The Strategic Competence of Small Businesses.
The Strategic Competence of Small Businesses
Abstract
The general investigative focus of our research paper is on the market. More specifically, we narrow our focus on the question as to whether there is something like a specific strategic competence of small firms. Our initial hypothesis is that small firms have a very different "strategic competence" as compared to large firms. An extensive literature review comes up with 35 potential variables for such a specific strategic competence of small businesses. After a thorough analysis, this list is narrowed down to 15 variables. These 15 variables have powerful theoretical and practical implications and their validity should be tested through more in-depth literature reviews as well as empirical research on a global scale.
CONTENTS
. INTRODUCTION 5
.1 The General Issue: The Market 5
.2 Narrowing The Focus: Specific Strategic Competences Of Small Businesses 6
.3 What Motivated Our Investigation 7
2. REVIEW OF THE PERTINENT LITERATURE 9
2.1 Vozikis and Mescon (2002) on the Strategic Competence of Small Businesses 10
2.2 Strategy and the Internet - Has Planning Become Obsolete? 16
2.3 The Importance of Planning and Preparation (from Sun Tzu through von Clausewitz to The Economist 2002) 21
2.4 Small Businesses and Planning 23
2.4.1 Perry (2001) On The Relationship Between Planning And Failure 23
2.4.2 Upton et al. (2001) On Strategic And Business Planning Of Fast-growing Family Firms 25
2.4.3 Masurel & Smit's Study On Planning Behavior Of Small Firms In Central Vietnam 29
2.4.4 O'gorman & Doran (1999) On Mission Statements In Smes 30
2.4.5 Rue & Ibrahim (1998) On The Relationship Between Planning Sophistication And Performance In Small Businesses 31
2.4.6 Matthews & Scott (1995) On Uncertainty And Planning In Small Firms 32
2.4.7 Rauch et al. (2000) On Cultural Differences in Planning/Success Relationships 33
2.4.8 Frese et al. (2000) On Planning As a Small Scale Business Owner 33
2.5 Other Potential Factors of Strategic Competence of Small Businesses 33
2.5.1 Sullivan & Kang's Literature Review On Innovation In Small Firms 34
2.5.2 Mccann Et Al.'S (2001) Strategic Goals And Practices Of Innovative Family Businesses 34
2.5.3 Motwani et al. (1999) On Managing Innovation In Small Enterprises 35
2.5.4 Ahire & Golhar (1996) On Quality Management In Small Firms 35
2.5.5 Kuratko et al. (2000) On Quality Practices For A Competitive Advantage In Smaller Firms 36
2.5.6 Pope (2002) On Why Small Firms Export 36
2.6 Potential Success Factors For Small Businesses 36
2.6.1 Lussier & Pfeifer's (2001) Crossnational Prediction Model For Business Success 37
2.6.2 Sheriff Luk On Success In Hong Kong And Elsewhere (1996) 39
2.6.3 Lin (1998) On Success Factors Of Small Enterprises In Taiwan 42
2.6.4 Pelham (2000) On Influences Of Performance In Small Manufacturing Firms 42
2.6.5 Sandvig And Coakley On Successful Diversification In Small Firms 43
3. THE CONCEPTUAL FRAMEWORK OF THE PROJECT 44
4. THE EVIDENCE 50
5. CONCLUSION 54
REFERENCES 56
. INTRODUCTION
.1 The General Issue: The Market
In this research paper, the general investigative focus will be on the market. The market is one of seven key concepts of a business plan. In Vozikis's and Mescon's book on Entrepreneurship: Venture Initiation, Management, and Development, the other six key concepts are the niche, the return, the need, the infrastructure, the people "FAKTS" (Financials, Attitude, Knowledge, Timing, and Skills, i.e. the ability to execute), and the deal (2002: 49).
A market is usually defined as a means by which the exchange of goods and services takes place as a result of buyers and sellers being in contact with one another, either directly or through mediating agents or institutions (Encyclopedia Britannica1). In the context of this research paper, it is short for venture strategic market targeting, management and planning.
The concept of target market stands for the five questions of who buys, how many buy, when do they buy, how do they buy, and where do they buy (Vozikis & Mescon 2002: 83). In essence, no company can operate in every market and satisfy every need, nor can it even do a good job within one broad market. The target market is at the beginning of a chain of concepts in the marketing concept. The target market is the starting point, the focus is on customer needs, the means is coordinated marketing, and the ends is profits through customer satisfaction (see Kotler et al. 1999: 21-22).
.2 Narrowing The Focus: Specific Strategic Competences Of Small Businesses
Chapter 5 of Vozikis's and Mescon's work (2002) focuses on our topic at hand, the market. In our reading, the three key theses in this chapter are as follows:
(1) Small firms have a very different "strategic competence" as compared to large firms.
(2) It is of key importance to find out a given venture's strategic competence in a specific strategic target market.
(3) The determination of a venture's course of action best takes place in the context of acting, reacting, proacting, or ignoring. A demand-driven opportunity target market is preferable to a supply-driven one, as the supply-driven one carries the additional burden of first having to educate the buyer.
The most intriguing and perhaps controversial thesis is (1) and shall thus be the focus of our investigation. Our hypothesis is:
H: Small firms have a very different "strategic competence" as compared to large firms.
However, we will also occasionally touch upon theses (2) and (3), as they are interlinked with thesis (1). We will try to prove that there is a unique set of potential strategic competencies of small businesses which differs from large companies.
A word more frequently used than strategic competence is core competence. In our understanding, a core competence is a special case of a strategic competence, as it has to fulfill more conditions than a mere strategic competence. According to Vozikis and Mescon, strategic competence is developed as follows: "The entrepreneur believes that by satisfying customers, loyalty to the firm is created along with repeat business and word-of-mouth promotion" (85).
Core competence is defined as the collective learning in the organization, especially how to coordinate diverse production skills and integrate multiple streams of technologies. It is an aptitude, capability, or skill that provides a firm with a sustainable competitive advantage. A competence must pass three tests to be considered a core competency: it should (1) be applicable across a range of products, (2) be difficult for competitors to imitate, and (3) provide a fundamental and valuable benefit to customers. A firm may possess many competencies, but only those that satisfy these criteria qualify as core competencies (see Prahalad & Hamel 1990, Hamel & Heene 1994, Kotler et al. 1999: 70, Barney 2002: 414).
Consequently, the strategic competencies which we are about to discuss may or may not be core competencies.
.3 What Motivated Our Investigation
The topic of a unique set of strategic competences of small businesses is of great personal interest to us as students, and partially practitioners, of entrepreneurship. All of us are would-be entrepreneurs and thus must investigate as to whether there may be such a thing as a specifiable set of advantages which small businesses hold vis-à-vis large businesses.
Generally, new venture creation, which inevitably starts with a somewhat small business, is "arguably the single most powerful force to create economic and social mobility" (Timmons 1999: 5). Smaller entrepreneurial companies, in the view of many senior managers, have also become role models for the way business should operate (Timmons 1999: 6). Research has shown that in the US, small entrepreneurial firms have been responsible for a staggering 95% of all radical innovations, and for half of all innovations (Timmons 1999: 9). Perhaps most importantly, entrepreneurship has been described by Timmons as the "great equalizer and mobilizer of opportunity," indifferent to race, religion, sex, or geography and rewarding of performance (Timmons 1999: 16).
New and small businesses have long been recognized as a major source of jobs, technical innovation, economic flexibility, and growth. Identifying a set of specific strategic competencies is also likely to lead to a checklist of possible success factors. This is of great interest to public policy makers who are concerned with economic development and also to (would-be) entrepreneurs such as ourselves (see Lussier & Pfeifer 2001).
Small- and medium-sized enterprises exert a strong influence on the economies of all countries, particularly in the fast-changing and increasingly competitive global market (Aharoni 1994). They have been a major engine of economic growth and technological progress (Mulhern 1995). Small enterprises are often more fertile than larger firms in terms of innovation (Carrier 1994). The features of small firms such as flexibility, innovativeness, and problem-solving action orientation are now being considered as vital for success. Even large companies have attempted to implement entrepreneurship and have learned to think like a small business (Chittipeddi & Wallett 1991).
Moreover, many small businesses have been started with a minute budget and they thus provide unique opportunities for the founders - as well as their staff - to obtain financial freedom. Our team is influenced by Robert Kiyosaki's concept of financial freedom (see Kiyosaki 1997,1998, 1999, 2000, 2002).2 Essentially, financial freedom can be achieved when the passive income (which is achieved through assets rather than work) exceeds one's expenses. Kiyosaki defines assets as income-generating ventures such as real estate or the stock market. One of the safest investments, which also offers unique tax advantages, appears to be owning a business, specially when there is a fit between opportunity, team and resources. Consequently, we are highly motivated investigating the hypothesis outlined in the previous section.
