The Paradox of a Marketing Planning Capability - Kelley School of ...

JOURNAL OF THE ACADEMY Slotegraaf, 10.1177/0092070304265217 OF Dickson MARKETING / MARKETING SCIENCE PLANNING

ARTICLE

FALL 2004

The Paradox of a Marketing Planning Capability Rebecca J. Slotegraaf Indiana University

Peter R. Dickson

Florida International University

Strategy scholars have long debated the value of formal planning, and research has offered inconsistent support for planning to enhance firm performance. Given these mixed empirical effects, we draw from the resource-based view of the firm to illustrate a paradox firms may face. In particular, a strong marketing planning capability may not only reduce the incidence of postplan improvisation but also contain inherent process rigidity. Since both of these can also increase performance, results illustrate a performance paradox in marketing planning. Keywords: marketing planning capability; written marketing plan; improvisation; planning paradox Strategy scholars have long debated the value of formal planning. On one hand, scholars have theoretically argued that planning processes are a critical aspect of decisionmaking and performance (e.g., Ansoff 1991; Dickson 1992; Simon 1993). For example, research empirically shows that planning is valuable for high-risk decision making (Sinha 1990) and enhances firm performance (e.g., Menon, Bharadwaj, Adidam, and Edison 1999). On the other hand, some scholars have argued against the role of formal planning primarily because it produces too much rigidity. For example, some have argued that formal planning is ineffective in dynamic or high-velocity environments (Fredrickson 1984; Mintzberg 1990). As a counterargument to this criticism, several scholars have shown that planning can enhance firm performance in either Journal of the Academy of Marketing Science. Volume 32, No. 4, pages 371-385. DOI: 10.1177/0092070304265217 Copyright © 2004 by Academy of Marketing Science.

dynamic or stable environments (e.g., Eisenhardt 1989; Miller and Cardinal 1994; Miller and Friesen 1983). At the foundation of this debate is the importance of flexibility. While strategic planning is valuable to firm performance, there is an underlying concern of subsequent rigidity or inflexibility. The value of flexibility is that it offers a means to more easily manage uncertainty. For example, strategic flexibility focuses on maximizing a firm’s range of future strategic options so that it can quickly adapt to market changes (Sanchez 1995), which can enhance a firm’s competitive advantage (Johnson et al. 2003). Acknowledging the role of flexibility within the strategic planning perspective, insight into the different elements fundamental to the overall strategic planning process may lead to a greater appreciation for the role of planning in firm success. One of the central elements of the overall planning process is a firm’s competency in strategic marketing planning. According to the resource-based view of the firm (RBV), the nature of a firm’s underlying heterogeneous resources drives its competitive advantage (e.g., Barney 1991; Wernerfelt 1984) and forms the basis for creating organizational capabilities (Grant 1991). Organizational capabilities represent the firm’s core routines and skills in carrying out various activities effectively (Day 1994; Grant 1991) at various hierarchical levels within the firm (Dickson 2003). As a core strategic process, marketing planning can cultivate an organizational capability through the integration, combination, and reconfiguration of a firm’s resources. For more than a decade, strategy researchers have exalted organizational capabilities as critical to competitive advantage, and within the marketing literature, various marketing-based capabilities are touted as key drivers of a firm’s performance success (e.g.,

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FIGURE 1 Conceptual Model Marketing Plan Content

H1a,b +

Comprehensive Coverage

H2a –

Rationality of Budget

H2b –

Marketing Planning Capability

Firm Performance Relative to Competitors

⊂

H5

H3 –

Incidence of Improvisation from Marketing Plan

Day 1994; Srivastava, Shervani, and Fahey 1998). Thus, a capability in marketing planning may also be expected to drive firm success. However, one of the main challenges of strategic planning is recognition that strategy can be emergent and that forecasting the environment may be virtually impossible (Mintzberg 1994). With a changing and unpredictable market environment, incorporating agility into the planning process becomes critical (e.g., Dickson 1992; Johnson et al. 2003; Mintzberg 1994). For example, improvisation that changes day-to-day operations in response to market fluctuations is a valuable source of agility (Galbraith 1990). Such improvisation can be valuable to a firm, especially when the environment changes at a faster pace than the firm’s planning cycle (Moorman and Miner 1998). While marketing planning capability and improvisation both offer specific advantages, their relationship within the overall planning process is less obvious. For example, it is possible that firms with a strong marketing planning capability apply similar resources, processes, and adaptive skills to their overall management approach so that they are more likely to engage in postplan improvisation. Alternatively, a strong marketing planning capability may lead to a competency trap (Levitt and March 1988) or create a core rigidity (Leonard-Barton 1992). That is, as experience and competence in a process develops, cognitive maps and problem-solving processes and solutions can become rigid (March 1991), reducing the likelihood that a new approach (improvisation) will emerge (Ahuja and Lampert 2001). Therefore, when a firm emphasizes its marketing planning capability, it may paradoxically reduce its adaptability and success. In investigating whether a paradox exists for a marketing planning capability, we focus on specific elements fundamental to the overall marketing planning process.

H4 +

Within our conceptual framework, we first focus on how a marketing planning capability may influence the comprehensiveness and budgeting approach within a marketing plan. We then focus on the incidence of postplan improvisation, examining the potential rigidities from a firm’s marketing planning capability and marketing plan content. We finally examine the performance-enhancing value of a marketing planning capability and the incidence of postplan improvisation, which make the rigidity effects salient. CONCEPTUAL FRAMEWORK Our general thesis is that firms with strong marketing planning capability possess different marketing plan content and engage less frequently in postplan improvisation1 than their less capable rivals, with these effects creating a paradox for marketing planning. We also purport that the incidence of postplan improvisation has a positive, direct effect on firm performance, which has important implications beyond the direct effect of marketing planning capability on firm performance. See Figure 1 for an overview of the conceptual framework. Marketing Planning Capability Developed over time, capabilities are complex patterns of routines and processes that constitute what an organization does well (e.g., Day 1994; Grant 1991). The main purpose of strategic planning is to promote the process of attaining and maintaining alignment (adaptation) between a firm and its environment (e.g., Ansoff 1991); that is, a fit of resources and strategies to projected market opportunities (Chandler 1962). It requires firms to understand their environment, to recognize the value of their available

