using the items of Lee et al.(2004).
4) Profitability
As a profitability item, the degree of change in return on assets(ROA) over the last three years was measured using t
he 5 point Likert scale(1 -very aggravated, 5 -highly improved). In order to minimize the effect of firm size, this study
excluded the absol ute amount of net profit from the measure of profitability.

3. Data Collection

The surveyed companies were SMEs in the United States. SMEs are generally referred to as companies that are rela
tively small in size, but by law, they are selected based on the number of employees, assets, and sales.
To extract the important fields and detailed items for business planning before the main survey, I selected 20 compa
nies and took the telephone interviews with executives in charge of business planning. The tar get companies were se
lected from SMEs in the Midwest and Eastern regions. A total of 500 questionnaires were distributed and 330 questi
onnaires were collected and response rate was 66.0%. Finally, 156 questionnaires were used in this study, except for
the insincere responses and missing questionnaires.
This survey was conducted for two months from September to October, 2015. In order to examine the existence of
non response bias, I compared and analyzed the data collected in September and October, and did not find any statist
ically significant difference. It indicates that non response bias is unlikely to be present in the data.

<Table 4> The Characteristics of the Samples
CHARACTERISTICS CONTENTS FIRMS %
CEO’s Gender Male
Female 104
52 66.7
33.3
Industry Manufacture
Service
Other 14
103
39 9.0
66.0
25.0
Company form Individual
Partnership
Corporation
Other 25
10
103
18 16.0
6.4
66.1
11.5
History Less than 1 year
1-3 years
4-6 years
More than 7 years 15
39
37
65 9.6
25.0
23.7
41.7
Annual Sales Less than $100,000
$100,000~Less than $500,000
$500,000~Less than
$1,000,000
$1,000,000~Less than
$5,000,000
More than $5,000,000 47
42
24
29
14 30.1
26.9
15.4
18.6
9.0

Employees Less than 10
11-30
31-50
More than 51 105
32
12
7 67.3
20.5
7.7
4.5
Entrepreneur type Technician/Craftsman
General/Opportunist 64
92 41.0
59.0
Development Stage Early Growth
Late Growth
Maturity 59
59
38 37.8
37.8
24.4

The 66.7% of CEOs of responding companies were male and 33.3% were female. The service industry(66.0%) and
the corporation(66.1%) was the most. 58.3% of responding companies said they had less than 6 years of experience
and 57.0% said annual sales were less than $500,000. In 87.8% of responding companies, the number of employees
was below 30 employees. The technician/craftsman entrepreneur type was 59.0% and general/opportunist entreprene
ur type was 41.0%. 59 companies(37.8%) were in the stage of early growth, 59(37.8%) were in the stage of late gro
wth, and 38(24.4%) were in the maturity stag e. The characteristics of the sample firms are summarized in Table 4.

4. Results

1) Reliability and Validity Check
As shown in Table 5, Cronbach ’s Alpha value of the latent variable used in this study was 0.894 for factor 1, 0.87
0 for factor 2, 0.844 for factor 3 and 0.642 for factor 4, so the reliabilities of all latent variables were acceptable(Nun
nally 1967).
Factor analysis was conducted to che ck the validities of the measurement items. Convergent and discriminant validi
ty can be confirmed through factor analysis. Varimax was used for rotation method, and the factors with eigen value
of 1 or more were extracted. The extracted factors explained 6 5.61% of the total variance. The details are shown in
Table 5.

<Table 5> The result of Factor Analysis for Business Plan Components
MEASUREMENT ITEMS Factor1 Factor2 Factor3 Factor4
Market research
Overall marketing plan
Advertising
Pricing
Distribution
Related Industry Analysis 0.864
0.768
0.757
0.702
0.636
0.572

Product(Service) Production Plan
Management Information System(MIS)
Product(Service) Development
Inventory issues
Quality Management

0.804
0.781
0.731
0.729
0.727

Tax issues
Accounting system
Financing
Financial analysis
Product(Service) Costing and Analysis
Employment and development of
employees

0.787
0.738
0.721
0.632
0.539
0.532
Corporate Vision and Mission
Competitiveness Analysis
Management Team

0.788
0.683
0.546
Eigen value 3.776 3.493 3.396 2.459

% of Variance explained 18.880 17.463 16.978 12.293
Accumulated % of Variance explained 18.880 36.343 53.321 65.614
Cronbach ’s alpha 0.894 0.870 0.844 0.642

(1) Factor 1 : Marketing Factor
Market research, overall marketing planning, advertising, pricing, distribution, and related industry analysis items s
howed high factor loadings on this factor, which is closely related to the marketing component of business plan. Wh
at is interesting is that respondents see related industry analysis items as marketing factor. This means that the range
of perceived marketing factor is very broad.