2. Review of the Pertinent Literature
In the following literature review, we will look at many different angles on strategic competence. Once we dug deeper, we discovered that there is a rather amazing array of literature on the topic. The Journal of Small Business Management alone turned out to be a veritable treasure chest. In fact, we feel that in the following literature review, we are essentially only scratching the surface, and we are thus hardly in the position to state whether or not there are any gaps in the literature.
Regarding methodological questions, we mostly relegate this information, wherever we have deemed it important, to footnotes, in order not to distract too much from the main content. On the question of theories, it does not seem to be the case that any major theories have been developed on the issue of strategic competence. To some extent, we will discuss the seminal writings of strategy gurus such as Michael Porter and Peter Drucker, but when it comes to many empirical articles, the research results are rather narrow and precise and just add to a very complex and probably forever-incomplete mosaic structure. In our opinion, this is not a bad thing as grand theory may not be as reliable and empirically valid as the long and arduous process of grounded theory.
From a practitioner's point of view, theory may not be quite as interesting as the many snippets of real-life experiences which we will summarize in the following literature review. So whenever possible, we will refer to practical conclusions, applications, and implications which have been derived in the context of the reviewed literature.
To our knowledge, the most detailed and current account of our issue is found in Vozikis and Mescon (2002). We shall thus start with outlining the argument found there.
2.1 Vozikis and Mescon (2002) on the Strategic Competence of Small Businesses
Vozikis and Mescon argue convincingly that small business ventures can compete in an era of corporate giants if they are able to effectively implement a market strategy in a competitive environment (2002: 84).3 Most small venture success stories hinge on satisfied customers and innovation. In the US, the saying is famous that "the customer is always right" (Vozikis & Mescon 2002: 85).4
Vozikis and Mescon argue that a small firm has distinctive advantages and disadvantages vis-à-vis a big business, as small firms have their own strategic competence, their own edge in the business world, their own abilities, fitness and means for survival (2002: 85).
In the following bullet points, we summarize the strategic competence of small businesses, as discussed by Vozikis and Mescon (2002: 86-7):
> Low need for co-ordination.
> High degree of inherent flexibility.
> No need for sophisticated control mechanisms.
> No costly sophistication.
> Environmental scanning is less important.
> Emphasis on effectiveness, not efficiency.
> Emphasis on satisfying specific customer needs.
> Experience curve learning effects.
> Short-term time-horizon and flexibility.
> Small business owners are experienced general managers.
> Decentralization; fewer hierarchical levels.
> Entrepreneurs change and innovate quickly - they ask "why not?"
> Intuition's role in creativity, innovation, and change is indispensable,
> Small firms are dynamic as they
o act to seize opportunities,
o react to threats, and
o proact to create opportunities.
> Entrepreneurs "satisfice."5
While this appears to be a comprehensive list, it is useful to also consider what Vozikis and Mescon appear to conceive of as the most important advantages of small firms. In their analysis, flexibility is the small firm's most important advantage. Moreover, the small firm should:
* Constantly redefine its strategic competence. A venture's strategic competence can be redefined through:
> Basic marketing and pricing strategies that flout industry norms.
> Goal-oriented and rigorously trained sales force with tight parameters and attitudes.
> A focus on profitability.
* Continuously identify "strategic windows" (Abell 1980: 224).
* Emphasize effectiveness rather than efficiency6
* Identify its strategic flexibility tactics:
> act to seize opportunities,
> react to threats,
> proact to create opportunities, and
> ignore a threat or an opportunity (Vozikis & Mescon 2002: 88-92).7
However, small firms can also outperform large firms in terms of efficiency and economies of scale!
Good strategic competence management requires careful considerations of the following managerial skills:
(1) industry structure considerations
(2) opportunity identification and evaluation considerations
(3) obtaining, managing, and controlling resources considerations;
(4) managing the strategic and operational elements of the business; and
(5) professional development skills.
Vozikis and Mescon recommend five guidelines for enhancing new venture performance (2002: 92-3):
(1) Focus on industries facing substantial technological or regulatory changes, especially those with recent exits by established competitors.
(2) Seek industries whose smaller firms have relatively weak competitive positions.
(3) Seek industries in early, high-growth stages of evolution.
(4) Seek industries in which it is possible to create high barriers to subsequent entry.
(5) Seek industries with heterogeneous products that are relatively unimportant to the customer's overall success (see Hofer & Sandberg 1987: 13-17).
Entrepreneurs must plan and develop an entrepreneurial strategy that matches successfully their strategic competence and the unique characteristics of the industry that they intend to enter.
Industry structure is a key factor in the success of a new entrepreneurial venture. We mention here in parenthesis that Barney did a thorough analysis about how industry structure affects the opportunities of firms and what strategies they should adopt. The following table adopted from Barney (2002:110) is very useful and should be considered very carefully.
Industry structure
Opportunities
Fragmented industry
Consolidation:
a. Discovery of new economies of scale
b. Altering ownership structure
Emerging industry
First-mover advantages:
c. Technological leadership
d. Preempting of strategically valuable assets
e. Creation of customer-switching costs
Mature industry
Product differentiation
Investment in service quality
Process innovation
Declining industry
Leadership strategy
Niche strategy
Harvest strategy
Divestment strategy
International industry
Multinational opportunities
Global opportunities
Transnational opportunities
Network industry
First-mover advantages and
"winner-takes-all" strategies
Hypercompetitive industry
Flexibility
Proactive disruption
Empty core industry
Collusion
Government regulation
Significant product differentiation
Demand management
Going back to our description of the main points in Vozikis & Mescon (2002), Hofer's and Sandberg's competence management strategies are (1987):
(1) Seek to differentiate your products from those of your competitors in ways that are meaningful to your customers (e.g. product quality, marketing approaches, and customer service).
(2) Seek to dominate the market segments in which you compete.
(3) Stress continued innovation, especially new product innovation that is built on existing organizational capabilities.
(4) Seek natural, organic growth through flexibility and opportunism that builds on existing organizational strengths.
Identification and implementation of the appropriate strategy for a new venture's target market is an uphill task, "but if the entrepreneur is willing to do his/her homework, it can pay off in the end in terms of sales and profitability" (Vozikis & Mescon: 94-95).
In conclusion, Vozikis and Mescon ask the "million dollar question" as to how to make strategic competence market targeting and strategic competence management work for the small firm. Their answer is as follows:
> Concentrate on the advantages typically possessed by a small enterprise
> Maintain flexibility in terms of strategic competence
> Exploit the plentiful profitable small value concept niche opportunities
> Take advantage of the relatively low overhead burden
> Direct profit orientation focus by the entrepreneur (see Van Kirk & Noonan, 1982)
> Get results via a well-designed planning process
Strategic competence targeting and management is deliberate, value-oriented, time-consuming, and specialized, and it is the transition from mere strategic thinking to full-scale strategic competence market targeting that makes new ventures succeed (Vozikis & Mescon 2002: 97).
2.2 Strategy and the Internet - Has Planning Become Obsolete?
The Internet has caused much excitement and dismay over the past few years. In terms of strategy, it is definitely an important consideration for small businesses. At the height of the dot.com euphoria, it may have appeared that the Internet renders strategy obsolete. Before many of the dotcoms turned "dotcons," and when there was a lot of babbling about the supposed "New Economy," and how it would change everything, companies were valued almost irrespective of their economic value. However, the creation of true economic value - the gap between price and cost, reliably measured only by sustained profitability - was and is the final arbiter of business success. To just mention one example of the wild extravaganzas of many dotcoms in the late 1990s:
"Before their online start-up had sold a single rag, the founders of boo.com, an Internet clothes shop, had splashed out on a small army of Gurkha bodyguards, rivers of champagne and rows of seats on Concorde to attend meetings with their investment bankers. Fleets of Webvan vehicles, some having made scarcely a journey for the failed online grocer, now sit for sale in parking lots, silent witnesses to their owners' waste of over $1 billion." (Hindle 2002)
Economic value was thus supposedly rendered obsolete during the days of the dotcom bubble. Similarly, planning had supposedly become unnecessary. Planning was further undermined by the myths surrounding the so-called 'new economy.' Its champions seemed to dismiss planning, saying that business had to think differently. In a world where change was said to take place at the speed of light, and the term "Internet time" was on everybody's lips, looking ahead beyond the next dollop of venture capital seemed pointless. "Why be prepared, the argument went, when nobody knew what to be prepared for?" (Hindle 2002)
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Economic value was thus supposedly rendered obsolete during the days of the dotcom bubble. Similarly, planning had supposedly become unnecessary. Planning was further undermined by the myths surrounding the so-called 'new economy.' Its champions seemed to dismiss planning, saying that business had to think differently. In a world where change was said to take place at the speed of light, and the term "Internet time" was on everybody's lips, looking ahead beyond the next dollop of venture capital seemed pointless. "Why be prepared, the argument went, when nobody knew what to be prepared for?" (Hindle 2002)
One main cause of the dotcom bubble was certainly the immaturity of the venture-capital industry. Let us now turn to an excellent article by strategy guru Michael Porter which argues convincingly that, because the Internet tends to weaken industry profitability without providing proprietary operational advantages, it is more important than ever for companies to distinguish themselves through strategy.8 "The winners will be those that view the Internet as a complement to, not a cannibal of, traditional ways of competing" (Porter 2001: 63).