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resources, and to allocate those resources to “mesh” (Dickson 1997) their offerings with the environment (e.g., Powell 1992; Simon 1993). While there are various perspectives on strategic planning, in defining the underlying processes involved in a marketing planning capability, we draw from the central skills that Simon (1993) identified as critical to planning: “(1) skill in anticipating the shape of an uncertain future, (2) skill in generating alternatives for operating effectively in changing environments, and (3) skill in implementing new plans rapidly and efficiently” (p. 134). The first of these skills emphasizes the importance of anticipating changes in the firm’s environment, while the latter two emphasize skills needed to respond to the changes. Anticipating environmental changes involves scanning and monitoring the firm’s internal and external environments. Scanning is necessary to monitor broad trends, including changes in consumer preferences and competitor use of new channels and technology; to identify new opportunities; to assess strategic issues; and to develop strategies (e.g., Bourgeois 1980). It heightens awareness of the environment, emphasizing not only a focus on the external market environment that enables insight into current conditions and future trends but also a focus on the internal organization environment that enhances awareness of available resources, core competences, and potential weaknesses. Responding to environmental changes involves generating alternatives and implementing the best alternatives that will strengthen a firm’s fit with its environment. Firms with strong marketing planning capability are able to generate alternatives, typically as a result of their superior scanning processes, and dedicate resources to implement these planned actions (Ramanujam, Venkatraman, and Camillus 1986). The ability to implement the planned actions is critical (e.g., Mintzberg 1990; Nutt 1989), with the role of resource allocation in particular argued to be an important characteristic of any planning system (King 1983; Menon et al. 1999). Research has shown, for example, that the availability and allocation of resources to carry out the firm’s planned actions is one of the most critical aspects of planning (Ramanujam et al. 1986). While anticipation and responsiveness to competitive conditions are also fundamental to strategic flexibility (Evans 1991; Johnson et al. 2003), there are additional elements embedded in anticipation and responsiveness that differentiate marketing planning capability from strategic flexibility, namely, an emphasis on strategic fit and a focused direction. In particular, as a firm incorporates strategic flexibility into its organization, it emphasizes maximization of strategic options (e.g., Johnson et al. 2003; Sanchez 1995) rather than a focus on strategic fit with the environment (Das and Elango 1995). However, strategic fit is integral to marketing planning, as a firm directs its resources toward aligning its distinctive competencies,

specific programs, and planned actions toward market opportunities. Furthermore, whereas a specific direction and guided focus are integral to marketing planning, strategic flexibility aims to generate contingent, firm-specific real options (Johnson et al. 2003) so that it can reposition itself or change its strategies due to market changes (Harrigan 1985). Firms that emphasize strategic flexibility, with an eye on keeping their options open, may find that they lack specific direction (Das and Elango 1995) and signal a lack of focus (Barnett 2003). In addition, in pursuit of strategic flexibility to gain faster responsiveness to market fluctuations, a firm may structure its divisions so that they operate independently (e.g., Das and Elango 1995), which may reduce the firm’s recognition of its internal resources and capabilities. In contrast, one of the goals of marketing planning is to provide both strategic and tactical direction, which is further emphasized by the commitment of resources to that direction. We therefore define marketing planning capability as the ability to anticipate and respond to the market environment in order to direct a firm’s resources and actions in ways that align the firm with the environment and achieve the firm’s financial goals. The Role of Marketing Plan Content In examining how marketing planning capability relates to plan content and the effect of the marketing plan on the incidence of improvisation, we focus on two dimensions that are argued to be critical aspects of marketing plan content: comprehensiveness (Menon et al. 1999; Piercy and Morgan 1994) and budgeting approach (Piercy 1987).2 Marketing plan comprehensiveness. The comprehensiveness of marketing plan content reflects the scope of coverage of different program and situational factors. Specifically, comprehensiveness refers to the extent to which an organization attempts to be exhaustive in making decisions and committing resources to those strategic decisions (Fredrickson 1984). The inclusion of a broad array of topics within the marketing plan is therefore likely to be driven by a firm’s comprehensive approach to strategic planning, including its ability to generate numerous alternatives for competitive advantage (Menon et al. 1999), to consider the feasibility of various alternatives, and to discard those perceived as less valuable to the firm. We expect that firms with strong marketing planning capability are better able and thus more likely to possess comprehensive marketing plans. In general, a written plan represents the collective mental model a firm has adopted in conceiving of and managing its internal and market environments (Day and Nedungadi 1994). A comprehensive approach to strategic planning is therefore likely to result in a comprehensive approach to marketing plan content

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coverage. Thus, a firm with strong marketing planning capability is likely to include not only a broad array of situational topics (and an appraisal of the opportunities and threats they pose) but also a broad array of programs, such as product positioning and customer relationship programs, within its marketing plan.

enhances its credibility and utilization (Piercy and Morgan 1994), it also induces inertia (Fredrickson and Iaquinto 1989). As an orchestra’s music score reveals the coordination, harmony, and synergy between musical instruments, a marketing plan functions more effectively as a coordination and integration tool for those responsible for its execution when all aspects of the situation and the marketing mix are included in the written plan. However, as a means of communicating the firm’s goals, this comprehensiveness is more likely to result in inertia, where the speed of organizational change is much slower than the rate of environmental change (Hannan and Freeman 1984). Therefore, we expect comprehensive marketing plans to produce rigidities, where managers persist with their planned actions even as environments change. Second, managers may struggle with change from the marketing plan. In particular, postplan improvisation may require that attention and resources be drawn away from prior learning and strategies that were based on market potential, customer preferences, and organizational objectives (Miner, Bassoff, and Moorman 2001). Substantial changes in the environment may require the firm to replace its response to the environment, yet this unlearning is often difficult and takes time (Hedberg 1981). Thus, a comprehensive and rationally budgeted marketing plan is likely to reduce the incidence of postplan improvisation. Finally, a marketing plan emphasizes the firm’s commitment to a course of action (John and Martin 1984), which may lead to an escalation of commitment. For example, when plans are comprehensive, they communicate a specific, cohesive direction for the firm. Similarly, plans that are based on a rational budgeting approach link resources to specific actions so that the allocation of resources can heighten the success of those actions (Ramanujam et al. 1986). However, managers can remain committed to a specific course of action (Simonson and Staw 1992) or experience escalation of commitment (Staw 1981) as a result of the way in which decisions and outcomes are framed (Whyte 1986). Consequently, these characteristics of the marketing plan may lead to an escalation of commitment (Whyte 1986) to the plan’s original specifications. Therefore, we expect that firms with comprehensive and rationally budgeted marketing plans are less likely to engage in postplan improvisation.