(2) Factor 2 : Production/Operation Factor
Product(service) production planning, Managem ent Information System(MIS), product(service) development, inven
tory issues and quality management items showed high factor loadings on this factor and which is closely related to
production/operation component of business plan .

(3) Factor 3 : Finance F actor
Tax issues, accounting systems, financing, financial analysis, product(service) costing and analysis, and employee h
iring and development items showed high factor loadings on this factor and which is closely related to finance comp
onent of business plan. The reason why regarding firms' employment and development item as financial factor is pro
bably because respondents considered this as the item having a great impact on the financial condition of a company
.

(4) Factor 4 : Strategic Management Factor
This factor included corporate vision and mission, competitiveness analysis and management team items. In other w
ords, this factor reflects the business philosophy of a company, so it is closely related to strategic management comp
onent of business plan.

2) Testing Research Hypothesis
(1) H1 : The relation between business plan components and profitability
As a result of multiple regression analysis using factor scores of business plan component items, all four factors had
a positive effect on profitability, and factor 1 and 3 had a relatively high influence. The F value of the regression mo
del was 6.543 an d statistically significant. However, in terms of statistical significance of each coefficient, factor 1 a
nd factor 3 were statistically significant while factor 2 and factor 4 did not. Therefore, Hypothesis 1 was partially su
pported.

<Table 6> The result of Multiple Regression Analysis for
Business Plan Components and Profitability
Dependant
Variable Business Plan Component R² F value sig. B T value sig.
Profitability Constant
F1 Marketing Factor
F2 Production/Operation Facto
r
F3 Finance Factor
F4 Strategic Management Fact
or 0.148 6.543 0.000 2.731
-0.291
-0.072
-0.308
-0.068 32.207
-3.416
-0.852
-3.625
-0.801 0.000
0.001
0.396
0.000
0.424

Note: Each item is reversed scale

On the other hand, although not building a hypothesis, I examined whether there were differences in the importance
of the components of business plan between good company and not -good company. This is as important as hypothes
is 1 because it can suggest th e items that should be emphasized in business planning.
The average value of the ROA changes of the surveyed firms was 2.733, which means that the surveyed firms did n
ot feel improvement in profitability over the past three years. Next, I divided the resp ondents into 2 groups; good co

mpanies and not -good companies based on the average value. As shown in Table 7, the average value of the ROA c
hanges of good companies is 3.455 while that of not -good companies is 1.474, and the mean difference between the
two groups was statistically significant(p=0.000).

<Table 7> The average value of the ROA changes
Total(n=156) Good Companies(n=99) Not-good Companies(n=57)
2.733(1.13) 3.455(0.659) 1.474(0.504)

Note: Likert 5pt. scale and parenthesis value is standard deviation

To identify the discriminant power of the business plan components between good and not -good company group, I t
ook a discriminant analysis. As a result, factor 1 and factor 3 among the four factors, had a relatively low Wilks' lam
bda and a large F value shown in Table 8. This indicated that the discriminant powers of them were high. Also, the r
esult of Box's M test showed that the covariance matrix did not violate the assumption of homogeneity(p=0.19 9). Th
e classification accuracy of the model was 66.7%.