The Internet is an enabling technology that can be used in almost any industry and as part of almost any strategy. From the standpoint of corporations, it is unfortunate that the Internet tends to dampen overall profitability, has a leveling effect on business practices, and reduces the chances for sustainable competitive advantages (Porter 2001: 64). In fact, it is the great paradox of the Internet is that its very benefits - making information widely available; reducing the difficulty of purchasing, marketing, and distribution; allowing buyers and sellers to find and transact business with one another more easily - also makes it more difficult for companies to capture those benefits as profits (Porter 2001: 66). As a consequence, far from making strategy less important, "the Internet actually makes strategy more essential than ever" (Porter 2001: 64). And Internet strategy, or e-strategy, should never be discussed in isolation: "Only by integrating the Internet into overall strategy will this powerful new technology become an equally powerful force for competitive advantage" (Porter 2001: 80).
More generally, Michael Porter's seminal work on competitive strategy provides a good framework for understanding the competitive environment of companies. According to Porter's model, firms compete along two fundamental dimensions: cost and differentiation. In any given market, typically only one firm is able to establish and defend a cost-leadership strategy, whereas other companies must differentiate their products along some dimensions valued by customers. The reward for effective product differentiation is the ability to command premium prices.
A second aspect of Porter's model is the range of markets a firm chooses to target. Products aimed at a broad range of industries have the potential for reaching a large number of customers but often face stiff competition. Alternatively, a firm may focus on meeting the needs of a narrow market segment. Porter (1980) notes that a company pursuing this strategy is "able to serve its narrow strategic target more effectively or efficiently than competitors who are competing more broadly." Thus, "the focuser seeks to achieve a competitive advantage in its target segments even though it does not possess a competitive advantage overall" (Porter 1985). Wright (1987) observes that small firms typically rely on the focus-differentiation strategy because they have neither the volume needed to compete on low price nor the resources needed to differentiate themselves in large markets (see also Sandvig & Coakley 1998).
For reasons of time and space constraints, we will not look into Jay Barney's (2002) very recent and most excellent writings on strategy, which possibly could be the most important developments in writing on strategy after Porter (1980). However, we shall briefly look into Peter Drucker's very deep and important elaborations on entrepreneurial strategies, albeit only in table form (1985).
ENTREPRENEURIAL STRATEGY
PREREQUISITES
SPECIFIC ENTREPRENEURIAL BEHAVIOUR
RISKS/REWARDS
. Being "Fustest with the Mostest"
Extreme concentration of effort and substantial resources.
Aim from the start at market dominance!
High risk - high reward
2. "Hitting Them Where They Ain't"
Also aims at leadership and dominance.
(a) creative imitation
Alertness, flexibility, willingness to accept market verdict; hard work and massive efforts.
Entrepreneur understands innovation better than innovator. Entrepreneur perfects and positions a product.
Less risk than 1.
(b) entrepreneurial judo
Analysis where alternative strategy would meet with the greatest success and the least resistance.
Entrepreneur first aims at securing a beachhead - hitting them were they ain't.
Least risky and most likely to succeed
3. "Ecological Niche"
Being inconspicuous, but essential.
Aims at control, at obtaining a practical monopoly in a small area.
(a) toll-gate strategy
Product has to be essential to a process; limited market; true ecological niche (which one species fills completely)
Entrepreneur must not abuse monopoly to exploit customers. (Else, switch to less effective substitutes.)
In many ways most desirable company position; but limited growth opportunities
(b) speciality skill strategy
Built around product/service; systematic analysis of new market. Niche can be fairly large, but must still be unique.
Entrepreneur has to establish a speciality skill niche at the very beginning of new market.
Most advantageous for high-growth market; optimal ratio between opportunity and risk of failure
(c) speciality market strategy
Built around specialized knowledge of a market; systematic analysis of new market.
Entrepreneur continually improves product/service in order to obtain/retain leadership.
Risk of speciality market becoming mass market!
4. Changing the economic characteristics
The strategy itself is the innovation!
Entrepreneur creates a customer.
(a) creating customer utility
Enabling customers to do what serves their purpose.
Entrepreneur enables people to satisfy their wants/needs in their own way.
(b) pricing
Price what the customer buys rather than what the manufacturer sells; lock-in customers.
The strategy is pricing. The entrepreneur structures payment to the needs/realities of the consumer.
(c) adaptation to the customer's reality
Insight that there are no "irrational customers," but only "lazy manufacturers."
Entrepreneur accepts that certain realities are not extraneous to the products, but are the product (from the customers' perspective).
(d) delivering what represents true value to the customer
Ask: "What does the customer really buy?"
The entrepreneur defines "value" for the customer.
Returning to the question of Internet and strategy and planning, it should be abundantly clear that, rather than rendering strategy and planning obsolete, they have become more important than ever before. In the next section, we shall go back some 2,500 years in history and see that the dotcoms should have listened to Sun Tzu and some other major strategists throughout history.
2.3 The Importance of Planning and Preparation (from Sun Tzu through von Clausewitz to The Economist 2002)
"Chance favors only the prepared mind"
Louis Pasteur
Strategic business planning went out of favor in the 1980s and 1990s because it got bogged down in the mathematics of detailed business plans that might or might not be implemented. Jack Welch, the leader of leaders during that period, set the tone by shutting General Electric's 200-strong planning department in 1983.9 However, we will argue that strategic planning is of key importance, irrespective of the size of business.10 This is an insight which is valid across time and also independent of national boundaries. We show this by glancing through the writings of possibly the two foremost military strategists of all times, Sun Tzu and von Clausewitz.
Although war is an act of destruction, and business an act of construction, Sun Tzu's classic treatise (written in the 4th century B.C.) on The Art of War has been successfully and meaningfully applied to business. To some extent, the Chinese expression Shang Chang Ru Zhan Chang ("The marketplace is a battlefield") is correct. Most important in our present context is Sun Tzu's tireless emphasis on the need for careful strategic planning:
"With careful and detailed planning, one can win; with careless and less detailed planning, one cannot win. How much less chance of victory has one who does not plan at all? From the way planning is done beforehand, one can predict victory or defeat" (Sun Tzu, quoted in Kotler et al. 1999: 66).
Sun Tzu can also be employed against the futile search for a single strategy that can solve all the problems of a business. Sun Tzu, all that time ago, emphasized the importance of flexibility, speed and timing in the successful pursuit of war, as only they enable us to seize unforeseen (and unforeseeable) opportunities as and when they arise (see Hindle 2002).
These views by Sun Tzu have been somewhat echoed by von Clausewitz. According to the latter, strategy is not a lengthy action plan, but rather the evolution of a central idea through continually changing circumstances. In von Clausewitz's classic 'On War,' he argues that men could not reduce strategy to a formula. Detailed planning necessarily failed, due to the inevitable frictions encountered: chance events, imperfections in execution, and the independent will of the opposition. Instead, the human elements were paramount: leadership, morale, and the intuitive savvy of the best generals. A plan was not to be more than the broadest of objectives and emphasized seizing unforeseen opportunities as they arose. According to a recent article in The Economist, von Clausewitz is overdue for a comeback (Hindle 2002).
A very recent article in The Economist, which, tellingly, was titled "Back to Basics," concluded that "good management is not a matter of adopting short-term fads, but of managers being consistently honest, frugal and prepared over the longer term. That is what adds the most value for their shareholders-and for themselves" (Hindle 2002).
2.4 Small Businesses and Planning
"Planning what is our business, planning what will it be, and planning what should it be have to be integrated.... Everything that is 'planned' becomes immediate work and commitment" (Drucker 1973: 122).
We will now move away from the classics and our considerations regarding the Internet age, and review some very solid academic research done in the past 20 years on small businesses and planning.
2.4.1 Perry (2001) On The Relationship Between Planning And Failure
Writers of popular management textbooks often describe "planning" as the first of four basic and essential managerial tasks. It would seem that there is nearly universal agreement that planning is essential for business success. Nevertheless, some authors caution that planning can be overdone, incorrectly done, and ineffective (Mintzberg 1994), while others seem to delight in firms having survived while avoiding it altogether (Baechler 1996 - see Perry 2001).