Hypothesis 1a: Marketing planning capability has a positive effect on the comprehensiveness of a marketing plan’s content coverage. Marketing plan budgets. Marketing budgets are integral to the marketing plan, with the budgeting technique directly affecting the size of the budget allocated to various planned programs (Piercy 1987). A rational budgeting approach directs resource allocation, and marketing plan budgets based on sound economic principles or decision rules, such as activity-based costing (Cooper and Kaplan 1988) and marginal return analysis (Lodish 1986), generate more effective deployment of resources. Since one of the key elements of marketing planning capability is resource allocation competence, we expect a firm with strong marketing planning capability to recognize the value of deploying necessary firm resources to support planned strategies. In addition, a fundamental purpose of the marketing plan is to inform senior management of the product-market situation, planned marketing mix, and associated sales-forecast, cash flow, and budget. This makes an important contribution to the rationality and diligence of the firm’s resource allocation and commitment processes. Consequently, we expect firms with stronger marketing planning capability to incorporate rationally based budgeting approaches within their marketing plans. Hypothesis 1b: Marketing planning capability has a positive effect on inclusion of a rationally based budgeting approach in the marketing plan. The Role of Postplan Improvisation Our focus on the incidence of postplan improvisation refers to the extent to which firms alter their actions from those specified in their approved marketing plan. Firms may engage in improvisation for a variety of reasons. For example, research suggests that high levels of environmental turbulence and low levels of firm experience each enhance the amount of improvisation (Moorman and Miner 1998). With respect to a marketing plan, which provides a means for communicating the firm’s goals and strategies (Ireland, Hitt, Bettis, and Auld de Porras 1987), we expect the comprehensiveness and budgeting approach of the marketing plan to lessen the incidence of postplan improvisation for several reasons. First, marketing plans that are comprehensive may inherently produce rigidity effects. While research shows that comprehensiveness in a plan

Hypothesis 2a: The comprehensiveness of marketing plan content has a negative effect on the incidence of postplan improvisation. Hypothesis 2b: The budgeting rationality of marketing plan content has a negative effect on the incidence of postplan improvisation. While marketing planning capability can influence the incidence of postplan improvisation indirectly through the marketing plan, we also expect marketing planning capa-


bility to have a direct effect on the incidence of improvisation. As previously mentioned, it is possible that firms with strong marketing planning capability apply a similar mindset to reacting to environmental changes, so that those with superior marketing planning capability will be more likely to engage in postplan improvisation. We expect, however, that firms with superior marketing planning capability will be less likely to engage in postplan improvisation. One potential explanation for this negative relationship is that firms with strong marketing planning capability have reduced their need for improvisation. Another explanation, however, is theoretically based on the negative effects associated with success. According to organizational learning theory, firms adapt based on their past successes and failures. In particular, firms seek ways to change when faced with failure yet produce stability in behavior when they attempt to repeat success (Levitt and March 1988; March and Simon 1958). Many firms are argued to use a simplification or specialization mechanism for learning (Levinthal and March 1993), often due to the overwhelming degree of information available for decision making (Simon 1991). This specialization mechanism suggests that learning focuses attention on specific competences, which can harmfully focus attention too narrowly (Levinthal and March 1993). Research on organizational capabilities also shows that a firm’s strengths can misguide its actions. In particular, a firm’s capabilities may lead it to remain committed to a particular direction, which results in a loss of openness to new information (e.g., Leonard-Barton 1992). As experience and competence accumulate, cognitive maps and related processes may become increasingly rigid so that current and dominant solutions are applied to new situations, which can diminish the probability of effectively reacting to requirements that the new situation bears (e.g., Ahuja and Lampert 2001). Firms with strong marketing planning capability may therefore believe that there is no need to make alterations to even seemingly minor changes in the environment. Therefore, even though the capability is strong, there is a stickiness factor that impedes adaptation. We thus predict the following: Hypothesis 3: Marketing planning capability has a negative effect on the incidence of postplan improvisation. However, seemingly minor changes in the environment may be critical to the success of a firm. Adaptation to a changing environment affects not only a firm’s success but also its survival, with small and incremental changes potentially having a large impact (March 1981). A firm that engages in improvisation may therefore realize instrumental value for capitalizing on the changing environment (Weick 1996). For example, research shows that improvisational routines can enhance the speed of new product development (Eisenhardt and Tabrizi 1995), which is a

primary means of adaptation in many industries (Dougherty 1992). Research also shows that firms with a strong organizational memory that engage in improvisation can enhance the effectiveness of their new product development processes (Moorman and Miner 1998). Furthermore, research on operational flexibility highlights the importance of responding to an uncertain environment in a timely manner. When the daily operational processes permit a high degree of variation and flexibility, a firm can more quickly adapt to dynamic fluctuations in the market (Carlsson 1989; Johnson et al. 2003). In general, given the value of adaptation to a changing market and competitive environment, we expect a firm’s engagement in postplan improvisation to enhance its performance. Hypothesis 4: A firm’s incidence of postplan improvisation has a positive effect on its performance. The Direct Effect of Marketing Planning Capability on Firm Performance Research on organizational capabilities has long suggested a positive relationship between capabilities, in general, and firm performance (e.g., Day 1994; Grant 1991). Regarding planning capability, in particular, research has shown that superior planning process skills enhance firm performance (Brews and Hunt 1999). Furthermore, the underlying process skills of a marketing planning capability have been shown to have a positive effect on performance. For example, research shows that organizational alignment has a strong impact on firm profit (Powell 1992), that a firm is most effective when it deploys its strengths to fit current or emerging market trends (e.g., Venkatraman and Prescott 1990), and that the availability of necessary resources and their commitment to a given function or program increases firm success (Menon et al. 1999; Ramanujam et al. 1986). Therefore, we expect firms with strong marketing planning capability to attain higher performance than their less capable rivals. However, we also expect diminishing returns at highest levels of the capability due to potential competency traps associated with strong capabilities. In particular, firms with strong capabilities run the risk of becoming mired by their prior success. Managerial systems, skills, and knowledge are less amenable to change because they are tacit, built over time, and tend to have greater organizational scope (Leonard-Barton 1992). Moreover, firms that have established strong routines in any of the underlying processes of marketing planning may find that there is also a structural impediment to change. For example, firms may have incorporated an online approach to managing the vast degree of market knowledge to aid in their understanding of the market environment (McCann and GomezMejia 1992). This structural element of the planning pro-