<Table 8> The Result of Testing the Homogeneity of Group Mean and Box's M
Factor Wilks‘ λ F df1 df2 p Box's M
F1 Marketing Factor
F2 Production/Operation Factor
F3 Finance Factor
F4 Strategic Management Fact
or 0.898
0.999
0.968
0.990 17.410
0.147
5.113
1.532 1
1
1
1 154
154
154
154 0.000
0.702
0.025
0.218 13.897
(0.199)

Note: parenthesis value is significant level of Box's M value

As shown in Table 9, two groups have statistically significant differences in the components of business plan for pr
ofitability. Table 10 shows the standardized canonical discriminant function coefficients and structural matrix of the
components of busine ss plan in terms of profitability. The former indicates the relative importance of the factors in e
xplaining the belonging group of firms, and it can be likened to the standardized beta coefficient of regression analys
is. Factor 1 had the largest effect, f ollowed by factor 3, factor 4, and factor 2. The structural matrix, on the other han
d, indicates the correlation between each factor and the standardized canonical discriminant function. The correlatio
n value is also called as the discriminant loading and can be likened to the factor loading of factor analysis. The stru
ctural matrix is judged to be significant when the discriminant loading value is ± 0.3 or more, so factor 1 was the m
ost important variable, and had the largest discriminant power. Factor 3 also showed good discriminant power, so it i
s possible to accept the discriminant power of marketing and finance factor.
<Table 9> Wilks' Lamda
Wilks‘ λ χ² df p
0.855 23.723 4 0.000

<Table 10> Standardized canonical discriminant function coefficients and structural matrix
Factor Standardized canonical
discriminant function coefficients structural
matrix
F1 Marketing Factor
F2 Production/Operation Factor
F3 Finance Factor
F4 Strategic Management Fact
or 0.859
0.075
0.443
0.243 0.818
0.088
0.502
0.281

(2) H2 : The relation between entrepreneur type and business plan components

I examined the impacts of business plan components on profitability according to the type of entrepreneur. Except f
or factor 4, technician/craftsman entrepreneurs were evaluating the influences of factor 1, 2, and 3 more weakly than
general/opportunist en trepreneurs. Table 11 shows the details.

<Table 11> The average impact of business plan components on profitability
by entrepreneur type
Factor Total technician/craftsman general/opportunist
F1 Marketing Factor
F2 Production/Operation Facto
r
F3 Finance Factor
F4 Strategic Management Fact
or 2.547 (1.041)
2.522 (1.042)
2.812 (0.955)
2.287 (0.885) 2.667 (1.100)
2.550 (1.002)
2.815 (0.997)
2.277 (0.961) 2.463 (0.995)
2.502 (1.075)
2.810 (0.930)
2.294 (0.833)

Note: reversed Likert 5 pt. scale and the parenthesis value is standard deviation

I examined wether the effects of these factors were statistically significant by independent sample t -test, but all fact
ors did not show statistically significant differen ces according to entrepreneur type unlike the expectation. Therefore
, Hypothesis 2 was rejected.
In order to improve the usefulness of the study, I analyzed the business plan component factors in detail, but found s
tatistically significant difference only in the distribution item of marketing factor.3

(3) H3 : The relation between development stage and business plan components
The influence of the business plan components on profitability was examined by the stage of development of a com
pany. Factor 3 h ad the lowest influence at all stages of development. Table 12 shows the details.
Next, I examined whether these influences were statistically significant by ANOVA. As shown in Table 13, the ass
umption of homogeneity of variance was not accepted for all f actors. Table 14 shows the result of ANOVA. Howev
er, unlike predicted, all factors did not show statistically significant differences according to the stages of developme
nt. Therefore, hypothesis 3 was rejected.
<Table 12> The average impacts of bu siness plan components on profitability
by development stage
Factor Total Early growth Late growth Maturity
F1 Marketing Factor
F2 Production/Operation Facto
r
F3 Finance Factor
F4 Strategic Management Fact
or 2.547
(1.041)
2.522
(1.042)
2.812
(0.955)
2.287
(0.885) 2.678
(1.200)
2.505
(1.178)
2.954
(1.063)
2.294
(0.999) 2.392
(0.992)
2.688
(1.012)
2.790
(0.840)
2.232
(0.685) 2.583
(0.819)
2.290
(0.820)
2.623
(0.933)
2.361
(0.985)

Note: reversed Likert 5 pt. scale and the parenthesis value is standard deviation