Since planning is just one of several managerial tasks, the linkage between planning and success or failure has been difficult to establish and even more difficult to quantify.
The most frequently cited cause of business failure is the somewhat simplistic and all-encompassing notion of "poor management" or a "poor management team" (see Perry 2001). Argenti put it as follows: "While everyone agrees that bad management is the prime cause of failure no one agrees what 'bad management' means nor how it can be recognized except that after the company has collapsed - then everyone agrees how badly managed it was" (1976: 3).
The objective of Perry's study (2001) was to investigate the influence of planning on U.S. small business failures.11 The main conclusion was that very little formal planning goes on in U.S. small businesses; however, non-failed firms do more planning than similar failed firms did prior to failure.
One practitioner-oriented recommendation flows logically from the findings and conclusions: if your small business employs five or more people, you should consider engaging in the planning activities implied by the five questions used in this survey12 to measure the extent of planning, because doing so may enhance your chances of survival and success.
2.4.2 Upton et al. (2001) On Strategic And Business Planning Of Fast-growing Family Firms13
Fast-growth family firms were surveyed about their business and strategic planning practices. Of the 65 fast-growth family firms surveyed by Upton et al. (2001), the majority prepared written formal plans. The business plans are in sufficient detail to enable the business to tie planning to actual performance and to adjust management compensation accordingly. The majority of the firms regularly share information with employees regarding comparisons between actual company performance results and goals or planned performance. Further, the majority of the firms describe their business strategy as a high quality producer strategy rather than as a low-cost or time-based strategy. Further, when bringing new products to market, these fast-growth family firms adopt a first mover or early follower strategy.
A wealth of research has shown that business and strategic planning is critical for family firm success, for growth, and for performance (see Upton et al. 2001).
Planned growth is particularly important to family firm survival. Family firms face many obstacles to growth, including a reluctance to plan for it (see Upton et al. 2001).
Porter (1980), well known for the delineation of types of business-level strategies, suggested that there were three generic, or basic, business level strategies, which he identified as overall cost leadership, differentiation, and focus. Porter acknowledged that a firm could carry out either the overall cost leadership or the differentiation strategy broadly by targeting an industry-wide market, or more narrowly by targeting a particular segment of the market. Porter referred to the targeting of a narrow segment of the market as a focus strategy. Since Porter's seminal theoretical work, many other researchers have empirically examined these generic business-level strategies and have suggested additional strategies that a business might use to out-perform other firms in the industry. In 1997, Ireland and Hitt suggested that a time-based strategy could influence performance for high-growth entrepreneurial firms.
A time-based strategy gains its advantage through good timing in seizing marketplace opportunities quickly. Eisenhardt (1989) found that in a turbulent environment it was important to move quickly in making and implementing strategic decisions. The ability to move swiftly in a rapidly changing environment may be the hallmark of many successful firms today. Sheriden (1994) found that speed to the marketplace is considered an important competitive weapon for many firms. Chen and Hambrick (1995) suggested that entrepreneurial firms were better positioned to compete based on speed because they were smaller and more flexible than their larger competitors.
Four techniques for implementing a time-based strategy have been suggested. A firm can be: (1) first to market; (2) an early follower; (3) in step with majority of competitors; and (4) a late follower. A firm that is first to market may earn above-average returns by being the exclusive provider of the product or service before competitors enter the market. These firms may also enjoy strong consumer preferences for products or services because of early identification with the new product. However, the performance of a firm following a first-to-market strategy may be restrained by high research and development and marketing costs for the new product or service. Lieberman and Montgomery (1988) suggested that entrepreneurial firms may find it difficult to endure these high levels of risk.
Firms that are early followers may enjoy some of the benefits of entering the market early, while avoiding some of the initial risk and cost. Further, an early follower firm may have the opportunity to learn from the response of the market to the products or services when they were first marketed.
Although firms which follow a strategy of being "in step with competitors" (also known as a competitive parity strategy) and "late followers" may avoid high R&D and marketing costs, their performance may suffer from competitive pressures on pricing and being unable to differentiate products or services from those of competitors.
When it came to choice of strategy, Upton et al. found that over 66 percent of these fast-growth family firms pursued a high-quality or benefits strategy. It can be concluded, then, that the majority of the firms in this sample found the route to fast growth by providing customers with products or services that were superior to those provided by their competitors. This finding is consistent with researchers who have suggested that the implementation of a differentiation strategy may enable firms to earn above-average returns (Ireland and Hitt 1997; Porter 1985). Interestingly, only 15 percent of the firms in the sample followed a low-cost strategy.
A first-to-market strategy was followed by over 44 percent of the firms, while an additional 37 percent pursued an early follower strategy. Thus, over 81 percent of the firms in this sample followed a fairly rapid market timing strategy when introducing new products. Perhaps these family firms found rapid growth by being early participants in the market in which they were competing.
This finding is consistent with the research of Chen and Hambrick (1995) which suggested that entrepreneurial firms were better able to compete in terms of speed because they were smaller and more flexible than their larger competitors. Further, it appears that firms in this sample were not inhibited by the high levels of risk associated with being first to market, which had been suggested as a danger by Lieberman and Montgomery (1988).
For family firms considering a growth orientation, three lessons are provided.
(1) Such firms should adopt long-range planning. It would be useful to involve the board of directors in that plan, and make the plan detailed enough so that it can be tied to performance.
(2) Firms should communicate the plan to all employees on a regular basis. Growth-oriented firms should also inform employees about performance relative to the plan. Firms should consider developing a strategy that builds on the motivation for quality and reputation.
(3) When introducing new products, firms should determine whether benefits could be derived from a first to market or early follower strategy.
2.4.3 Masurel & Smit's Study On Planning Behavior Of Small Firms In Central Vietnam14
Masurel & Smit's findings reveal that the common relationship between size and planning holds true for SMEs in the economy of Central Vietnam - bigger companies are more involved in business planning and use more sophisticated planning procedures than do smaller ones. Moreover, the planning companies are also more profitable than the nonplanning ones. Planning is connected with growth and profitability, but the direction of causality is obscure (Masurel & Smit 2000).
The empirical evidence supports the proposition that the common relationship between size and planning holds for SMEs in the transitional economy of Vietnam - larger firms are more involved in business planning and use more sophisticated planning procedures than do smaller firms. The planning firms are also more profitable than the non-planning firms. Planning is associated with growth and profitability, though the direction of causality is unclear. Vietnamese entrepreneurs should therefore be encouraged to make business plans (Masurel & Smit 2000).
According to Masurel & Smit (2000), in the research on planning in small business up to date, two different conclusions regarding planning have been drawn: (1) the adoption and consistent use of planning are not widespread; and (2) planning is useful for the attainment of external validation. The partial adoption and the inconsistent use of planning can be explained by entrepreneurs' widespread perception that planning reduces their freedom and their ability to use their intuition. The relationship between planning and external validation is quite obvious, given the demands of outside investors for more certainty as they invest financial resources in these firms.
Studies directed at the relationship between SME planning and business performance have yielded ambiguous results. Baker et al. (1993) found that only some operating dimensions (such as decision-making, communication, unity, and motivation) were positively affected by business planning. Operational planning is positively correlated with business performance. However, no relation between strategic planning and performance has been found. Another stream of research has indicated that planning firms performed no better than did non-planning firms (Robinson & Pearce 1983). The failure to correlate planning and performance may be explained by the possibility that SMEs enhance their effectiveness through the informal application of business planning concepts. It may also be exacerbated by the fact that a firm's performance is dominated by other factors, such as its size and business activities.
In spite of this ambiguity, a positive relationship between planning and performance can generally be expected if and only if a small business uses the right kind of planning. The existence of a planning process (rather than the presence of a business plan) makes the business operator more aware of the firm's actual strengths and weaknesses and therefore makes the anticipation of future opportunities and problems more likely.
2.4.4 O'gorman & Doran (1999) On Mission Statements In Smes15
O'Gorman & Doran's findings revealed that high-growth SMEs do not have more comprehensive mission statements than low-growth SMEs (1999). In addition, including company philosophy, self-concept, or public image in a mission statement does not improve a firm's performance. Entrepreneurs and managers in high-growth SMEs should not necessarily adopt the management practices and processes of much larger organizations, and management time spent developing a mission statement could be better spent on the management of the business (O'Gorman & Doran 1999).
2.4.5 Rue & Ibrahim (1998) On The Relationship Between Planning Sophistication And Performance In Small Businesses16
Rue & Ibrahim's study makes a contribution to work on small businesses by showing that greater planning sophistication is associated with growth in sales. In addition, there is a moderately significant relationship between planning and perceived performance relative to the industry. On the other hand, no significant relationship was found with respect to return on investment. This raises an important issue: although a higher sales growth rate was reported by companies with more sophisticated planning processes and their executives felt that their firms' performance exceeded industry averages, one of the objective measures of performance ROI was not affected.