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cess may produce a rigid approach to interpretation of market information, thus rigidifying a firm’s skill in market scanning and situation analysis. Furthermore, the more processes involved in the capability, the greater the potential for rigidities to occur (Leonard-Barton 1992). Therefore, we expect that while strength in marketing planning capability can enhance firm performance, a negative effect can occur at high levels, producing a curvilinear effect. Hypothesis 5: Marketing planning capability has a curvilinear effect on firm performance, illustrating an inverted U-shaped relationship. METHOD AND ANALYSIS Sample A survey was mailed to 2,164 senior executives of strategic business units (SBUs) of Fortune 1000 companies. The vice president or director of marketing at the SBU was selected as the key informant due to his or her specific knowledge and likely involvement in the marketing planning process. The survey, developed with extensive pretesting in collaboration with the Conference Board, is an extension of a survey used in 1990 in a previous joint research venture with the Conference Board (Sutton 1990). Following the approach of Menon et al. (1999), we contacted a random sample of 880 executives in the sample to determine the level of nondeliverable and noncompliance rates.3 From this process, we determined that approximately 16 percent of surveys were undeliverable (e.g., respondent recently left firm and has not yet been replaced, company is closing) and that about 11 percent had a corporate policy of not responding to academic surveys. Overall, a total of 209 surveys were returned (186 usable), yielding a response rate of 13.1 percent and adequately reaching the 10 percent to 20 percent average range for top management survey response rates (Menon, Bharadwaj, and Howell 1996).4 Of the final sample, respondents represented SBUs from various industries (see Table 1), with approximately 36 percent from manufacturing SBUs, 35 percent from service SBUs, and 29 percent from consumer retail and other SBUs. Measures Overall, three types of measures were used: reflective multi-item measures, formative multi-item measures, and single-item measures. The reflective measures were constructed so that the individual items refer to various necessary and related levels of the unobserved construct (Cohen, Cohen, Teresi, Marchi, and Velez 1990). The formative measures were constructed from items related to

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TABLE 1 Industry Representation Industry Categorization Financial services Business services Wholesale/retail Utilities General transportation and equipment Agriculture or farming Travel and tourism Manufacturing Telecommunications and electronics Chemicals and allied products Paper and printing Food and kindred products Other

Frequency 22 20 20 14 13 11 11 10 10 10 8 6 31

the unobserved construct yet involve separate conditions for the emergence of the construct (Bagozzi and Baumgartner 1994; Jarvis, Mackenzie, and Podsakoff 2003). All measures are provided in Appendix A, and measurement results are discussed in the Results section. Marketing planning capability. Based on the core, underlying process skills to develop a marketing planning capability, we included seven items to capture a firm’s quality in these various processes (see appendix). Specifically, we focus on seven processes that are measured as a set of benchmarked judgments (i.e., relative to industry average), using a 7-point scale that ranges from 1 (far below average in industry) to 7 (best in world across all industries). This relative judgment measure enables us to eliminate distortions created by differences across industries or product markets and to remain consistent with our firm performance measures. Since each process is distinct yet critical for an overall competence in marketing planning, our measure of marketing planning capability is a formative measure. Content and indicator specification are critical for formative measures (Bollen and Lennox 1991; Diamantopoulos and Winklhofer 2001), so we constructed this measure to include facets of the three key skills in planning specified by Simon (1993) and in our earlier discussion. Using this approach, firms must be highly competent in all of the specified processes in order to reflect a strong marketing planning capability. Marketing plan comprehensiveness. For comprehensiveness of coverage, we created two separate index measures for situational information and marketing mix programs. For each index measure, it was important to include many different topics that could be included in a marketing plan to ensure content and indicator specification. For situation coverage, we used 16 different items that reflect various environmental factors that firms could include in their marketing plans, such as those related to


TABLE 2 Measurement Results Profit Model Scale Item/Brief Description

λ

Marketing planning capabilities Market scanning Market situation/environment analysis Matching firm strengths to market opportunities Meshing programs to market realities Implementing marketing programs Marketing budgeting/allocating resources Program performance tracking Marketing plan comprehensiveness Comprehensiveness of situation coverage Comprehensiveness of program coverage Postplan improvisation Not strict execution of marketing plan Improvise a lot in implementing plan Programs ad-libbed as executed

γ .52 .50 .64 .67 .75 .80 .93 .72 .98

.84 .74 .72

Brand Equity Model

AVE

IC

α

.NA

.NA

.NA

.NA

.NA

.NA

.59

.81

.81

λ

γ .49 .51 .69 .64 .77 .85 .88 .73 .98

.83 .75 .73

AVE

IC

α

.NA

.NA

.NA

.NA

.NA

.NA

.59

.81

.81

NOTE: λ = item loading; γ = causal path; AVE = average variance extracted; IC = internal consistency; α = Cronbach’s alpha. AVE, IC, and α are not appropriate for formative measures and are therefore only reported for reflective measures, in this case, postplan improvisation. Items that were originally reverse-coded have been rephrased to remove the reversal.