<Table 13> The result of test of homogeneity of variance
of business plan components
Factor Levene Statistic df1 df2 p
F1 Marketing Factor
F2 Production/Operation Factor
F3 Finance Factor
F4 Strategic Management Fact4.205
3.998
2.445
4.881 2
2
2
2 153
153
153
153 0.017
0.020
0.090
0.009

3 The analysis results are not provided because of the page limitation

or

<Table 14> ANOVA of the impact of business plan components on profitability
by development stage
Factor sum of squares df square mean F value p
F1 between
within
total 2.472
165.353
167.825 2
153
155 1.236
1.081
1.143

0.321

F2 between
within
total 3.700
164.666
168.366 2
153
155 1.850
1.076
1.719

0.183

F3 between
within
total 2.584
138.657
141.241 2
153
155 1.292
0.906
1.426

0.244

F4 between
within
total 0.390
120.965
121.356 2
153
155 0.195
0.791
0.247

0.782

As in Hypothesis 2, I analyzed the components of business plan by detailed items. Statistically significant differenc
es were found in four items of employee employment and development, product(service) costing and analysis, produ
ct(service) production, in ventory issues.4 These items belong to factor 2 and factor 3.

3) The Situation of US SMEs' Business Planning
About the time of business planning, 53.2% of the surveyed companies said that they did business planning when es
tablishing a strategic plan. N ext was business startup, expansion of business, and acquisition of existing company.

<Table 15> The time of Business Planning(multiple answering)
contents company %
establishing a strategic plan 83 53.2
starting up 78 50.0
expansion of business 42 26.9
acquisition of existing compa
ny 10 6.4

Also, 76.9% of respondents said that they were establishing a business plan at least once a year. Most of them have
done business planning for each year.

<Table 16> The period of Business Planning
contents company %
month 11 7.1
quarter 25 16.0
half year 27 17.3
year 57 36.5

4 The analysis results are not provided because of the page limitation

other 36 23.1

Time constraint was the most disturbing factor in business planning. The next obstacles were market uncertainty, la
ck of expertise, budget constraints and resistance to change.

<Table 17> The obstacles in Business Planning(multiple answering)
contents company %
time constraint 106 67.9
market uncertainty 67 42.9
lack of expertise 49 31.4
budget constraints 34 21.8
resistance to change 15 9.6

As a result of investigating the degree of involvement in business planning, CEO was most actively involved, follo
wed by the finance/accounting department manager and the marketing department manager. Therefore, it can be see
n that the closest internal fu nctions to business planning are finance/accounting and marketing. Participation of exter
nal personnel such as certified public accountants, lawyers, and financial firms were generally low. Alternative expl
anations for it might be related to security issue .
The surveyed companies were using business plan most to establish the strategy of company, and CEO felt that ther
e was the greatest achievement in this. On the other hand, managers were less likely to utilize for performance -based
payment setting or for venture capital funding and CEO's evaluations were also low. As an alternative explanation fo
r them, a more specific evaluation index could be used instead of business plan in the case of incentive setting, and
many companies not utilizing venture capital might included in the surveyed companies. However, following studies
will be needed to identify the e xact reason.

<Table 18> The degree of involvement in Business Planning
contents the average of involvement
CEO 4.56 (1.097)
finance/accounting manager 2.37 (1.738)
marketing manager 2.32 (1.662)
production/operation manager 2.16 (1.620)
HR manager 1.95 (1.540)
MIS manager 1.60 (1.304)
R&D manager 1.48 (1.242)
the chairman of the board of director
s 2.07 (1.716)
external CPA 1.64 (1.285)
external lawyer 1.53 (1.150)
external financial firm 1.41 (1.002)

Note: Likert 5 pt. scale and the parenthesis value is standard deviation

<Table 19> The degree of utilization of business plan and CEO ’s evaluation
contents manager CEO
Establishment of corporate strategy 3.87 (1.357) 3.58 (1.290)
Determining the direction of the company's operations 3.57 (1.550) 3.49 (1.257)
Measuring the performance of the enterprise 3.22 (1.456) 3.13 (1.364)

Preparing new business 3.12 (1.561) 3.12 (1.465)
Creation of major customers 2.15 (1.510) 2.24 (1.411)
Ongoing financing 2.15 (1.515) 2.15 (1.369)
Request funding from financial institutions for growth or new en
try 2.06 (1.484) 2.18 (1.337)
Setting incentives for managers 1.70 (1.150) 2.04 (1.249)
Request funding from venture capitals for growth or new ventur
e 1.63 (1.260) 1.99 (1.255)

Note: Likert 5 pt. scale and the parenthesis value is standard deviation

The improvement effect of business planning was the highest in terms of communication and cohesion, followed by
operation management and resource allocation. The ini tiative in the industry was the lowest.