The literature strongly supports the argument that, in small businesses, planning is a key issue. Planning not only increases the success rate (Jones 1982), but it also affects the level of performance (Schwenk & Shrader 1993; see Rue & Ibrahim 1998).
Researchers have found that firms with structured planning procedures outperform firms with non-structured planning procedures (Bracker et al. 1988) and that formal planning results in a wider variety of strategic decision-making. It has also been found that structured planning processes are more thorough and are associated with improved performance as measured by growth in sales (Lyles et al. 1993). Some authors have also determined that although planning improves performance, formalization of the plan does not affect performance (Ackelsberg & Arlow 1985).
2.4.6 Matthews & Scott (1995) On Uncertainty And Planning In Small Firms
Despite the evidence supporting a positive link between firm strategic and operational planning and firm performance, the antecedent conditions of planning remain poorly understood. In both large and small business ventures, sophistication of strategic and operational planning declined with increasing environmental uncertainty. For the most part, this pattern was consistent regardless of the source of the uncertainty - financial, competitive, or governmental.
Successful entrepreneurs are extremely sensitive to the perishable nature of the opportunities they identify in a rapidly changing environment. To take the time to plan under conditions of high uncertainty may result in the loss of that opportunity (Bhide 1994). Since entrepreneurial start-ups are defined by novelty and innovation in products, processes, and/or practices, a high state of uncertainty is the norm rather than the exception to the rule for such firms. Thus, for the entrepreneur, reduced sophistication of planning might be a highly adaptive response to a turbulent environment. While entrepreneurial ventures tend to plan more than do small businesses, the absolute level of planning has been reported to be relatively low (Bhide 1994; see Matthews & Scott 1995).
2.4.7 Rauch et al. (2000) On Cultural Differences in Planning/Success Relationships
Degree of uncertainty avoidance in national cultures is important for success of planning - in Ireland, detailed planning is counterproductive, whereas in Germany, there is a high positive relationship between planning and business success (Rauch et al. 2000).17
2.4.8 Frese et al. (2000) On Planning As a Small Scale Business Owner
Frese et al.'s research has led them to the conclusion that localized planning with a clear concept of what is important combined with a quick reaction to environmental opportunities (opportunism) is optimal for start-ups (Frese et al. 2000).18
2.5 Other Potential Factors of Strategic Competence of Small Businesses
After the above tour de force through the issues of strategy and planning in small businesses, we will look at some other potential indicators of strategic competence of small businesses. Essentially, we will focus on innovation, quality management and potential export advantages vis-à-vis large firms. In the subsequent section of our literature review, we will look at success factors for small businesses in general.
2.5.1 Sullivan & Kang's Literature Review On Innovation In Small Firms
The noteworthy findings in the above literature review are as follows:
> Small and new enterprises can make important contributions to innovation (Acs & Audretsch 1993).
> Employees at all levels of organization in small firms are engaged in search activities for new ideas (Hartman et al. 1994).
> Firm size is not directly related to generating innovative output, but industry structure, as measured by level of skilled labor, exerts a positive influence on innovative output (Audretsch & Acs 1991).
> Innovative activity is hindered in concentrated markets, and more innovative activity exists in industries dominated by large firms (Acs & Audretsch 1993).
> Small firms may have an innovative advantage in industries dominated by large firms and skilled labor as well as in highly innovative industries (Acs & Audretsch 1993).
2.5.2 Mccann Et Al.'S (2001) Strategic Goals And Practices Of Innovative Family Businesses
In McCann et al.'s study,19 the classic typology of business strategy developed by Miles and Snow (1978) to measure family firm strategy was employed. Typically, Prospectors emphasize the importance of product and market effectiveness, product research and development, and market research, among other innovative practices. Analyzers are characterized as growth-oriented, but tend to follow their industry. Whereas Reactors have no strong strategic profile and demonstrate weakness in general management, Defenders adhere to what they know best and have a strong general management. Although the literature does not consistently identify what strategies are more effective for family businesses, in general an innovative strategy appears to offer greater potential for high performance. A major finding of McCann et al.'s study is the important role innovation plays in the family firm's competitive market position (2001).
2.5.3 Motwani et al. (1999) On Managing Innovation In Small Enterprises
According to Motwani et al.'s literature review, the main thrust of overview articles have been to identify and highlight the critical success factors for innovative strategy in SMEs, and the importance of a marketing orientation and effective strategic formulation in successful small high-tech firms. The critical success factors highlighted in these studies include (among others): promoting a corporate culture; creating an effective structure; analyzing competitors; developing co-operations and partnerships; and developing flexibility and speed of response.
2.5.4 Ahire & Golhar (1996) On Quality Management In Small Firms
Ahire & Golhar (1996) came to the result that, although small firms are constrained by their influence in the market, inadequate resources, and lack of managerial expertise, they can use their relative strengths, such as flexibility and innovation, to implement TQM as effectively as large companies and benefit from a consequent high product quality.20
2.5.5 Kuratko et al. (2000) On Quality Practices For A Competitive Advantage In Smaller Firms21
The current literature defines flexibility as one of the primary competitive priorities for smaller firms. Small firms tend to employ quality practices that enable change and that position the firm to pursue flexibility as a competitive priority. Consequently, flexibility as a competitive priority and quality practices are a winning combination (Kuratko et al. 2000).
2.5.6 Pope (2002) On Why Small Firms Export
Pope's article examines what factors motivate small firms to export (2002).22 The results suggest that firms with 25 or fewer employees export for two main reasons: the firm has a unique product, and it has a technological advantage over competitors. Firms with more than 25 employees export for the above two reasons, plus two additional reasons: to achieve economies of scale and to avoid losing out on foreign opportunities.
2.6 Potential Success Factors For Small Businesses
After reviewing the literature on strategy, planning and some other potential candidates for strategic competence, such as innovation, quality management and the issue of export, we will now turn to some articles which look at the issue of small business success as a whole. As will become obvious already during this stage of our paper, studies on common underlying factors of business success are inextricably intertwined with the question of strategic competence.
2.6.1 Lussier & Pfeifer's (2001) Crossnational Prediction Model For Business Success
According to the authors, the same factors found to be predictors of success in the U.S. (staffing, education level, use of professional advice, and planning) were also predictors of success and failure in Croatia (Lussier & Pfeifer 2001).23 Lussier and Pfeifer argue that these findings should lead to reconsideration of preconceptions in many countries as it is commonly believed that human resources have little to do with business success and failure. This implies that policies toward human resources should change, and more resources should be devoted to the development of employees.
Moreover, they argue that the most promising finding of their study is that although there are great differences between countries, their model significantly predicts success and failure for firms outside the U.S. As a consequence, businesses in different countries may be more similar than is generally supposed and, with the trend toward increasing globalization, crossnational success prediction models become more valuable.
Below is a more detailed look at the criteria for business success according to Lussier's & Pfeifer's research in the US and Croatia:
> Capital. Businesses that start undercapitalized have a greater chance of failure than firms that start with adequate capital.
> Record keeping and financial control. Businesses that do not keep updated and accurate records and do not use adequate financial controls have a greater chance of failure than firms that do.
> Industry Experience. Businesses managed by people without prior industry experience have a greater chance of failure than firms managed by people with prior industry experience.
> Management Experience. Businesses managed by people without prior management experience have a greater chance of failure than firms managed by people with prior management experience.
> Planning. Businesses that do not develop specific business plans have a greater chance of failure than firms that do.
> Professional Advisors. Businesses that do not use professional advisors have a greater chance of failure than firms using professional advisors. A more recent source of professional advisors are venture capitalists.
> Education. People without any college education who start a business have a greater chance of failing than people with one or more years of college education.
> Staffing. Businesses that cannot attract and retain quality employees have a greater chance of failure than firms that can.
> Product/Service Timing. Businesses that select products/services that are too new or too old have a greater chance of failure than firms that select products/services that are in the growth stage.
> Economic Timing. Businesses that start during a recession have a greater chance of failing than firms that start during expansion periods.
> Age. Younger people who start a business have a greater chance of failing than older people starting a business.
> Partners. A business started by one person has a greater chance of failure than a firm started by more than one person.
> Parents. Business owners whose parents did not own a business have a greater chance of failure than owners whose parents did own a business.
> Minority. Minorities have a greater chance of failure than nonminorities.
> Marketing. Business owners without marketing skills have a greater chance of failure than owners with marketing skills.
2.6.2 Sheriff Luk On Success In Hong Kong And Elsewhere (1996)
With the presupposition that there tend to be common underlying factors that are associated with success (Hills and Narayana 1990), small business research has been undertaken to identify common success factors. Luk (1996) sets out to find out whether the research results for small businesses in Hong Kong are similar to the ones regarding small firms operating in North America and in European countries.