technological, regulatory, competitor, and customer trends. For marketing mix program coverage, we used 19 different items that included product, distribution, advertising, pricing, sales, and customer relationship topics (see appendix). In calculating these index measures, we incorporated a breadth and depth dimension, since comprehensiveness should focus on both the scope and the depth of alternatives (Eisenhardt 1989; Menon et al. 1999), using the following equation: CVGij =

k

∑ (wijm ),

m =1

where CVGij refers to comprehensiveness of marketing plan content coverage for firm i for type of coverage j; wijm refers to the weight for depth of coverage (0 for no coverage, 1 for brief coverage, 2 for detailed coverage) for firm i, type of coverage j, and item m; j refers to the type of coverage, situational or marketing mix programs; and k refers to the number of items for each type of coverage (16 for situational coverage, 19 for marketing mix program coverage). Marketing plan budget. For rationality of the budgeting approach, we focused on seven budgeting process rules that a firm can use to allocate funds within its written marketing plan. Each of the seven budgeting approaches reflects a rational approach for allocating financial resources to planned actions, rather than a traditional approach (e.g., using prior year budgets to allocate funds for the current year) that tends to reflect simple heuristics that do not necessarily allocate resources where needed (Dickson 1997).

For example, one of the budgeting rules included in our measure is an activity-based approach, which reflects a rational means of allocating resources in accordance with a firm’s plans. To capture various rational approaches that a firm could use, we included seven different rationally based budgeting process rules (see appendix) and calculate this measure as follows: 7

BGTi = ∑ Ri , n =1

where BGTi refers to the rationality of firm i’s budgeting approach and Ri refers to the type of rational budgeting rule followed by firm i. This approach captures the firm’s frequency of rational budgeting use, where firms with higher scores have included more rationally based budgets within their marketing plans than do those with lower scores. Po s tp la n im p rovis a tio n . Th is m easu r e was operationalized as the extent to which firms alter their actions from those indicated in their approved or established marketing plan. Notice that our focus is on improvisation from a marketing plan rather than on a firm’s improvisation in general. Furthermore, we focused on the quantity rather than on the quality of improvisation. We constructed the incidence of postplan improvisation as a reflective multi-item measure, using three items adapted in part from Moorman and Miner (1998). This measure illustrated fairly high internal consistency (see Table 2). Fir m p er fo r m a n ce. F ir m p er f o r m an ce was operationalized as long-term performance relative to competition. Research shows that strategic planning typically

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FIGURE 2 Measurement and Structural Model Marketing Plan Content CVG1

MPC1 γ11

γ21

MPC2 γ12

MPC4

γ15

MPC5 γ16 MPC6

γ17

γ22

Comprehensive Coverage

+

MPC3 γ13

γ14

CVG2

–

Marketing Planning Capability

Rationality of Budget –

+

(Marketing Planning Capability)2

–

–

Firm Performance Relative to Competitors

+

MPC7

Incidence of Improvisation from Marketing Plan λ31 IMP1

has a 3- to 5-year lag in affecting performance (Robinson and Pearce 1983), so we delimited performance to a 5-year span. Our specific measures of firm performance included relative long-term profitability and brand equity. Firmlevel brand equity reflects the present value of the stream of rents expected from the reputation of the firm’s brands. These two different measures allow us to examine whether the predicted effects differ for a firm’s tangible profitability in comparison to its intangible value not reflected in its short-term bottom line. Furthermore, each of these two measures reflects subjective, relative performance compared to best in industry. In obtaining subjective assessments of a firm’s competitiveness, the measures are likely to more accurately reflect a firm’s true position when captured as relative to top rivals rather than as a pure level. Moreover, a relative measure of performance during a period of 5 years captures a firm’s degree of competitiveness that a cross-sectional, aggregate measure cannot. Analysis Our conceptual framework involves interdependence among several unobserved constructs. Consequently, the models needed to test the predictions require measurement of latent constructs as well as interdependent equations, where response variables from one equation can be modeled as regressors in other equations. A partial least squares (PLS) estimation approach is a component-based structural equation modeling technique (Wold 1975, 1985) that offers advantages over covariancebased approaches when measures are not well established

λ32 IMP2

λ33

Control Variables: Industry Dummy variables

IMP3

(e.g., Fornell and Bookstein 1982) or when few latent constructs in the model are reflective measures (Chin 1998). PLS is not new to strategic issues (see Hulland 1999) or to the marketing literature (e.g., Fornell, Tellis, and Zinkhan 1982; Smith and Barclay 1997; Zinkhan, Joachimsthaler, and Kinnear 1987). Therefore, we used PLS for examining the measurement properties and hypotheses (see Figure 2 for the measurement and structural model).5 In modeling the quadratic term to test the curvilinear effect of marketing planning capability on performance, we followed the approach suggested for formative indicators estimated with PLS (Chin 2000). Specifically, we first created a weighted score of marketing planning capability, using the gammas for this measure as the weights. We then mean-centered this weighted score to reduce collinearity between the main and interaction effects (Aiken and West 1991) and then computed its quadratic product. Given the formative nature of this measure and the use of PLS, this approach is fairly similar to that used in multiple regression. Finally, because we examine two distinctly different forms of firm performance, we estimate two separate models for each of the two performance measures in order to capture any differences for a tangible versus an intangible measure of performance. RESULTS Measurement In PLS, reliability of individual items is assessed by examining the loadings of the items with their respective


TABLE 3 Correlations of the Latent Constructs Construct

MPC

COMP

BUDG

IMP

PERF

Marketing planning capabilities (MPC) Marketing plan comprehensiveness (COMP) Marketing plan budget (BUDG) Postplan improvisation (IMP) Firm performance (PERF)

1.00 .14 .23 –.42 .38

.14 1.00 .20 –.31 –.01

.24 .20 1.00 –.22 .17

–.44 –.31 –.22 1.00 .04

.25 .02 .16 –.03 1.00

NOTE: Profit model latent variable correlations above the diagonal; brand equity model latent variable correlations below.