<Table 20> The degree of improvement effects of Business Planning
contents average
Communication and Cohesivene
ss 3.45 (1.388)
Operation Management 3.17 (1.409)
Allocation of resources 3.12 (1.353)
Motivation 3.08 (1.300)
Control 3.06 (1.369)
Marketing/4P Mix 2.79 (1.419)
Profitability 2.73 (1.474)
Assets increasing 2.65 (1.248)
Industry initiative 2.44 (1.374)

Note: Likert 5 pt. scale and the parenthesis value is standard deviation

Ⅳ. Conclusions

1. Summary and Implications

The purpose of this study is to identify the components of business plan and to examine the effect of each compone
nt on profitability in US SMEs. In addition, I analyzed whether the influences of the business plan components are d
ifferent when considering the entrepreneur type and the development stage. I also tried to add the usefulness of the st
udy by the investigation of the situation of US SMEs' business planning.
The components of business plan were selected through prel iminary research based on existing studies and then red
uced to four factors of marketing factor, production/operation factor, finance factor, strategic management factor by
factor analysis. Profitability was measured by the degree of improvement over the l ast three years of return on assets
(ROA), and then the effects of business plan components were examined.
As a result, I found that the components of business plan had positive effect on profitability. Among the four factors
of business plan, the influenc es of marketing and finance factor were relatively high. In addition, the discriminant m
odel including the business plan component factors distinguished statistically significantly between the inferior and t
he superior enterprise group in terms of profita bility. Among the four factors, marketing and finance factor also sho
wed good discriminant power. Therefore, business managers should pay attention to these two factors in business pl
anning.
Technician/craftsman entrepreneurs evaluated the influences of m arketing, production/operation and finance factor
more weakly than general/opportunist entrepreneurs except for strategic management factor. However, unlike the ex
pectation, the influences of all factors did not show statistically significant difference ac cording to the type of entrep

reneur. This implies that there is a consensus on the importance of the business plan components regardless of the ty
pe of entrepreneur but further studies are needed for accurate interpretation. As for the detailed items of co mponent f
actors, only statistically significant difference was found in the distribution item of marketing factor.
Finance factor had the weakest influence at all stages of development. However, unlike the expectation, the influenc
e of all factors showed no statistically significant difference according to the stage of development. Only in the four
detailed items such as employee hiring and development, product(service) costing and analysis, product(service) pro
duction planning and inventory issues statist ically significant differences were found. They belong to production/ope
ration and finance factor. It can be interpreted as meaning that the two factors are closely related to the stage of dev
elopment of a company, but related researches will be needed fo r accurate interpretation.
In addition, the time and period, the obstacles, the participants, the improvement effects related business planning w
ere identified through the survey on the actual behaviors of business planning of US SMEs.

2. Limitations and Further Research Directions

Despite the findings and implications, this study has the following limitations.
First, considering the number of surveyed companies and the regional distribution of this study, it is rather cautious
to ge neralize this research results to all SMEs in US. Second, the subjective judgment of respondents is highly likely
to be intervened because of single informant measures in data collection, and Third, this study is cross sectional rese
arch, so the causal rel ationship between variables is limited. More following studies are needed to solve these proble
ms.
On the other hand, the research on the relationship between firm performance and density of industry(Suarez and Ut
terback 1995) and/or company size can pro vide very useful results both academically and practically. In addition, an
alysis of companies in heterogeneous and/or homogeneous industries will enable to identify the characteristics of sp
ecific industries and the difference between companies, thus maki ng it possible to derive more useful results. Identif
ying the degree of influence of each business plan component on various management performances can also give l
ots of fruitful results.

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