In his article, Luk reviews the literature on business success, and some of the more important results are briefly described in the following (see Luk 1996). Murphy (1986) found that success was attributed to hard work, dedication, and a commitment to service and quality.
Larson (1987) showed the positive impact of growth potential, quality, innovation, and operating efficiency on successful performance (see Luk 1996).
Bird's (1989) research disclosed that small firms with successful performance were characterized by innovation and risk-taking behavior and that small businesses started by a team of partners who had advance training were more likely to achieve successful performance (see Luk 1996).
The research carried out by Hills and Narayana (1990) enumerated a total of twenty-three factors identified by entrepreneurs as important to success. These factors include high quality products and services, a good reputation, appropriate response to customer desires and requests, hard work and devotion to business, high employee devotion and spirit, and good management/employee relations (see Luk 1996).
Duchesneau and Gartner (1990) identified three categories of factors that are perceived to increase the likelihood of small business success: entrepreneurial characteristics, start-up behavior, and the firm's strategy.24
Steiner and Solem (1988) found that relevant managerial background and experience, flexibility in operations, availability of labor, and possession of identifiable competitive advantages were by far the most significant success factors for small manufacturing firms (see Luk 1996).
Moving on to his own groundbreaking study of small businesses in Hong Kong, it is noteworthy that small businesses have played a prominent role in Hong Kong's economy, as over ninety percent of Hong Kong's companies are small businesses (Luk 1996).25 Luk's findings with regard to success factors are as follows.
"Good decision-making skills" were reported by the majority of small business owners as the most influential factor in the performance of a small business. "Accumulation of sufficient relevant experience prior to the establishment of own company" appeared as the second most important factor. Successful entrepreneurs also indicated that good interpersonal skills were a great personal asset which facilitated business expansion. It is interesting to note that in Luk's study on Hong Kong, "education," "prior training," and "establishment of business connections prior to starting own business" were far less important than in other studies. Perhaps the most striking finding is that all the financial management considerations turned out to be the least important factors in terms of their impact on small business success - probably because they are already considered as essential for business survival.
The top six important management factors were "good marketing techniques," "good personal selling techniques," "use of good quality production materials," "good product management skills," "ability to take advantage of the China factor," and "ability to motivate employees and enjoy low turnover rate". Of product and market company-specific factors, unique product features, focus on customer needs, superb customer services, and effective market niche strategy were perceived by successful entrepreneurs to be strongly linked to small business success (Luk 1996).
2.6.3 Lin (1998) On Success Factors Of Small Enterprises In Taiwan
Lin's major findings include the following: (1) "people"-related issues are more emphasized than those of "structure" and "technology"; (2) business founders' management skills, customer focus, and resource creation are more important than their technical skills; and (3) companies show more concern for "soft" attitudes, skills, and operating methods than for "hard" equipment (1998).26
2.6.4 Pelham (2000) On Influences Of Performance In Small Manufacturing Firms
The main result of Pelham's research was that, compared to strategy selection, firm size, or industry characteristics, market orientation had the strongest positive relationship with measures of performance (2000).27
2.6.5 Sandvig And Coakley On Successful Diversification In Small Firms28
Sandvig and Coakley start off with the observation that small firms are especially vulnerable to product obsolescence. "They lack the product diversity to cushion the loss of key products, and they have limited resources for developing new ones. They often operate within small, volatile market niches that can shrink or be invaded by low-cost competitors. Without the cash or market power needed to repel competitors, their markets are easy prey for larger companies" (Sandvig & Coakley 1998).
Two of the key findings of Sandvig and Coakley are that the successful firms: (1) retained their strategy of providing highly specialized products and services, and (2) relied on their existing core competitive advantage to their new markets. In Sandvig and Coakley's research, successful companies exhibited the following "best practices." Although a firm did not have to possess all these features, they appeared to be almost ubiquitous among the successful firms:
> Leveraging existing capabilities
> Entering growth markets
> Targeting niche markets
> Diversification strategy
> Adding new capabilities
> Strong top management leadership
> Skilled work force
> High employee productivity
> Low overhead
> Tenacity
3. The Conceptual Framework of the Project
The major concepts and variables of the question of a specific strategic competence have already been touched upon in the previous sections. However, the discussion has been less-than-systematic, as we were following the crooked paths of the vast amounts of literature which we came across. We have now reached a juncture where it is necessary to organize not only these concepts and variables, but also look into the relationships between them.
We have already sufficiently clarified the concept of strategic competence in previous sections. However, it is now necessary to analyze all potential "candidates" for the specific strategic competence of small businesses. For an overview, it is best to create a new list and to immediately elaborate on it. As the basis of our discussion of small business-specific strategic competence, we will go back to the discussion by Vozikis & Mescon (2002 - see section 2.1) and then expand on their list by going through our literature review. It is worth remembering that what looked for a short time as the panacea or great equalizer for small businesses - the Internet - does not make life easier for small businesses, in fact it complicates matters further (see specially section 2.2 and Porter 2001). The following considerations are thus more important than ever.
(1) Low need for co-ordination (Vozikis & Mescon 2002).
(2) High degree of inherent flexibility (Vozikis & Mescon 2002, see also Steiner & Solem 1988).
(3) No need for sophisticated control mechanisms (Vozikis & Mescon 2002).
(4) No costly sophistication (Vozikis & Mescon 2002).
(5) Environmental scanning is less important (Vozikis & Mescon 2002).
(6) Emphasis on effectiveness, not efficiency (Vozikis & Mescon 2002).29
(7) Emphasis on satisfying specific customer needs (Vozikis & Mescon 2002). Commitment to service and quality (see Murphy 1986, Larson 1987, Hills & Narayana 1990, Luk 1996).
(8) Experience curve learning effects (Vozikis & Mescon 2002).
(9) Short-term time-horizon and flexibility (Vozikis & Mescon 2002). Developing flexibility and speed of response is a critical success factor (Motwani et al. 1999, see section 2.5.3).
(10) Small business owners are experienced general managers (Vozikis & Mescon 2002, see also Luk 1996). Lussier & Pfeifer (2001) mention both industry experience30 and management experience as factors which contribute to higher success rates for small businesses (see section 2.6.1). Additionally, business owners without marketing skills have a greater chance of failure than owners with marketing skills (see ibid., Luk 1996). "Good personal selling techniques" are also important (Luk 1996).
(11) Decentralization; fewer hierarchical levels (Vozikis & Mescon 2002).
(12) Entrepreneurs change and innovate quickly - they ask "why not?" (Vozikis & Mescon 2002). Small firms have a huge potential with regard to innovations (Acs & Audretsch 1993, Timmons 1999, see sections 1.3, 2.5.1). More specifically, small firms may have an innovative advantage in industries dominated by large firms and skilled labor as well as in highly innovative industries (Acs & Audretsch 1993, see section 2.5.1). An innovative strategy appears to offer greater potential for high performance (see McCann et al. 2001, section 2.5.2).
(13) Intuition's role in creativity, innovation, and change is indispensable (Vozikis & Mescon 2002).
(14) Small firms are dynamic as they identify their strategic flexibility tactics: they
o act to seize opportunities,
o react to threats,
o proact to create opportunities, or
o ignore a threat or an opportunity (Vozikis & Mescon 2002).
(15) Entrepreneurs "satisfice" (Vozikis & Mescon 2002).
(16) Constantly redefine its strategic competence (Vozikis & Mescon 2002).
(17) Continuously identify "strategic windows" (Abell 1980: 224).
(18) Planning (Lussier & Pfeifer 2001; see below)
* Successful small firms do more planning than unsuccessful ones, though less than large firms (Jones 1982, Perry 2001, Masurel & Smit 2000, see sections 2.4.1 & 2.4.3, 2.4.5).31
* Planning is useful for external validation (Masurel & Smit 2000).
* Operational planning is positively correlated with business performance (Masurel & Smit 2000).
* The existence of a planning process appears to be more important than the presence of a business plan. Formalization of the plan does not affect performance (Ackelsberg & Arlow 1985, see section 2.4.5).32
* There appears to be no correlation between mission statements and business performance (O'Gorman & Doran 1999, see section 2.4.4).
* Reduced sophistication of planning is a result of a highly uncertain environment for entrepreneurial start-ups that are defined by novelty and innovation (Matthews & Scott 1995). Certain national cultures tend to plan more out of a need for uncertainty avoidance, while others regard detailed planning as counterproductive (see Rauch et al. 2000, section 2.4.7).
* Fast-growing family firms engage in detailed long-range planning, involve the board of directors and communicate the plan to the employees, and move relatively quickly with regard to new products (Upton et al. 2001, see section 2.4.2).
* Greater planning sophistication is associated with growth in sales (Rue & Ibrahim 1998).