latent constructs. The item loadings for each of the multidimensional constructs are shown in Table 2. In general, loadings of less than .4 should be dropped from a model, since a low loading may be the result of a poorly worded or inappropriate item (Hulland 1999). Recall, however, that two of our key constructs are formative measures, while a third is a reflective measure. When evaluating the adequacy of formative measures, measures of internal consistency and reliability are inappropriate (Bollen and Lennox 1991). In particular, dropping an indicator from a formative construct could restrict the domain of the construct (Jarvis et al. 2003). Therefore, none of the items were eliminated from the two formative construct measures. For the reflective measure, postplan improvisation, none of the items fell below the .4 threshold. Also, measures of convergent validity indicated by the measure’s internal consistency (Fornell and Larcker 1981) and reliability each exceeded the .7 benchmark (Nunnally 1978). In particular, the internal consistency for postplan improvisation is .81, and Cronbach’s alpha measure of reliability is .81 for each of the models. Furthermore, the average variance extracted (AVE) is .59, which exceeds the .5 benchmark (Fornell and Larcker 1981). To examine discriminant validity, we compared the square root of AVE to the correlations of the constructs. As evident in Table 3, the largest correlation is that between marketing planning capability and postplan improvisation (r = –.44 in profit model), which is less than the square root of AVE for postplan improvisation ( 0.59 = .768), thus illustrating discriminant validity. Structural Although PLS does not provide statistics to measure overall model fit, the variance explained and the sign and significance of path coefficients can be used to assess nomological validity. The variance of firm performance explained is 29 percent for brand equity and 13 percent for profit. Although these results could be argued as fairly low, they are not surprising and are actually quite respectable given the myriad of exogenous, economic, and market factors that influence a firm’s performance. Regarding the

sign and significance of path coefficients, results indicate that most of the path coefficients are significant, and all are in the expected direction. With respect to the individual predictions, results indicate that marketing planning capability does not have a significant effect on the marketing plan’s comprehensiveness, although the direction is positive (β1 = .14, not significant [ns] for profit model; β1 = .14, ns for brand equity model), failing to support Hypothesis 1a. However, results indicate that a firm’s marketing planning capability has a positive, significant effect on the inclusion of rationally based budgeting rules within the marketing plan (β2 = .24, p < .01 for profit model; β2 = .23, p < .01 for brand equity model), providing support for Hypothesis 1b (see Table 4). In examining the role of postplan improvisation, results show that marketing plan comprehensiveness has a negative effect on the incidence of postplan improvisation (β3 = –.26, p < .01 for profit model; β3 = –.26, p < .01 for brand equity model), offering support for Hypothesis 2a. However, results show that the inclusion of rationally based budgeting rules in the marketing plan does not have a significant effect on the incidence of postplan improvisation (β4 = –.08, ns for profit model; β4 = –.09, ns for brand equity model), failing to support Hypothesis 2b. These results suggest that while marketing planning capability increases the inclusion of rational budgeting rules in a written marketing plan, their inclusion does not significantly reduce the incidence of postplan improvisation. Results indicate that marketing planning capability has a significant, negative effect on the incidence of postplan improvisation (β 5 = –.40, p < .01 for profit model; β 5 = –.39, p < .01 for brand equity model), even after controlling for industry-level effects, offering strong support for Hypothesis 3. Therefore, firms with strong marketing planning capability are less likely to engage in improvisation from an approved marketing plan. Although strong marketing planning capability reduces the incidence of postplan improvisation, results show that the incidence of postplan improvisation can have a positive effect on intangible firm performance (β6 = .12, ns for profit model; β6 = .26, p < .01 for brand equity). Therefore, the incidence of

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TABLE 4 Structural Results Firm Performance Hypothesized Path Marketing plan comprehensiveness Marketing planning capabilities → Marketing plan comprehensiveness Marketing plan budget Marketing planning capabilities → Marketing plan budget Postplan improvisation Marketing plan comprehensiveness → Improvisation Marketing plan budget → Improvisation Marketing planning capabilities → Improvisation Improvisation → Firm performance Marketing planning capabilities Marketing planning capabilities → Firm performance 2 (marketing planning capabilities) → Firm performance Firm performance

Profit Model a

.02 .14 .06 .24** .30 –.26** –.08 –.40** .12 b .— .30* –.08 .13

Brand Equity Model .02 .14 .05 .23** .29 –.26** –.09 –.39** .26** .— .49** –.22** .29

Support for Hypotheses Hypothesis 1a (+): not supported Hypotheses 1b (+): supported Hypothesis 2a (–): supported Hypothesis 2b (–): not supported Hypothesis 3 (–): supported Hypothesis 4 (+): partially supported Hypothesis 5 (+): supported Hypothesis 5 (–): partially supported

NOTE: Results from covariates excluded for ease of interpretation. In the profit model, only one industry (paper and printing) had a significant effect on improvisation (β = .14, p < .05), and only one industry (transportation) had a significant effect on performance (β = –.12, p < .05). In the brand equity model, none of the industry covariates had a significant effect on improvisation, and only one industry (business services) had a significant effect on performance (β = .19, p < .05). a. Variance explained. b. Variance explained is not relevant for marketing planning capabilities since they are modeled as exogenous. *p < .05. **p < .01.

postplan improvisation enhances the long-term intangible value of a firm, presenting a paradox for firms with a strong marketing planning capability. Finally, results indicate that marketing planning capability has a direct effect on a firm’s performance and that this relationship is curvilinear. In particular, while the linear effect of marketing planning capability on a firm’s intangible performance is positive (β7 = .49, p < .01), its quadratic effect is negative (β8 = –.22, p < .01), illustrating an inverted-U effect and providing support for Hypothesis 5 (see Table 4). Regarding firm profit, results indicate that marketing planning capability has a positive linear effect (β7 = .30, p < .05) and a negative though insignificant quadratic effect (β8 = –.08, ns), providing some evidence of decreasing returns. These results suggest that marketing planning capability can directly produce a paradox with respect to a firm’s long-term performance. DISCUSSION This research offers new insight into specific relationships underlying the planning process and illustrates a paradox for firms interested in building or cultivating a marketing planning capability. The Paradox of Planning Much of extant research on organizational capabilities has advanced our understanding of the various approaches that organizations can take to attain higher performance. Our results indicate that a marketing planning capability

can enhance firm performance, which supports previous research that illustrates the positive effects of strategic planning capabilities on firm performance (Brews and Hunt 1999). However, our results also illustrate two avenues in which marketing planning capability can lessen firm performance. First, our results show that firms are less likely to improvise from their approved marketing plans when they have a strong marketing planning capability. The concern is that, as evident in our results, when firms engage in improvisation from an approved marketing plan, they can enhance their performance. That is, firms highly skilled in marketing planning are less likely to improvise from their plans, yet this postplan improvisation can increase performance. Although others have shown the concurrent benefits of synoptic formalism and incrementalism (Brews and Hunt 1999), our research supports this conclusion but also indicates a core rigidity associated with planning capability. Second, our results show that the direct effect of marketing planning capability on firm performance is curvilinear. In particular, while marketing planning capability can enhance firm performance, decreasing returns exist so that firms with very strong marketing planning capability experience a negative effect on their performance. This substantiates the rigidity effects seen for new product development capabilities (Leonard-Barton 1992). Therefore, an emphasis on marketing planning capability presents managers with a paradox—how to capitalize on the benefits associated with planning capability without suffering from its rigidity-inducing effects.