* Firms with structured planning procedures outperform firms with non-structured planning procedures (Bracker et al. 1988).
(19) different from large firms, small firms export due to a unique product or a technological advantage over competitors (see Pope 2002, section 2.5.6).
(20) Capital. Businesses that start undercapitalized have a greater chance of failure than firms that start with adequate capital (Lussier & Pfeifer 2001).
(21) Record keeping and financial control. Businesses that do not keep updated and accurate records and do not use adequate financial controls have a greater chance of failure than firms that do (Lussier & Pfeifer 2001).33
(22) Professional Advisors. Businesses that do not use professional advisors have a greater chance of failure than firms using professional advisors. A more recent source of professional advisors are venture capitalists (Lussier & Pfeifer 2001).
(23) Education. People without any college education who start a business have a greater chance of failing than people with one or more years of college education (Lussier & Pfeifer 2001).34
(24) Staffing. Businesses that cannot attract and retain quality employees have a greater chance of failure than firms that can (Lussier & Pfeifer 2001, Luk 1996).
(25) Product/Service Timing. Businesses that select products/services that are too new or too old have a greater chance of failure than firms that select products/services that are in the growth stage (Lussier & Pfeifer 2001).
(26) Economic Timing. Businesses that start during a recession have a greater chance of failing than firms that start during expansion periods (Lussier & Pfeifer 2001).
(27) Age. Younger people who start a business have a greater chance of failing than older people starting a business (Lussier & Pfeifer 2001).
(28) Partners. A business started by one person has a greater chance of failure than a firm started by more than one person (Lussier & Pfeifer 2001). Bird (1989) emphasizes that a team of partners who had advance training is more likely to be successful than others.
(29) Parents. Business owners whose parents did not own a business have a greater chance of failure than owners whose parents did own a business (Lussier & Pfeifer 2001).
(30) Minority. Minorities have a greater chance of failure than nonminorities (Lussier & Pfeifer 2001).
(31) Hard work and dedication (Murphy 1986).
(32) Risk-taking behavior (Bird 1989).
(33) Good decision-making skills (Luk 1996).
(34) Good interpersonal skills (Luk 1996).
(35) Effective market niche strategy (Luk 1996, Sandvig & Coakley 1998).
It follows a list of various intriguing relationships, which is not comprehensive.35
(1) Planning is connected with growth and profitability (Masurel & Smit 2000). The direction of causality is obscure.
(2) Some entrepreneurs have the perception that planning reduces flexibility and the ability to use their intuition (Masurel & Smit 2000). It appears clear that this is not necessarily the case. For instance, we should remember the quotations by Sun Tzu and von Clausewitz about the processual character of planning - rather than the plan as a petrified object (see section 2.2). Moreover, Frese et al. (2000) have found out that planning and opportunism is optimal for start-ups.
(3) Formal planning results in a wider variety of strategic decision-making (Rue & Ibrahim 1998).
(4) The flexibility and innovation of small firms means that they can implement Total Quality Management as effectively as large companies (see Ahire & Golhar 1996, Kuratko et al. 2000, sections 2.5.4, 2.5.5).
At the outset of this research paper, we have stated our hypothesis as follows:
H: Small firms have a very different "strategic competence" as compared to large firms.
We will now state the hypothesis more precisely.
H*: Small firms have a very different "strategic competence" as compared to large firms inasmuch as the above-stated 35 points apply.
4. The Evidence
We have already discussed certain evidence that substantiates or rejects certain of the 35 points related to our revised hypothesis. In the interest of reduction of complexity, we shall also try to reduce the number of points and structure them further. Before we do that, we can already answer the questions as to how our evidence was gathered and as to how it was verified and tested. The evidence here has to rely almost solely on our literature review, and to a much lesser extent, on our personal experience in managing small businesses.36 Sir Karl Raimund Popper, whom we quote from memory (in The Logic of Scientific Discovery), did not believe that it was possible to "verify" hypotheses, he stated that they could only be falsified. The test - or verification, if Popper is put back into the shelf - of hypotheses here can only be done in an abstract way, weighing various research results against each other.37 Thus, on the basis of our prior analysis, we can move straight to a refinement of our hypothesis, which is justified by our previous discussion in prior sections, specially section 3. This also serves as a summary of our findings and results.38
In reexamining our hypothesis and the 35 points listed and discussed in the previous section, we realize that we set out to search for a strategic competence of small businesses that is different from the strategic competence of large competence. In our reexamination, we thus have to consider whether any of the points can also apply to large businesses. If that is the case, then this is obviously not something that provides a competitive advantage to small business as compared to large businesses.
The constant redefinition of strategic competence and the continuous identification of "strategic windows" (Vozikis & Mescon 2002) are actions that also appear to be of the essence for large businesses.39 Similarly, the ranking of the reasons as to why firms export may be slightly different than for large firms, but it is again difficult to discern any specifiable strategic competence for small firms with regard to that particular variable (see Pope 2002). Irrespective of size, business should avoid undercapitalization.
Large businesses do have professional advisors, so by obtaining such services, small businesses can only aim at "competitive parity" in this respect. Similarly, having partners is the norm in large businesses, so by avoiding the "lone wolf syndrome," small businesses only have a competitive advantage versus (de facto) sole proprietorships.
Record keeping and financial control as well as education (of the leader(s) of the firm) have not been always confirmed as important in small business success (see specially Luk 1996). Moreover, it is hard to see as to how these factors could contribute to a specific strategic competence of small businesses.
Planning is of key importance for both small and large businesses. Our extensive discussion on planning confirms exactly what Vozikis and Mescon (2002: 84 and passim) write in their book. Planning is also very important for small businesses, although it does not give them an edge vis-à-vis large businesses. It only gives them an edge vis-à-vis other small businesses which do not plan as much or as well.
There is an incomplete list of characteristics that applies to personal characteristics of the entrepreneur or business owner cum manager. Essentially, such a discussion always is in danger of falling into the trap of a trait theory, and it is easy to come up with counter-examples for the factors discussed below. For instance, when it comes to age, we think of Colonel Harland Sanders, who was in his 60s when he started Kentucky Fried Chicken with his first social security check, but we also believe that the rigors of new ventures may favor the "young at start" (Timmons 1999: 31). There are many business owners whose parents did not own a business, and in many countries, minorities enjoy special support (e.g. from the government) in running a business. Hard work and dedication (Murphy 1986), risk-taking behavior (Bird 1989), good decision-making skills (Luk 1996) and good interpersonal skills (Luk 1996) are all good to have, but again, these traits and skills are also found in large companies. Finally, an effective market niche strategy (Luk 1996, Sandvig & Coakley 1998) is only one strategic option, which by no means will be always the optimal strategy.
The attraction and retention of quality employees, selecting products and services that are in the growth stage, and not starting one's business during a recession may increase the chances of success for small businesses, although we can again think of counter-examples. More importantly, these factors may be more important to small than large businesses, but it is again hard to see as to why these factors should constitute any strategic competence of small businesses. Intriguingly, we have had to thus discard many potential "candidates" for small business-specific strategic competence. The ones that held steadfast against our rigorous analysis are all mentioned in Vozikis and Mescon's work (2002). They are the following 15 characteristics:40
(1) Low need for co-ordination.
(2) High degree of inherent flexibility.
(3) No need for sophisticated control mechanisms.
(4) No costly sophistication.
(5) Environmental scanning is less important.
(6) Emphasis on effectiveness, not efficiency.
(7) Emphasis on satisfying specific customer needs.
(8) Experience curve learning effects.
(9) Short-term time-horizon and flexibility.
(10) Small business owners are experienced general managers.
(11) Decentralization; fewer hierarchical levels.
(12) Entrepreneurs change and innovate quickly.
(13) Intuition's role in creativity, innovation, and change is indispensable.
(14) Small firms are dynamic as they identify their strategic flexibility tactics: they
o act to seize opportunities,
o react to threats,
o proact to create opportunities, or
o ignore a threat or an opportunity.
(15) Entrepreneurs "satisfice."
As a consequence, our hypothesis has to be modified as follows:
H**: Small firms have a very different "strategic competence" as compared to large firms inasmuch as the above-stated 15 points apply.
5. Conclusion
Our findings are described in the previous section. There are obvious limitations to them, this being a student paper written in just a few weeks (and having day jobs and other responsibilities). There is an unbelievable wealth of material out there which is related to the topic, and a very thorough analysis of the literature would be very worthwhile and could have very far-reaching practical implications for entrepreneurship and running small businesses.
Let us now look into some of the theoretical implications of our findings. We have seen that strategy has not become obsolete and is also very relevant to small businesses. Our most important theoretical finding is that we could confirm the 15 points mentioned by Vozikis and Mescon (2002) and despite our efforts could not add any further points. It is thus a preliminary result that the 15 points differentiating small business strategic competence from large business strategic competence are valid and appear to be rather comprehensive. However, as this is a very important topic, it is certainly worthwhile to do much deeper future research on it.