Managing paradox involves resolving its tensions while also capturing its enlightening potential (Eisenhardt 2000; Lewis 2000). In an attempt to suppress the negative effects of a paradox, the positive effects will initially intensify, yet their polarity creates a cyclical loop so that it eventually results in unintended and intensified negative effects (Lewis 2000). Therefore, instead of trying to suppress the negative effects of a paradox, managers need to first recognize its existence and then lean from the tensions in order to capitalize on the power of the paradox and generate creative insight and change (Eisenhardt and Westcott 1988). A critical examination of the entrenched assumptions or organizational intricacies offers a deeply rooted perception of the paradox. This “reframing marks a dramatic change in the meaning attributed to a situation as paradoxical tensions become viewed as complementary and interwoven” (Lewis 2000:764). To manage the marketing planning capability paradox, one suggestion is a reframing of the organization’s decision-making processes so that the subprocesses of planning and postplan improvisation are viewed as complementary rather than competing. In this approach, managers could be discouraged from remaining committed to the specified path simply because it was formally planned and encouraged to make real-time changes to strategies that are based on changes in the firm’s external or internal environments yet remain within the firm’s strategic direction. At the same time, the marketing plan could include contingency plans or direction to alter the strategies, programs, or tactics when new opportunities arise. Another suggestion is to include multiple levels of hierarchy in the initial stages of the marketing planning processes. Boundaries between hierarchy, functions, divisions, and occupations require a “rich behavioral repertoire to bridge, integrate, and manage” (Denison, Hooijberg, and Quinn 1995:537) that may intensify the complexity of managing the paradox. Therefore, inclusion of managers from multiple levels, different divisions, and potentially different functions may offer different insight into the overall value and multi-level commitment to the firm’s overall anticipation of, and responsiveness to, environmental changes. Finally, managing the paradox could include a physical reorientation of the planning process, one that focuses on the several stages of the planning process and produces several forms of the marketing plan for each stage of planning. We now address this last suggestion in more detail. The Role of Plan Content Our results show that marketing planning capability influences the content of a marketing plan in different ways. Specifically, firms with a strong marketing planning capability are more likely to use rationally based budgeting approaches. These firms may recognize that rationally based budgets afford more resources for the planned

actions (Piercy 1987). However, firms with strong marketing planning capability do not necessarily include more comprehensive coverage of their situational analysis and marketing mix programs within their written marketing plan. It is possible that firms more capable at marketing planning identify the most critical elements and only include those elements within their marketing plan. We offer a different explanation. Consider Simon’s (1993) process framework as different stages of planning. At the earliest stage of the planning process where an attempt is made to anticipate the future and synthesize information, comprehensiveness in coverage of key market trends, drivers, risks, and uncertainties is advantageous. In the second stage of planning when alternatives are being generated to fit the changing environment, strengths, weaknesses, opportunities, and threats (SWOT)-like analyses and systematic evaluation of marketing mix options against the key market insights (Dickson 1992, 1997) are critical. During the third stage, where the plan plays a role in the firm’s rapid and efficient execution and implementation, the emphasis in the plan needs to be focused on specific actions that are new, innovative, and central to the achievement of the firm’s competitive strategy. Now, the planning document needs to be focused in its coverage. This perspective suggests that these three different stages of the planning process should produce three different marketing planning documents, which raises a question about the conventional conception of a firm’s marketing plan as a single written document. If the codified knowledge that is prepared, written, and presented to support activities at different stages of the planning process is very different, then the marketing plan should not be conceived of as a single document. Marketing managers and educators who conceive it as such are making a fundamental mistake that is likely to decrease a firm’s procedural rationality (Simon 1976) and potentially intensify the dysfunctional side of the marketing planning capability paradox. Future research needs to be much more open to the possibility that the final plan used for implementation is only one of several crucial written documents sequentially used in the strategic planning process. Further research that studies the use of different forms of codified knowledge throughout the planning cycle may provide much additional insight as to how planning processes and planning documents interact to create competitive advantage. Study Limitations Any research study is not without limitations, and we recognize specific issues that warrant caution in interpreting our results. First, we studied large firms that were expected to have standard marketing planning practices, heavily influenced by headquarters’ senior management.

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As a result, our results do not address the role of marketing planning in medium-size or small firms. Furthermore, although we controlled for industry-level heterogeneity, we were unable to control for firm-level heterogeneity. In particular, anecdotal evidence suggests that written marketing plans may play less of a role in such firms where communication between management is constant, thus reducing the coordinating purpose of the plan. In addition, several of the measures deserve attention. Our measure of marketing plan content focused only on the comprehensiveness of coverage and the inclusion of rationally based budgeting rules. While our measurement of these constructs was fairly extensive, further research that examines other content characteristics may illustrate additional avenues for a planning paradox. In addition, our measure of postplan improvisation focused on the quantity of improvisation, and our results illustrate the importance of improvisation quantity, yet perhaps the relationships shift when firms practice high quality improvisation. Finally, we focused on a tangible measure and an intangible measure of firm performance, each measured as unidimensional. Use of a multidimensional measure for long-term performance was constrained by the desire to measure relative rather than absolute performance, and we refrained from using secondary measures of performance so that we could focus on firms at the SBU level. Further research could thus examine other forms of firm performance such as sales growth or stock price returns. Overall, these limitations do not jeopardize the integrity of the results, yet they do place bounds on the conclusions that can be drawn from the results. CONCLUSION This research illustrates that a firm’s marketing planning capability presents a paradox. This paradox may help explain the mixed empirical results of prior research that debates the value of strategic planning. When a paradox exists, firms can either capitalize on the duality of coexisting tensions to ride an “edge of chaos” of creative potential or become ambivalent by coexisting halfway between the two extremes (Eisenhardt 2000:703). Therefore, managers need to be aware of this paradox and consider how to take advantage of their marketing planning capability without allowing its dysfunctional side to impede the firm’s full potential.