In terms of practical implications, we have discussed a wealth of studies discussing success factors for small businesses. These findings give us a very good idea as to how small businesses can do well in an extremely competitive, globalized world. The reader is referred to our discussion in section 2.6. It is probably most important, however, to look into the results of the specific small business strategic competence. From these findings, especially the 15 points, it is obvious that small businesses would do well to try hard to make full use of these variables rather than making futile attempts to copy the strategic competence of large businesses.
Finally, with regard to future research, a much more comprehensive in-depth literature review is suggested. It would also be very meaningful to conduct empirical research on a global scale in order to find out whether there are any more than the 15 variables or whether they are universally valid. Another exciting and related research area is the question of the success factors for small businesses. This is also an excellent area for an in-depth literature review, and by the looks of it, there is also a lot of empirical research to be done.
As we are currently witnessing a silent revolution - a triumph of the creative and entrepreneurial spirit of humankind throughout the world - the impact of which will perhaps equal that of the Industrial Revolution (see Timmons 1999: 3), such research into the success factors and the specific strategic competence of small businesses will be of paramount importance.
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We used the online version at http://www.britannica.com. Vozikis and Mescon (2002: 90) define the market similarly: "A market is defined by the performance of given functions in given consumer groups, and includes all the substitute technologies to perform these functions."
2 An interesting background article about Kiyosaki is Fowler/Kammer 2000.
3 Vozikis & Mescon rely on a wealth of literature as well as their own experience as management consultants in their analysis.
4 This focus on customer satisfaction or customer delight, appears rather universal in an increasingly globalized world economy. For instance, in Japan, "the customer is God" - okyakasuma wa kamisama desu (see Kotler et al. 1999: 507).
5 I.e. they "seek solutions that are satisfactory and sufficient" - individuals do not meet the requirements for full rationality and thus act within the confines of bounded rationality (see Robbins 2001: 135-6).
6 Wright's (1983) formula for small firms on the road to effectiveness, growth, development, and profitability: Uniqueness + Quality + Personal Attention + Flexibility = Profitability.
7 Strategic options in terms of (1) flexibility and (2) position in the marketplace are strategic tactics that represent the overall disposition of the firm towards the market and the competition. There are certain relationships between strategic competence and strategic tactics:
> When acting is inexpensive and reacting expensive, act on the opportunity!
> When acting is expensive and reacting inexpensive - and the market has high entry barriers - react!
> When preventing threats, or preempting other firms from acting, proact - but only for short period, as it is expensive.
> When perceived threats or opportunities are not so significant, ignore!
> Opportunities and threats are all a matter of perceptions and value judgments (Vozikis & Mescon 2002: 91).
8 Michael Porter's article appears to largely rely on a wealth of secondary data. He applies the theories developed in his seminal works on competitive strategy and competitive strategy to these data (see specially Porter 1980, 1985).
9 It is important to note that Welsh did not get rid of strategic planning, but strategic planners (see Hindle 2002).
0 "Market-oriented strategic planning is the managerial process of developing and maintaining a viable fit between the organization's objectives, skills, and resources and its changing market opportunities. The aim of strategic planning is to shape and reshape the company's businesses and products so that they yield target profits and growth" (Kotler et al. 1999: 66-7).
1 The research design for this study featured paired samples of failed and nonfailed small businesses in the U.S. The sampling frame was more than ten million companies. Companies were selected at random. A letter was written to the leaders of the company and they were informed that they would receive a telephone call within a few days with the intent of soliciting their responses to a questionnaire. Speed in making contact with the top management of the failed (bankrupt) firms was essential. Successful interviews with failed firms were matched with companies that had not failed and that were similar in age, industry, size, and location. The survey took place during the summer of 1997 and yielded 152 matched-pair cases (see Perry 2001).
2 The five extent-of-planning questions the respondents were asked were as follows:
. Does/Did your business prepare a written sales forecast?
2. Does/Did your business prepare a written staffing forecast?
3. Does/Did your business prepare a written forecast of cash requirements for at least 12 months into the future?
4. Does/Did your business prepare a written pro forma capital expenditure forecast?
5. Does/Did your business analyze its competition and prepare a written identification of strategies and measurable goals which extend/extended three or more years into the future?
3 Family firms have an important position in the U.S. economy. It is estimated that between 90-95 percent of American businesses are family owned or controlled. Family businesses generate half of the U.S. gross national product (GDP) and employ half the workforce (McCann et al. 2001).
4 Data were drawn from over 900 Vietnamese SMEs from seven distinct sectors.
5 Data were gathered from surveys completed by 115 of the 255 Irish-owned companies appearing on the Business and Finance 1995 Top 500 listing, Ireland's equivalent to the Fortune 500 listing.
6 Data were drawn from a survey of 253 small firms in Georgia with at least 15 employees.
7 Planning strategies and their relationship to success were compared in 77 Irish, 102 East German, and 98 West German small-scale enterprises. The business owners participated in a standardized interview (about 60 minutes) and completed a questionnaire (see Rauch et al. 2000).
8 The sample consists of 80 small scale business founders who were owners and managers at the same time in Amsterdam, the Netherlands. According to Frese et al., the sample was representative of small scale business founders in Amsterdam (2000).
9 Survey instruments were mailed to 1,000 family businesses in the state of Washington, and were distributed twice to business owners and/or managers within a two-month period. The final sample of 231 firms represents all usable surveys. In addition to business characteristics (type of management and ownership structure, firm age, industry, number of full-time employees, revenue, and market position), the survey measured how businesses characterized their competitive business strategies and which family and business priorities and practices were most associated with those competitive strategies (see McCann et al. 2001).
20 Ahire & Golhar's study focused on the motor vehicle parts and accessories industry, selected because it has been a leader in implementing progressive quality management strategies in the U.S. and Canada. Plants were used as the unit of analysis, and plant managers as the key respondents. A survey of 1,400 plants was conducted, and a total of 499 usable questionnaires were returned (see Ahire & Golhar 1996).
21 A survey of 184 small firms in the U.S. was conducted using the classification scheme for quality systems consistent with the Malcolm Baldridge National Quality Award (MBNQA) performance criteria.
22 A questionnaire was sent to the leaders of 600 Californian exporting firms, which represented six SIC classes. 137 returned surveys were considered usable (see Pope 2002)
.
23 The authors initially give the somewhat misleading impression that, rather than about Croatia, they speak about the whole of Central Eastern Europe (this is probably because they are worried that some of their readers may not be able to put Croatia onto the map). A random selection of 350 Croatian small businesses was taken, and a total of 120 usable questionnaires were returned. Sample respondents consisted of a total of 120 owner/managers representing 84 successful and 36 failed businesses.
24 More specifically, the factors found by the authors were prior start-up business experience, an effort to reduce business risk, long working hours, ability to communicate well, good customer service, a clear and broad business idea, willingness to spend more time in planning, and a flexible, participative, and adaptive organization.
25 Content analysis of two major local magazines was employed to identify common factors pertinent to the successful performance of Hong Kong's small businesses. 52 reports met the sample criteria.
26 Lin's study utilized analyses of published cases to probe key factors of successful SMEs in Taiwan. The 43 case companies were mainly recipients of outstanding organizational performance awards granted by the Taiwan government.
27 1,200 industrial manufacturing firms in the US were selected on the basis of size ($12-200 million in sales), ownership (wholly owned), and manufacture of industrial products. 235 presidents returned usable questionnaires with all responses completed.
28 Their study is based on in-depth case studies of nine New England defense contractors.
29 Larson (1987) put emphasis on operating efficiency (1987).
30 This is similar to the criterion of "prior training" which could not be substantiated by Luk's research in Hong Kong (1996).
31 As mentioned in section 2.4.3, Robinson & Pearce 1983 found no such correlation.
32 However, Lussier & Pfeifer (2001) conclude that businesses that do not develop specific business plans have a greater chance of failure than firms that do.
33 In Luk's research in Hong Kong, all financial management considerations were perceived as least important (1996).
34 That criterion could not be substantiated in Luk's research in Hong Kong (1996).
35 It is difficult to discuss variables and concepts separately, so this was also already done in the above.
36 The latter is the case is with co-authors Chen Dewei and Jürgen Rudolph.
37 It is not possible in the given time frame to conduct primary research in Singapore, which would certainly be very interesting.
38 The evidence is much discussed already in sections 2 and 3.
39 Vozikis & Mescon (2002) do not make the claim that these two actions are part of a specific strategic competence of small businesses. However, they convincingly stress the importance of these strategic actions for the survival and success of small businesses.
40 For a fuller description of these characteristics, please refer to Vozikis & Mescon 2002.