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APPENDIX Operationalization of Measures Market Planning Capabilities (7-item, formative measure) What is your objective assessment of your strategic business unit on the following competencies? (Using a bench-marking scale of 1 = far below average in industry, 2 = below average in industry, 3 = above average in industry, 4 = above average but not best in industry, 5 = best in industry domestically, 6 = best in industry worldwide, and 7 = best in world across all industries) Competency in market scanning. Competency in market situation/environment analysis. Competency in matching firm strengths to market opportunities. Competency in meshing programs to market realities. Competency in implementing marketing programs. Competency in marketing budgeting/allocating resources. Program performance tracking competence. Postplan Improvisation (3-item, reflective measure: reliability = .81) Seven-point agreement scale, adapted in part from Moorman and Miner (1998) Our actions follow a strict step-by-step execution of the marketing plan. (R) We improvise a lot in implementing the marketing plan. We “ad-lib” our marketing mix programs as we execute them. Firm Performance Relative Profit If your rival with the highest profitability during the past 5 years rated a 100 for its profitability, what profitability rating would you give your firm? _____ Relative Brand Equity If your rival with the highest brand equity rated a 100 for its brand equity, what brand equity rating would you give your firm? _____


Marketing Plan Rationally-Based Budget Approach (7-item index measure) Please check all of the following techniques, processes, and/or rules in which your marketing budgeting/spending is based. Opportunities and threats revealed by marketing plan Apparent potential of initiatives proposed in the plan Return on investment computer model “What-if” spreadsheet analyses “Bang-for-the-buck” marginal return analysis Computer optimal marketing mix spending model Activity-based costing Comprehensiveness of Coverage How are the following topics usually described in your marketing plan? (described in detail, described only briefly, not described or included at all, not applicable to us) Situational Coverage (16-item index measure) Economic/market sales forecasts Technological trends in product/service design Environment/safety issues and trends Product-market life-cycle/growth analysis Company goals and mission/vision Strategic business unit strengths/weaknesses analysis Appraisal of opportunities and threats Current product service line profitability analysis Market share of company and competitors Changes in behavior of competitors Bench marking of rival products/services Customer segmentation analysis Current customer profitability analysis Changing consumer wants/needs/preferences Changes in customer use of Internet/Web Trends/changes in regulations, laws, and government support programs Marketing Mix Program Coverage (19-item index measure) New product or service development New product or service launch Product/service-line repositioning Product quality programs (e.g., quality function deployment) New channels-of-distribution strategy Customer after-sales service programs Major customer relationship programs Field sales force/reps education programs Role of field sales force/sales reps Regional sales campaigns Sales force/trade incentive programs PR and promotion programs

Marketing research projects Data-based marketing programs Direct marketing/telemarketing programs Ad agency’s planned campaign Web marketing campaign Pricing policies/discounts/promotions Integrated marketing communication program NOTE: (R) = reverse-coded.

ACKNOWLEDGMENTS The authors thank Lance Bettencourt, Scott MacKenzie, Chris Moorman, Neil Morgan, and Dan Smith for their valuable comments from an earlier version of this article, as well as the anonymous reviewers and the editor for their constructive comments and insightful suggestions. The authors also thank Tom Bodenberg and the Conference Board for their research and financial support, and Paul Christopher for his field research support. NOTES 1. We focus on the incidence of improvisation rather than the quality of improvisation in order to disentangle its role from marketing planning capability. We also chose this focus because improvisation ability does not necessarily indicate that a firm will engage in improvisation. Analogously, organizational theory recognizes that resource possession does not necessarily mean resource deployment. 2. While marketing plan content can be characterized in various ways, we focus on these two characteristics because they are often referred to as fundamental components of a strategic or marketing plan (e.g., Piercy and Morgan 1994; Walker, Boyd, and Larreche 1996). For example, other characteristics, such as relative balance between, or strategic emphasis on, different issues within a marketing plan build from the content coverage component. 3. This approach was used because the Conference Board handled the survey mailing process yet did not explicitly track the undeliverables. 4. A post hoc examination of early versus late responders suggests that there is no systematic distortion in responses, offering some evidence to lessen concerns over nonresponse bias. 5. We also estimated our model with a three-stage least squares (3SLS) approach to examine the extent to which our results are robust. A 3SLS estimation approach accounts for correlation between error terms, and its estimates are asymptotically equivalent to maximum likelihood estimates; however, it assumes no measurement error. Because the partial least squares (PLS) approach offers a rigorous test of the relationships and incorporates measurement error into the analysis, we report results from the PLS estimation approach within the article. In comparing results across the two approaches, results are quite robust, with main differences occurring only for degree of significance, which would be expected given that the 3SLS approach does not account for measurement error.

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ABOUT THE AUTHORS Rebecca J. Slotegraaf ([email protected]) is an assistant professor of marketing in the Kelley School of Business at Indiana University. Her research focuses on the nature and effect of organizational resources, marketing capabilities, and deployment actions on competitive advantage. She received her Ph.D. from the University of Wisconsin–Madison. In addition to this publication in the Journal of the Academy of Marketing Science, she has also published several articles in the Journal of Marketing Research. Peter R. Dickson ([email protected]) is the Knight-Ridder Eminent Scholar in Global Marketing at Florida International University. He was previously the Arthur C. Nielsen Jr., Chair of Marketing Research at the University of Wisconsin–Madison and before that the Crane Professor of Strategic Marketing and a professor of industrial design at the Ohio State University. He received his Ph.D. from the University of Florida. Thirty of his articles on buyer and seller behavior have been published in leading marketing journals.